What Went Wrong in Great Financial Crisis Stimulus with Reporter Jon Hilsenrath

27:08You had to figure out where the debate was going inside the room and put enough pieces of the puzzle together in order to say this is what they're likely to do. And it was also very important. You know, people used to say, oh, how could his stories always be right? He's clearly being spoon-fed stuff. Well, there's like there's a reason for that because I didn't report stuff I didn't know. So, you know, you had to do a lot of reporting to get to a point where you could say, all right, this is where they are and what they're going. And where you could say, you know, this is what we know about the kind of state of the debate or how certain, you know, there were some meetings where they weren't sure what they were doing going into it.

27:46And I wasn't going to get over my skis on that stuff. So it was, you know, so there was reporting that went into that. There was understanding the institution. I became very good friends with the New York Giants beat. I'm a big football fan. New York Giants beat reporter in those years. And we used to compare notes. Like I saw my job in some way similar to what she was doing. Like I needed to know what was going on in the locker room. Right. Right. And I needed to know kind of who the players were, what the game plans were, who the trainers were, like every angle of the, of the locker room in order to get a whole picture and in order to say with authority, what I thought was happening and what was going to go on next so that, you know, by game day was an FOMC meeting.

28:30By then I had already done the hard reporting. It was just a matter of saying, all right, here's what happened on the field. Fed reporting as a sports analogy. Well, I started out as a sports writer. So, yeah. It makes perfect sense. So, so let's talk a little bit about, um, the Fed today versus when you were covering them. Now you're covering them as a researcher and an analyst. Then you're covering them as, as a reporter, you wrote the era of consensus and comedy at the U S central bank is ending. Yeah. Explain. Well, uh, so, I mean, the fed is a very consensus driven institution. Uh, when I was covering the fed back in the financial crisis period, 2008, 2009, 2010, There was actually a lot of disagreement.

29:19At the time, the disagreement was internal and mostly in the regional Fed banks. So I actually spent a lot of time talking to these regional Fed bank hawks to understand what their case was against programs like QE and interest rate cuts and things like that. Financial repression. And there were a lot of unknowns. For sure, there were a lot of unknowns. So – and Bernanke and Yellen and then Powell spent a lot of time trying to build in processes to build consensus around their decisions. what's happening now is is it's the the disagreement and division is politically driven right we all know that but uh what the the president uh has a clear view of where he wants interest rates going he wants all interest rates going down uh it's i'm afraid a little more complicated than what he perhaps thinks he's going to get out of that because he might cut short-term interest rates and get higher long-term interest rates which which happened very recently Yeah, it happened with the Fed's cuts last year.

30:23And so, you know, he's putting on people in the institution who were, you know, he expects to be loyal to him. Stephen Mirren is the latest. So we're and there's a lot at stake. So and there's turnover happening at the Fed right now. There's we all know there's going to be a new chairman appointed by the president next year. There are tests of loyalty. The really big issue is if the president gets four people who are loyal or even closely loyal to his views, he has an opportunity to remake the entire system. Because with a majority on the Fed board, there are seven board governors. With a majority of four on the Fed board, then the board can start firing and restructuring the regional banks that might oppose some of the policies that the president wants to pursue.

31:12So there's a lot at stake right now on two levels, one with the succession of Jay Powell and two with the construction of who the other governors are going to be on the Fed board and how loyal they'll be to the president's vision of how monetary policy should be run in the United States. So let's talk about that. You wrote a piece early in the summer of 2025, the fourth seat, meaning once the president gets a hold of that fourth seat, he is essentially running the supposedly independent Fed. Tell us a little bit about that. And we'll eventually talk about Lisa Cook. Yeah. And what this pretense firing really looks like an attempt to get an early grab at that fourth seat.

31:54Yeah, and I'm actually going to go straight into Lisa Cook in a moment. But so there's the president appointed Chris Waller. He's a Fed governor. He might get the chairman's job. He appointed Michelle Bowman. These were in his first terms. And she was given a promotion to vice chair of supervision. He's now appointed Stephen Mirren, who's made the president's case for a much lower interest rates just last week. And so he's, in theory, one seat away from having four governors and a majority on the board and an opportunity to move the Fed in a whole new direction. And what's happened, it looked like that fourth governor job might be Jay Powell's job next year when his chairmanship ends.

32:37But what happened is now, and this gets a little complicated, but the chair of the FHFA is accusing the Federal Home Finance Administration or agency is accusing Lisa Cook, another Fed governor, of fraud and mortgage applications that she submitted to her banks in 2021. It's an unproven allegation, but they're trying to remove her for cause. The president has effectively announced that he's firing her for cause and she's challenging that. It could be in the Supreme Court. Now, there's a whole concept of Fed independence. Right. And the Fed board can fire someone from cause. There doesn't seem to be any precedent for the president firing.

33:26Let's hold aside a fact. Wink, wink, nudge, nudge. We all know that this mortgage thing is nonsense and it's just a pretense. Let's just hold that aside. We're talking about governmental power. Who has the power to hire and fire Fed governors? Oh, the president has power, the power to fire a Fed governor for cause. Right. Then we get to, it hasn't happened. No president has tried. But then you get to our question was of, well, how, A, how do you define cause? and B, what is the process for defining cause and then going through the process of firing a Fed governor? This is all on chartered ground and it's moving to the Supreme Court to make some decisions now.

34:11There are a whole other set of decisions the Supreme Court has made where it has found that the president can fire heads of other agencies at his discretion. And one of the questions is whether firing a Fed official for cause is held to a higher standard than firing a participant in the National Labor Relations Board. And the Supreme Court, for reasons I can't say I fully understand, seems to be ready to draw a circle around the Fed. But there are big questions of how do you define cause and what's the process? And we don't know where they're going to go with it. They might kick it back to lower courts.

