Is the Federal Reserve Rewarding Corporate Mischief? (w/ Mark Blyth & Adam Tooze)
MARK BLYTH: So let's talk about the Fed because if I grab your book off the shelf from last year, the Fed is the dominant actor. The Fed seems to be the dominant actor again. The Fed is basically the global central bank. And when all of this was kicking off, I was reminded of a discussion, I think, that we had at one point whether if there was another big crisis, would the Fed be able to do what it did last time because the politics have changed. And the politics have changed, but they've done even more, so how do you think about that? ADAM TOOZE: I think that's one of the real puzzles. And it wasn't just us having that conversation. I can tell you that like some, and I'm sure you've had the same experience, of extremely highly-placed people in institutions like the IMF were having that conversation and would ask me in a kind of open-eyed way, well, does this imply that? Could you imagine getting this done with the GOP? I think the short answer-- and this may be, like, the simplistic answer, but nevertheless it may be the most correct answer-- is it really depends who's president is in the White House. Like if you have a Republican president in the White House, the GOP is a very different beast. And I would expect all sorts of trouble to kick off if and when Joe Biden is elected. I think the whole thing may tip. Whilst there's a Republican-- I mean, I know this is a crude explanation, but I think it may explain most of what's going on-- is that the GOP is a ruthlessly cynical political actor. And in a year like this, where they think they've got a president who has a fighting chance of getting reelected, unlike Bush in 2008, when the parties actually sort of battered itself into compliance with the Trump team, when you've got somebody like Mnuchin who appears to be doing a reasonable job of squaring the circles on Congress and pulling in Pelosi and co from the Democrats, in fact, they're not going to kick up a fuss. And the internationalism is kind of is internationalism lite. It's technocratic. It doesn't appear to be an issue. I mean, I had a bit of a wobble, I must admit, when I heard that Erdogan of Turkey had explicitly raised the issue of swap lines, which would be the backdoor mechanisms through which the Fed is doing this lender of last resort to the central banks. And he probably raised it in a phone call with Trump. And you know, there were two things that they're worrying about that A, Erdogan knows-- well, three-- Erdogan knows about swaps, Trump knows about swaps, and Trump knows Erdogan wants a swap. And if there's a configuration more likely to produce a blow up than that, it's pretty hard to imagine. I mean, I have another theory, which is that the folks around Trump just didn't know. And that's not true. MARK BLYTH: But let me throw this one at you. Let me through this one at you though because here's the puzzle I have thinking about this. When I think about the Trump administration in terms of trade, I think about basically arguing over bilateral trade deficits. And you and I both fall into the camp that it's really about global patterns of saving and investment, and it doesn't actually mean that much, and in fact, it's a show of strength rather than a weaknesses, et cetera, et cetera. Nonetheless, they seem to sincerely hold this point of view. And if you do hold that point of view, then doing swaps should annoy you. But they're kind of letting it go. Now, is it because in a sense- - let's flip that around. Are they really just cynical on the whole trade thing? Do they really actually understand the picture a lot more than we think, and that this is just a way of pissing off China, and doing various, like, foreign policy goals, but they actually do get the plumbing? They do get the architecture. They do understand not just the exorbitant privilege, but the fact that the Fed is the global central bank. And if you do get that, you're kind of the top dog, right? It's good to be the king. Why would you screw with that? ADAM TOOZE: Well, I mean, another way of sort of squaring the circles-- I mean, I agree it's a fundamental puzzle. I mean, Gillian Tett wrote a great essay about this-- like this question of the compatibility of a populist nationalism with an international global hegemonic role is a fundamental one, and it's a fundamental one all the way back to the beginning of the 20th century in the aftermath of World War I. The same problem arises. And part of the answer may simply be that one of the way that power operates is it's incoherent. All the dots don't need to join up. One of the ways in which to do this is that you disaggregate the different functions of the state and politics, and they operate in different spheres. And so then the coherence is, as it were, the matter A, in the intellectuals head of like how these things fit together and B, whether or not certain political actors decide through political entrepreneurship to basket things together and say, look, this means that, and so. But if you were looking for strands of coherence, I mean, couldn't you broadly say that Trump's been pretty consistent in not wanting a strong dollar? And one of the ways in which you avoid the dollar strengthening is to pump dollar liquidity out into the global system to prevent what appeared to be going on, especially around the 18th of March, which I think is going to go down in history as, like, the absolute high point of financial tension in March this year. The big foreign exchange market in London was all one way, and it can't work like that. Everyone just wanted to sell everything and buy dollars. And in a sense, what the Fed's policy is designed to do is to find every conceivable way possible of gently easing that pressure off and avoiding a spike in the dollar. And there's nothing that would be from the point of view of that kind of mercantilist trade view that kind of fits, right? You want a weaker dollar. You don't want a strong dollar. So that might be part of the way in which this works. How it fits with the geopolitical dimension, the way in which last year, we were so worried about trade issues shading into something much nastier, and that, I think, we still haven't worked out. And you know, this repo facility that the Fed has set up where they allow foreign central banks to borrow against treasuries they hold as collateral, the advantage of that is the foreign central bank doesn't have to sell the treasury, which is what the Fed really wanted to prevent from happening because in March, several of those weeks were really dodgy even in the treasury market. But on the other hand, that implies a degree of cooperation between the central banks in partnership, if you like, which really doesn't fit all that well from the point of view of an antagonistic relationship. And when we're in the Huawei worlds, then that seems to me almost more at odds with the Fed's role. MARK BLYTH: Well, just to build on that then, I mean, if we think about it in let's be gross and aggregate again, so the United States' growth model, if you will, even though it's large and disaggregated, is basically consumption driven. And we do deficits. And the German, Northern European, Eastern European, and Chinese growth model-- even though China's export platform has much declined in the 10 years-- is still quite export heavy. They rely on accumulating dollar claims, and they're not intermediate in the domestic banking system, and essentially giving them back to us. That kind of circular floor of dollars is what the entire system depends upon. So you don't even have to invoke enlightened self-interest in this one because ultimately, Chinese and German firms earning dollars, and then dumping them in their local banks, forcing their banks to find a corresponding asset keeps the whole thing going. The Treasury just needs to sit and play the regulator on this whole thing. And that kind of implies that the politics, in a sense, is not that it doesn't matter, but it matters less than perhaps we think. ADAM TOOZE: Absolutely, I think that's a great view. And I mean, the other element they need to then do is hedge a little bit currency risk because that strategy involves you basically in accepting foreign exchange loss if you expect the dollar basically to dribble down. And that then can produce eddying effects, where people have got big dollar hedges. And if the dollar then suddenly reverses, which is what we've seen periodically-- like if you've got a bunch of people who are basically heavily hedged against the dollar depreciation, and then suddenly a panic builds up and the dollar surges, that can cause real ructions. But otherwise, I agree. There's a sort of hydraulic quality to this, which should not be underestimated. And we shouldn't just take the news conferences at face value. Those news conferences have a functional significance. They matter very, very crucially for the reproduction