34:47It's not just tweeting. It's not just putting out something on social – on any social media order. You actually have to have a process. Well, I don't know. I mean, the Supreme Court might decide that the president can do it at his discretion on X. So if it's at discretion. But then what does for a cause mean? Lisa Cook's argument is that, well, so there's a definition of for a cause. And I don't have the specific language in front of me, but it has to be for discrete malfeasance or neglect on the job. And one of her one of her defenses is that he isn't accusing me of doing anything wrong on the job.

35:27These were applications I submitted years ago or and but then there's some fuzzy language that, you know, or or the like or something to that effect. And so there's a question of whether there's enough gray area for the president to define what for cause means. On the first two things of, you know, malfeasance on the job or neglect on the job, they don't seem to hold up. But there's some gray area on the third piece of that. You know, and that's kind of legal precedent that's been said over many years. It's fascinating because the government, when they were defending the tariffs, kind of said, well, IEPA says emergency.

36:06They don't say anything about tariffs. What's an emergency in the government's position was whatever the president says it is. Yeah. All these words that theoretically have actual meaning, once you start saying it's subjective at the president's discretion, for cause, emergency, things like that go out the window. Right. It's going to be interesting to see if the Supreme Court contorts themselves to acquiesce to the president or follows what we think of as traditional legal theory. It's another big year. Yeah, giant. For sure. And I mean, if you want to get really philosophical and pull the lens way back, I mean, I personally think we're living through revolutionary times.

36:49Agree. akin to the French Revolution and the American Revolution. And one of the things we know is that in revolutionary times, standards and norms get thrown into the air and redefined. Which came first? Did the throwing of the norms away lead to the revolution or was the revolutionary setup in place and norms are just collateral damage? The revolution has been building for years. And I'll take this back to my Fed beat. It's a little off the subject. But when I was covering the Fed by 2013, 2014, I was regularly getting emails from really angry readers who saw the Fed as being at the center of America's problems.

37:36an example of an elite Wall Street institution hurting the little guy in favor of rich guys, an insider's game. And they saw me as a reporter at the Wall Street covering the institution. Carrying their water. Yeah, as carrying their water. And I routinely got emails from people saying there's a revolution coming. And like they told me, like as a warning, they said there's a revolution coming. And when When we come, you're going to be one of the people we string up on, you know, on pitchforks. On pitchforks. They used imagery of the French Revolution. I was seeing this back in 2014. It actually led me to write a series, a collection of stories with actually the most prolific Wall Street Journal page one reporter of all time, a guy named Bob Davis, about the economic roots of what we call the economic roots of political discontent.

38:33By 2016, by 2015, like I was getting death threats and we saw that there was like something going on in the country that was kind of deeper than your normally agitated reporter. And so we went out and wrote a bunch of stories called The Great Unraveling in 2016. I recall that. I recall that. It was all about how kind of trade had gone the wrong way for many Americans, how finance had gone the wrong way for many Americans and technology, and that people were angry and they were angry at the elites. And so to answer your question, the revolution started a long time ago, and I think we're pretty well into it.

39:11And, you know, I think a lot of this revolution has been, you know, we have digital guillotines now, right? Where like we'll cut off your head by your reputation. But sadly and disturbingly, it's now getting somewhat bloody. Yeah, no, to say the very least. You know, it's kind of fascinating. When I was writing Bailout Nation, one of the things that kept coming up when you look at the history of who is Treasury Secretary, they seem to be pulled from two different groups. They were either pulled from Wall Street and banking or they were pulled from manufacturing and industry. And throughout history, if you had an industrialist as treasury secretary, when things hit the fan, well, a whole bunch of banks are gonna have to go under.

40:07Sorry, flip that when you have someone from Wall Street, well, then we're gonna rescue the banks. And ironically, I don't disagree with anything you said about the history. I think some of the anger is misplaced because it wasn't – the Fed basically stepped in when Congress threw their hands up and said we can't do anything. Well, it was a financial crisis. Right. To say the least. And it is the lender of last resort. Right. It's their role. They were supposed to do that. That's where they were created in 1913. That's right. What didn't happen during a normal financial crisis is fiscal stimulus along with monetary stimulus.

40:49Monetary stimulus benefits the holders of capital. You own stocks, bonds, real estate. Rates go down. You do great. When the government does a big fiscal stimulus, that tends to land on the middle class. Hey, we're going to build an interstate commerce system, an interstate highway system. We're going to, you know, create weaponized teensyism and build up defense. That tended in the past to find its way to the middle class. What happened in the 2010s were you had all that monetary stimulus, very little fiscal stimulus, at least until the pandemic. And for a brief period of time, it looked like the middle class was bought off.

41:32Yeah. I mean, there's a lot of economics in history here. What I'll say is I agree with you. We got fiscal policy exactly 180 degrees wrong after the financial crisis in the sense that what we needed was – and there was some fiscal stimulus right after the fact, but it wasn't sustained. We went to fiscal austerity within a year or two. What we needed was short-term stimulus and long-term fiscal austerity in order to get the budget under control. And what they did was short-term austerity and nothing about the long-term. And I'm still waiting, by the way, for the bond market to recognize this, and it doesn't seem to do that.

42:15But it's kind of fascinating that the bond vigilantes, I keep hearing those names come up and they don't really seem to exist anymore. They seem to flutter their eyes and wake up and then go back to sleep again. I have a pet theory that there's just a shortage of quality sovereign paper. And so even a damaged high debt United States is still going to make good on its debts. So there's still appetite. Right. Right, and I think that helps to explain why spreads are so tight right now because people will buy whatever paper they can get. Right, right. Absolutely true. Hey, I know that you have a bunch more things you want to ask about the Fed.

42:52You were asking a few minutes ago about covering the Fed and being the Fed whisperer and being spoon-fed, so to speak. Right. You did no shoe leather, no heavy research, no investigative journalism. They just handed you your stories written. And I pushed back and said, there's a lot of reporting that went into those stories. I just wanted to say, I don't know if this was among the things you wanted to ask, but I just wanted to describe for a second, like, what my mentality was about, like, what my job was. Right. Right? So, and I used to preach this to colleagues all the time. As a beat reporter, I felt like this is really important to me.

43:31I had three responsibilities. One responsibility was to break stories, right? That was those Fed scoops. And it mattered. You know, if people are going to pay to subscribe to The Wall Street Journal, they want something different in there. The other responsibility I had was to explain a complicated world. There were a lot of complicated things going on when I was covering the Fed with QE and zero interest rates. And I had to understand it and try to explain it to people. But then the third piece was holding powerful people and institutions accountable. And, you know, I think that from the outside, maybe people would look at this and say, oh, he's getting spoon fed these scoops and he's pulling his punches.

44:13He's not holding them accountable. But that third part was important to me. And I mean, I'd be happy to talk about stuff that we did on that front and, you know, what we did to try to hold the Fed accountable. Well, let's zoom out. And there's also this sense that those two things are in conflict, right? that, well, you know, if they're holding their feet to the fire, they're not going to, you know, they're not going to give you the next scoop. And my response is, first of all, they weren't spoon feeding me scoops. I had to work to get the information and put them in positions where they would tell me things.

44:43That didn't happen by accident. I had to leverage information how I could. But also, you know, I had a responsibility to do the accountability stuff and I couldn't let, you know, fear get in my way of doing that, that it was going to undermine. And, you know, know, there were times when I made them uncomfortable and I just had to do that. So let's zoom out and take like a 10 ,000 foot view. A Fed chair has a story he wants to inform the market of. And that's always been my thought process. When the Fed is communicating, it's not about image or PR. They want the market to do some of their work for them, or at least not shock or surprise the market.

45:25They want the market to understand what's coming and be prepared for it. So how would a Bernanke or a Yellen go about communicating, hey, you guys don't understand there are, after you left in 2022, there was a bunch of increases coming, but let's stick with the 2010s. Hey, rates are low and they're going to stay low for the next, for the foreseeable future. How does that get disseminated out to the public and then to the bond traders so that the street knows what's coming up next. Right. Yeah. OK. So there are a lot of pieces to this. The first one is you're right. There's there are two really important imperatives from their perspective, especially in the 2010s, because the short term interest rate had gotten to zero.

46:16What they realized was the only way they're going to affect financial conditions in a way that helps the economy is if they convince the markets that they're going to keep interest rates really low for a long time, then you get long-term rates down in addition. And so projecting a stance of dovishness for a long time became part of the mission, right? And that was part of what they wanted to do to influence the economy and financial conditions. But then the other thing, as you said, is they don't want to freak the markets out because that causes in their mind unnecessary turbulence that can be really damaging.

46:51And they're still haunted to this day by 1994, when Greenspan raised rates, I think, by three quarters of a point in the market started pricing in a succession of three quarter point increases. And then the next thing you know, Orange County, California blew up and Mexico blew up, right? So like they want their view of the world to be understood. And they do a lot of different things along those lines. They give speeches. They've become more, you know, back in the early 90s when I started on this beat, the Fed didn't tell anybody anything. Right, there wasn't. It's so funny. I've told people this.

47:28You get an announcement, we've raised rates. The only way you knew the Fed did something was from the open market activity in the bond market. Right. Oh, the Fed must have done something. What's going on? Yeah, right. Yeah, that was what I was going to say. Like they weren't putting out announcements in 1989 when they did something. You had Fed watchers. That's what the original term Fed watcher. You had people in the markets who looked at what were going on with money market rates and the Fed injected X billion dollars. And they're like, oh, they just pushed up interest rates. And then it took you three days to figure out if that was their intention or an accident.

48:02And then so over a course of 30 plus years, they've become more and more transparent. Right. So they started Greenspan started putting out statements. Oh, and by the way, Alan Greenspan just delighted in how obscure he could be and what he said because he wanted to confuse people. And they came to see over time that there was a benefit to just being clear. So they put out statements. They put out minutes, obviously. They started doing press conferences. Is there interaction between Fed officials and reporters that doesn't show up? Yes. Yes, Fed officials talk to reporters on background in certain circumstances.

48:44And so like, yeah, we did talk to Fed officials, you know, not for attribution. But it was part of a very dynamic process. When I was writing stories about, for instance, QE2 stands out to me, like that was a situation where like they were moving towards making a decision about QE2 over several months. It took them like six to nine months to get there. And that was a case where I was putting pieces of a puzzle together to be able to figure out how – they didn't even know where they were going at the time. And so there was a lot of reporting that had to go into understanding what was going on behind the scenes and which words that they used mattered and how they used them.

49:31My recollection of QE2, and this is 10 plus years ago, was I think it was before I even launched my own firm. We had maybe it was a double line bond fund that was primarily mortgage-backed. And it used to be 90 % mortgage-backed and then it was 80 % and then it was 70%. And what was going on is the Fed was just sucking up all of the mortgage-backed bonds out there that the private sector had very little of it. And eventually this went from a substantially mortgage-backed fund to just another treasury fund. And that was QE2. That was exactly what they wanted to happen. It's kind of crazy. Because it took down risk-free rates.

50:19Right. They wanted you to embrace risk capital. And then so I don't know if you or others and other investors in your funds decided, all right, well, if we want to get a return, we got to move further out on the risk curve. That was exactly what they were trying. You just you just explained QE to an action like the way they wanted to do it. And the ironic thing is the first person who said that to me about risk capital was Jim Bianco, summer of 09 in a canoe. Maybe it was 10 in Maine. You're at the David Kotak. That's right. And he had said the purpose of quantitative easing is to get people out of the safe, all of the risk aversion that people developed during the financial crisis, flooding into money market and bonds.

51:08Hey, in order for the economy to work, we need this money to move up the risk curve. And by the way, the purpose, this is another thing is like I was always amused by how like people on Wall Street reacted to stories because they very often thought the stories were foreign about them. But the purpose wasn't to get – like the end goal wasn't to get you guys to move out the risk curve. It was to ease financial conditions in a way that economic activity that was being put off for five years from now would take place now instead. Right? It was to get people to – it was to generate economic activity today that was being deferred because people were so underwater or uncertain.

51:48So it's funny you use the word underwater. border, I always assume that the way to recover from a crisis is the mistake wasn't letting Lehman Brothers collapse. The mistake was many more banks should have been allowed to collapse, tear the Band-Aid off, have the government provide debtor and possession financing. So all these companies, you know, the joke was there's no such thing as toxic paper, only toxic prices. At the right price, these pools of bad mortgages had value. That's the age-old debate in finance, right? If you bail them out, you're putting off all these hard decisions. Basically, I remember talking to Bill Dudley about this, but basically what you're doing is trying to smooth out the curve so that there isn't as much damage today.

52:40You're bringing forward some activity, but by design, you're actually putting off some of the damage for the future. The alternative is you tear the Band-Aid off, you get to the right price. But the worry at the Fed at the moment was that they were replaying the Great Depression. And in the Great Depression, what happened was the price didn't correct and readjust. The whole process of destruction fed on itself. And it became its own self-feeding equilibrium that took a decade to get out. And so that's the choice they made was that they didn't want to go down this path where banks start collapsing.

53:18There's no credit. Businesses start collapsing. People get laid off. People have no money to spend. More banks collapse. So they were trying to short circuit that kind of process. Although obviously we have the FDIC. We have all these other structures in place to prevent a replay. But that wasn't enough. Lehman Brothers was an FDIC insurer. So here's my analogy. But Citi, Chase, Wells Fargo, go through all the lists. There were plenty of banks. Chase was fine, but Wells Fargo ran into trouble. AIG? Yeah. Well, but they're an insurer, not a bank. Right. But that's what I'm saying. What they recognized was that they were replaying potentially the Great Depression.

54:00But the old story of a bank run had been altered. And now we're dealing with very exotic instruments and institutions that didn't fall under the institutions that were – that didn't fall under the umbrellas that were created during the Great Depression. And they were potentially going back there. So as we were speaking earlier, and it's a little ironic, they avoided the Great Depression, but sort of an unintended consequence was they helped lead us to the French Revolution. Well, yeah. Yeah. In fact, I remember a conversation I had with Bernanke way back then where he said he expected a populist blowback.

54:43Really? Yeah. He expected a populist blowback. Just not as far as it went. Well, I mean, I think he was surprised by where it came from. Right. I don't think he would have expected it to have come from the right. Well, that whole Rick Santelli, you know, Tea Party nonsense. Yeah, no, I had my ring run in with Rick during that whole thing. I mean, wait, we're bailing out banks to the tunes of tens of billions of dollars. But the people who applied for mortgages, you're just going to cut them loose? That seemed to be what took place. Yeah, and there were a lot of consequences for that. It's funny you mentioned Rick because Rick – I went on with Rick on CNBC and he lectured me that I needed to be more opinionated in my questions at press conferences and reporting.

55:25It's like you don't understand what a journalist does, right? It's like you seem to think – I'll give you a little analogy since we're talking about the depression. My analogy for Ben Bernanke is imagine that you are a Civil War historian at Wake Forest University and you're an expert on the battlefields of the Civil War. Actually, let's call it University of Virginia because Virginia was more center place. And you're an expert on the artillery and the battlefields and the personnel and you know everything about the Civil War. And then you got a job as a consultant at the Pentagon. And you did such a good job as a consultant at the Pentagon that they made you the defense secretary.

56:07And then a new civil war broke out, but it was being fought with drones and laser-guided missiles. That's what happened to Ben Bernanke. He was a Great Depression historian who knew about all the battles and wrote decisive histories of it. And then he got the job at the Fed and he was fighting – he was refighting what he thought was a Great Depression moment. But he was doing it with these really high-tech financial instruments like credit default swaps and credit collateralized debt obligations and the like. Coming up, we continue our conversation with John Hilsonrath, former Wall Street Journal reporter and current research advisor at Serpa Pinta Advisory, discussing rates, politics and the Fed today.

56:54I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

57:13I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. and some of you are watching us on YouTube. My extra special guest today, John Hilsonrath, former chief economics correspondent and Fed Whisperer for the Wall Street Journal, now an analyst and researcher at his own shop, Serpa Pinto Advisory. So let's talk about where we are today in the world, starting with a quote of yours, the old normal is dead, the new normal is here. What does that mean? Wow, I'll be honest with you. I don't even remember writing that. All right. So let me remove that. But let me redefine that.

57:54Okay. And then go back to our French Revolution story. Sure. Which is I think there's a new old normal setting in, which is that – I mean I think we're living through historically changing times on several levels. So one of those is just information, right? And this brings me again, I've become, I've been obsessed with the French Revolution ever since people started telling me they're going to stick my head in a guillotine. But, you know, there was an information revolution happening during the French Revolution, too. There were printing presses everywhere. Relatively new. There were pamphleteers.

58:31I mean, the printing press had been around for a couple of centuries, but it wasn't being mass produced and in every village and every, you know, neighborhood in Paris. Loggers of the 18th century. If you read histories of the French Revolution, there were pamphleteers everywhere giving their version of events on every street corner. And they were basically tearing down the old institutions of the church and the aristocracy who defined the story for the public as they saw fit. And the United States too, the Declaration of Independence was a pamphlet. They signed the thing in Philadelphia. They fled because the British were coming, found their way to a printing facility in Baltimore and started mass producing the Declaration of Independence.

59:19So, you know, I think we're going through something like that now where the old institutions of power in the media are being redefined. I mean, for goodness sake, podcasters had a bigger influence on the last election than CNN did. It's amazing to me. Yeah, no doubt about it. So I think that, you know, that's an old normal, but the new normal is, you know, this technological revolution in my mind is mind boggling. I mean, I'm happy to sit at the table with a contemporary. When you and I were young men, if you wanted to take a picture, you know. You had to get a camera. You had a black box called a camera with something called film, a canister called film in it.

1:00:00And then, you know, you would take 36 snaps and then you had to take it to a store. Or a photo mat, a little yellow booth. Yeah, yeah. It had to get – it took a week in the store to get developed and you had to pay some amount of money. If you wanted to do research, you went to a library. If you wanted to write a letter, you wrote it with a piece of pen on a paper. You stuck it in an envelope, put a stamp on it, put it in a blue box and waited a month for – all of that stuff is now instantaneous, infinite and practically costless. and so you know and like i ride the subway in new york you look like every every you know three out of every four people sitting next to you was staring at their phones right i think the the information we're living through right now is uh quantums of magnitude of what they were going through i think during the french revolution so it's an interesting time to be alive to say Say nothing about bad information, misinformation, propaganda, a whole other thing.

1:01:04Bad information, the word libel has its root in part in the French word libel, which were these scandalous pamphlets that were being put out about Marie Antoinette on, I think it was called Grub Street in London. So, yeah, an abundance of information includes an abundance of really bad information and misinformation. So we're living through all of that right now. So let's talk about - It's not quite the central bank stuff you're talking about. Not quite, but let's talk about what all this means for the economy, which as you have noted, has proven to be much more resilient than most forecasters have predicted.

1:01:42So where are we in the economy today? What sort of job does the Fed have to do balancing their dual mandate in the post-pandemic economy we are living through? Yeah, I mean, I think the Fed is in a tough spot and is prone to making some costly mistakes right now. Do you think they make mistakes or are they just always late to the party? No, I think they make mistakes. They clearly made a mistake after COVID. And I understand what happened. So this is the thing. Like people attack the QE programs that Bernanke did. I think, you know, in the moment that he implemented them, the net benefits were greater than the net costs in those moments.

1:02:28What happened, I think, was we went into another shock after COVID. And I think, you know, Jay Powell made a mistake. He's frankly, he's not an economist. And he misread a supply shock to the economy as a potential demand shock. So we took all these tools off the shelves that Bernanke and Yellen had created and threw them at the COVID shock, which was a supply shock, overstimulated demand, and we got inflation. So yes, that was a mistake. You're putting more of that on the Fed than the massive fiscal stimulus from CARES Act 1 and 2 under Trump, CARES Act 3, and all the various spending bills under Biden.

1:03:05You think that was more monetary than fiscal? I think it was all of these things combined. Okay, that's fair. And by the way, the other thing that the Fed and the Trump administration did intentionally was decided we're not just going to bail out the banks this time. We're going to bail out the little guys. That's why everybody got those checks. Everyone was reliving the trauma of the 2008 financial crisis when they made these decisions that created a whole new trauma. My mom was a historian and she talked about the kaleidoscope of history. So the configuration is constantly turning and growing out of whatever last configuration we were in.

1:03:41The feds made a mistake, a discrete mistake. And the mistake in 2000 – I'm sorry, 2020, 2021 was overstimulating in the face of a supply shock. But to get – to come more – and I think one of the problems that economists have is they call certain things like a law or a rule. and they think when they, once it's called a law rule, then it must always be true, right? The SOM rule, Claudia SOM, brilliant economist, wonderful person. You know, she noticed a correlation between that. You know, at certain moments when the unemployment rate rises a certain amount, I think a half percentage point over a six month period, it tends to keep going up.

1:04:22That's like in a historical observation. It's not a law written into the rules of economics. And never from a 0 % interest rate and a sub 4 % unemployment rate. Like when you, where the SOM rule didn't work, was coming from levels that historically had never existed. Yeah. So yes, it's a correlation. You have to look at the situation you're in right now and these rules of thumb and people do, you know, they're like, oh, GDP contracted. You know, we're close to a risk. I think you have to look at the situation you're in and make the most sense of it that you can. So where are we right now? So growth has proven to be more resilient than a lot of people expected, but employment is slowing down.

1:05:07Inflation is above the Fed's 2 % target. What sense do I make of this? I think that the economy has slowed down a little bit, but coinciding with all this uncertainty from the tariff shock is we're going through an investment boom. We're going through a technology-driven investment boom right now, which, by the way, could hurt laborers and workers in the long run. And maybe we're seeing some of that as we speak. By the way, I also think that if the demand for capital is rising for investment in AI and data centers, higher demand for capital should mean a higher equilibrium interest rate, a higher cost of capital, right?

1:05:47If the demand for capital is higher, then the price for capital should be higher. and you know but the fed is being asked to respond to a labor market that's softening you know my my own uh concern is that the fed is that the fed is going to ease into the slowdown in the job market when it when the financial markets are on fire when it thinks the cut the the risk-free rate is lower than it actually is uh and when there's still an inflation problem and they're going to light even more of a fire into these markets, which might feel good for a few months for, you know, as we saw in the early 2000s, late 90s, go on for years.

1:06:27But those situations often don't end well. So you, I want to combine two of the things you said. You mentioned we're above the Fed's 2 % inflation target, but why is that a rule? If you look at the 2000s, 2010s era, 2 % was an upside monetary target from below. Now we've kind of pivoted into a fiscal stimulus era. Yeah. 2 % is a downside target. Should you have the same inflation target in the 2020s that you had in the 2000s and 2010s? Yes. A hundred percent. It should be immutable. So it should always be 2%. Because it is now and it's in everybody's interest to keep it there. and here's why. So we have a fiat currency, right?

1:07:17And so, you know, if you go back 200 years, 300 years, the anchor for that currency was gold. You know, people would say your money is as good as gold. If you had a dollar today, you could buy X number of ounces with that dollar today. That was the anchor for the currency. Gold doesn't work as an anchor for the currency, in my humble opinion. Do you know that Americans spend about, the last time I looked at the this, about as much money every year on dry cleaning as they spend on gold. Yeah, no, that makes sense. And do you know that the largest producers of gold in the world include countries like Russia and South Africa and Venice, not the most stable producers.

1:08:00So why would we anchor our currency to an idea like gold? You want to have an anchor. Now, so the inflation target, what inflation is, is an anchor that your dollar is going to be worth a known and set amount every single year. It is – the 2 % inflation target is the gold standard of the past. And in my mind, it's a more sensible gold standard because it touches a wider array of what it costs us to live. So then the question becomes, well, why 2 %? Right. Well, so the answer is because that's what they chose. Because – and this actually – I go through this in my book about Yellen. But, well, why shouldn't it be zero?

1:08:45Well, the fear is – the fear was that if your anchor is zero, then interest rates are always very low. And when you get to a point where the economy is slowing down like a depression or a recession, unemployment is rising, the central bank can't do anything. Exactly what we lived through in the 08 period. You need to have the inflation number a little bit above zero. You want it low, but you want it something above zero so that the Fed has a little wiggle room to support the economy in a crisis. That's the idea. So you could say, well, it should have been 3%. It should have been 4%. OK, but we chose 2%.

1:09:20And once you've chosen it, then it's very hard to say, like, we choose something else now. I read a paper by former Fed vice chair, Roger Ferguson, about the 2 % target. And Ferguson said it's a random number that came out of New Zealand where someone just happened to be talking about inflation in the 1980s and they tossed out 2%. And that's the history of it. It traces to a New Zealand banker discussion 50 years ago. First mover advantage. There was certainly an element to it. But I want to say something else about it because people sometimes make this argument that, you know, why should you accept any inflation?

1:10:02We're debasing our currency. The currency today is worth 5 % of what it was worth. I hate that argument. 2 % of what it was worth in 1913 when the Fed was creative. But like in my mind, what matters is the purchasing power of an hour of your labor, right? Exactly. So if inflation is going up 2 % a year, okay, that's one thing. If you're earning 3 % a year for your labor, if you're earning 5 % a year for your capital, then you're getting ahead. And it would be impossible for anyone to argue to me that the human condition is – I mean on many levels, maybe psychological. I can't make this case. But the human condition is worse today than it was in 1913.

1:10:46Of course. Like America became a world superpower in 19 – so it's just – it doesn't make sense to me when people say you're debasing. currency. You're like, what I want to say is against what measure? Here's another, like when I was covering the dollar is not supposed to be a permanent store of value. It's a medium of exchange. If you're holding onto a dollar for a century, you've made some financial errors. That's not what you're supposed to do. People used to always say to me, and I used to hear them say when I was covering the Fed, that the Fed is destroying the value of the dollar. And like, I spent a lot of time, this gets to something I think we're going to think about, like, well, Well, so what does that mean when the Fed, like one of my principles for writing was like, I need to be able to break things down to their core meaning.

1:11:34Like, what does it mean when you say that the Fed is destroying the value of the currency? They're debasing it. I love that. Like it's a metal, a precious metal. But, you know, so you couldn't say that like kind of relative to other currencies because the dollar was going up. And while it's – the purchasing power of a dollar today was going down, the purchasing power of your income is long – and this again brings me back to the revolution because this is also a technological revolution. A lot of working class Americans got left behind during this era of technology and globalization. And what happened was the purchasing power of their labor declined.

1:12:12It wasn't the Fed that did that from inflation. Inflation was very stable. The purchasing power of the labor declined because they were competing against low-wage workers in Mexico and China and because they were competing against machines that were replacing them in the workplace. And so it is true. It is a fact. And this is another part of the revolution, which is related and potentially intensifying. We've lived – we're 25 years into this kind of post-industrial information-driven economy. me. And what we know about this is that it exaggerates inequality. It concentrates wealth among very few people and a lot of people are being left behind.

1:12:55And the question is, and how do you like preserve the value of the dollar? It's how do you preserve the value of an hour of your work? You know, how do you find work that's going to keep you, keep your family fed and get your kids through school and, you know, get you your trip to Disneyland? You know, the federal government dropped the ball and we see it in some specific industries, like if you're shutting coal mines in West Virginia, well, you have to retrain those people to do something else. And if you work in a furniture factory, a garment factory, any of the low end manufacturing businesses that all left, those people have to be retrained.

1:13:35I wrote a lot about this and we did, but it wasn't as if we didn't recognize we i mean all right i'll just say it the elites who were driving the bus didn't recognize that there was a challenge there you know there was a trade adjustment act right there were facilities that were meant to get people retrained uh and then and there was a vast american community college system which was meant to be a vehicle to get people retrained But I talked to people from manufacture, you know, from furniture plants in Hickory, which is one of my favorite analogies for America because Hickory, North Carolina is right next to Charlotte.

1:14:19One's a banking center. One was a furniture center. One went one way. One went red. One went blue. One did better. One did worse. Anyway, yeah, I talked to people in these plants in Hickory and they're like, you know, I didn't finish high school. Now you're telling me to go out. I'm 50 years old. I got to go and reeducate myself. And then like for the people who actually went through it and did it, you're like, I was making$25 an hour with a pension and health benefits. Now I'm a phlebotomist. I'm pulling blood out of people's veins making$12 an hour at a hospital. It didn't work for them. And this was one of the great errors of the economics and economic policy profession over the last 25 years is they didn't think that stuff through.

1:15:07and the politics didn't really warrant conducive to addressing that problem. But – and this is my – this is one of my kind of warning signs – warnings for politicians. I don't see how anyone is fixing that underlying problem that we live in a post-industrial economy that bifurcates wealth and income. And frankly, I don't think it's realistic to expect we're going to re-industrialize this country. Even if we do, it will all be automated robotics. Exactly. It's going to be machines. And we're moving out of an industrial year. So my question is, like, how do you – I talked to an economist, David Otter, who's thought a lot about this stuff.

1:15:47He wrote the papers about the China shock. Our work is not only a source of kind of fulfillment and income, but the way we work is also the way we distribute wealth and income. And so if the whole nature of work is changing because of technology, then like are we thinking about how we're going to manage the distributional effects of that? And I'm not like saying this as some kind of, you know, screaming, bleeding heart liberal. I mean Donald Trump actually got elected because of the disaffected American working class. And I don't think either party has actually gotten their hands around it. I wrote a book about Janet Yellen.

1:16:27I talked a lot of time, spent a lot of time talking to Democrats about this. I don't think any of these people have gotten their hands around, how do we navigate this, like this revolution that we're going through, the economic post-industrial revolution? So, so I have one last question I'm going to ask you before we get to our favorite questions. We ask all guests, but you've been alluding at it. So feel free to go back to a previous conversation. What do you think investors are not talking about but should be? It could be a policy issue, an asset class, a data point. That's it. But I think it's – Yeah, it's the inequality issue.

1:17:07And when I said – I don't want to use the word inequality in like the kind of conventional, politically divisive way. What I mean is that an economy creates income and wealth and how that income and wealth is distributed across the population is a result of the way – and by the way, there is – I'm looking for a chart on this exact thing. There is no law. There is no rule in economics that says that wealth and income will be distributed in a fixed or predictable way. The agricultural era did not create an economic system that distributed wealth and income equally. It was very unequal. You had kings and queens and peasants, right?

1:18:00It just so happened that the industrial economy created a vast middle class because you needed people attached to machines to make the stuff that made our lives more comfortable. But there's no rule that I see that says moving into a post-industrial high-tech world that this whole new world is going to distribute income and wealth in the same way. And so my question is what are we doing about that? And by the way, I think the institutions – we talked about norms before. The institutions that we've created over the last 200 years were built for an industrial economy. Our tax base, our voting systems, everything is built for an industrial – So to me, the big existential question is, how are we going to manage the distributional effects of income and wealth creation in a high-tech, high-information economy?

1:18:51I saw a table this morning. I can't I can't find it now. But it basically shows a number of industrialized countries and what percentage of their workforce is below the median income. And the U.S. and the U.K. are substantially, I think it's something like 23, 24 percent, substantially below. You look at other countries like Japan, the difference between the mean and the median isn't that big. And when you have a very skewed distribution like you're describing, that gap gets bigger and bigger. So I'll dig up that table. Well, you said it to me. I'd love to. Yeah, I'll say I'll share it with you and I'll post it when we when we this goes live.

1:19:38But it's kind of fascinating because you don't think of the country that way. And when you look at, what was it, the Z1 flow of funds that the Fed puts out? Good one. You can see that gap getting bigger and bigger, especially since the 90s. I mentioned unintended consequences. some legislation passed by the Clinton administration to cap executive compensation at, I want to say it was a million dollars or$2 million that just led to massive equity compensation. Right. Helped drive a lot of this. And by the way, accounting fraud. That's right. That's right. So not only were you driving people to hyper-focus on the quarterly calls, leading to some quarterly earnings, leading to some monkey business, but people were getting paid in equity.

1:20:25We're making tens of millions of dollars. And so from a political perspective for Republicans, how are you going to take care of the working class? Are these promises about reindustrialization – can you realize them? And for the Democrats, how are you going to win people back? Because they lost them. Donald Trump took them from him. Well, the question is – And by the way, in terms of the Fed, all the Fed can ever do is make a mistake. It's like his job is to prevent financial crises and keep inflation stable. Like people love to attack the Fed because, you know, you only notice it when it's screwing something up.

1:20:59So and by the way, one of the thing about the Fed is, you know, I live in Washington, D.C. It's this place where like people – like 90 percent of people, what they're doing, you know, 90 percent of the time is spinning you and trying to get you to believe a story that's in their personal or institutional or economic interest. The Fed is out there trying to tell people what it thinks it's going to do. Like you can give them a hard time for making mistakes. I just said I think Jay Powell made mistakes. but like at least they're trying to be honest about what they're up to. When so many other people in Washington are trying to mislead you, I admire them for trying to be straight.

1:21:43I got to ask you a question. You've lived in New York, you've lived in Washington, D.C. Which town is more transactional? Oh, oh, that's a good question. I didn't think you were going in that. They're both transactional but the difference is New York is a transactional town and everyone's looking out for their own interests and everybody knows that. And everybody knows that and accepts that as like the rules of the game, right? In Washington, it's all transactional and everyone's out for their own interests, but they're trying to make you believe that they're doing it for you. And that's why it all looks so hypocritical because like, yes, they're totally transactional and they're totally trying to advance their party or their power or their fundraising, but they're trying to make you believe that they're doing it for you to help you so that your children will be better off.

1:22:35Right. I'm sorry. I've grown a little cynical about it. No, I - I much prefer being a New Yorker. I asked that question because I had a feeling you were going to go that way. New York, there's no pretending. Yeah. It's transactional because it's the center of US capitalism. DC is something else entirely. Yeah, and like New York is traitors and it always has been. Washington is lawyers. Here's my other New York, Washington analogy. If you're driving down the street in New York, although you can't anymore because there's so much traffic, if you kind of move in and out of one lane, if you kind of overstep your bounds, someone will honk the horn, give you the finger and keep driving.

1:23:12Right. If you do that in Washington, instead of giving you their middle finger, they'll point their pointing finger. They'll wag their finger at you and tell you you broke a rule and then like threaten to turn you in. And then, by the way, there are speed cameras everywhere. It's a little bit more oppressive of a place, I think. Really amusing. All right. So I only have you for a certain amount of time. Let's jump to our favorite questions. We ask all of our guests, starting with, who are your mentors who helped shape your career? Well, so I'd have to say one of my most important mentors at the journal was a guy named David Wessel, who covered the Fed.

1:23:49I remember David Wessel. covered the Fed in the 1990s, was just like an institution in economics and economic policy coverage. He gave me chances and he was usually nice to me. So, you know, he's a tough boss too. Dave Wessel was a great guy. And my best friend at the journal all those years was a guy named Bob Davis. Gentleman, good guy, great reporter. Number one in terms of page one bylines. Yeah, and by the way, Nick Timrose is going to pass me pretty soon, I'm sure. I don't know the numbers, but Nick is my successor covering the Fed. He'll pass me, but I don't know if he's going to catch Bob Davis.

1:24:30That's amazing. Let's talk about books. What are some of your favorites? What are you reading? Well, I've been reading. I've alluded to this. I've been reading a bunch about the French Revolution. I'm also reading the book Sapiens, but I can't remember his full name, Harari. Yuval? Yeah, Yuval Harari. It's a pretty bleak perspective on humanity. Yeah, very. I think I'm a little more optimistic about our species and its intentions. But there's interesting insights in there. Like the reason I picked it up is I think that humans have these kind of primitive brains with primitive amygdala and emotion centers.

1:25:09we have an industrial area era um economic and political structures and we're living with 23rd century technology and i'm trying to understand the primitive parts and how that might interact with all this other stuff you keep bringing stuff up i have chapters in a book for you that you're gonna love good um what do you remember the name of the french revolution book you know you're putting email it to me i'll dig it up and you cracked me up comparing dc to a city of lawyers versus new york as a city of traders i'm going to share a book title with you called breakneck um china's rush to build the future by dan wang and he compares china versus the u.s the U.S.

1:25:57as a country of lawyers, China as a country of engineers, which is why they could put up as much stuff as they do as fast as they do. But we're also a country of entrepreneurs. For sure. For sure. And we're not just lawyers. Not a state dictate, although I was going to say not a state dictated industrial policy, but that's changing. So, you know, so this is another thing that I just have having a hard time getting my head around. So like China's economy is really struggling right now. They definitely pushed us they challenged us you know we we were our workers were hurt by the incursion of china imports but we're you know on many measures you know we're still doing all right and winning but we basically conceded to china's economic model it's like we're moving we're moving towards the state-run capital is state-run capitalism which is you know it's it's hard for me to get my head around the idea that we've given up on a system and a project of democratic capitalism and that that's if i should let me is democratic change i should say democratic free market capitalism you know we seem to be having our doubts about it i i guess what i would hope is that we don't give up on it too fast i'm curious is this a permanent pivot or is this hey, let let the president have his 10 percent of intel.

1:27:21But he's this is his second term and he's almost 80. And this is an apartment change. Like, I've heard that sort of vibe from people and I don't know how serious. I think I think he and his followers and his leaders who are working with him are vulnerable on the issue of inflation and the cost of living. And he got in there in part because people were angry about the inflation of the post-COVID period. Back then it was eggs. We're doing a lot of things right now. It's not just tariffs, but with monetary policy pushing. I guarantee you, if we get the interest rate down to where the president wants it, we're going to have inflation.

1:27:58And if we don't get inflation, there's going to be an asset price boom where, again, this inequality thing. There's a few people who are going to make a lot of money off of that. So, I mean, I think that they have a little bit of an Achilles heel on that issue. Let's talk about streaming. What are you listening to in terms of podcasts or watching on Netflix or Amazon Prime? I watched a really cool show called Tehran, which was about Israeli Mossad agents infiltrating Tehran. It was put out a couple of two, three years ago, infiltrating Tehran to blow up their nuclear reactors. I watched it like a couple of months before they went and blew up their new, you know, so that was really interesting.

1:28:42I'm also just, I'm a sports fanatic. So I don't really, I don't have to, I'll tell you what, I've stopped watching cable television after been participating in it for a long time. But if there's a game on, I'm there. You're right there. Yeah. I'm a football fanatic. Final two questions. What advice would you give a recent college grad interested in a career in financial journalism? Financial journalism. All right. So I've had this talk. This is getting back to the whole printing press French Revolution thing. I mean, I think it's clear that journalism is going through a period of exceptional disruption right now, right?

1:29:25And so the choices that I was looking at when I was coming into the field of like, you know, how do I get to the Wall Street Journal? How do I get to the New York Times? Like it's a different set of choices. And if you use the kind of pamphleteer's analogy, you know, when you see what's going on, look at you. You know, you started a podcast and, you know, this has become this great thing for you. I say this to young people all the time. Be – think expansively and creatively about where these interests might take you. You know, the core skill set of getting information, distilling and making sense of the information and conveying information, like that's the core of journalism.

1:30:08That's like – that's more essential than ever. But the way you're going to practice those skills is going to be different than what I did. And, you know, like I had a young student that I was working with and talking to at Duke a few years ago. You know, she was going down the whole newspaper route. She's now doing a true crime broadcast in the Midwest. And so, you know, I think that there's a lot of opportunity out there for people who are willing to kind of take chances and be nimble. And it's scary, but there's a lot of opportunity for people who can be flexible and find the opportunities and go for it.

1:30:43And I love being a journalist. I would not take – there's this ritual that journalists go through where, like, experienced journalists are constantly trying to tell young journalists, don't do this. It's a terrible field. It's a dying profession. and go become a lawyer, you know, blah, blah. I had a great experience. Like, I'm never going to tell someone not to pursue that dream or that interest because it was so good to me. But you've got to be willing to, you know, kind of take chances and go down some roads you might not expect to go down. Recognize how the business model has changed. And our final question, what do you know about the world of economics, finance, central banks today?

1:31:22Might have been helpful 25 or so years ago when you were starting out. 30 years ago. Well, I mean, I guess the basic thing is just that it's so much more interesting than I expected. I didn't want to get into economics writing. I did by accident. And I stayed in it. I wanted to be a war correspondent. And what I came to see was that like – or a sports writer that the great battlefields and the great arenas that really affected the human condition were in markets and economics. So I guess what I would tell myself now was to go into it with even more conviction because it turned out to be so fascinating.

1:32:04Really, really interesting. Thank you, John, for being so generous with your time. We have been speaking with John Hilsonrath, former chief economics correspondent for The Wall Street Journal. Today he runs Serpa Pinto Advisory. If you enjoy this conversation, check out any of the 567 we've done over the past 11 years. You can find those at Bloomberg, iTunes, Spotify, YouTube, wherever you find your favorite podcast. Be sure to check out my new book, How Not to Invest, the ideas, numbers and behaviors that destroy wealth and how to avoid them. How Not to Invest at your favorite bookseller. Now, I would be remiss if I didn't thank the crack team that helps with these conversations together each week.

1:32:51Alexis Noriega is my video producer. Anna Luke is my audio producer. Sean Russo is my head of research. Sage Bauman is the head of podcasts here at Bloomberg. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

1:33:14Thank you.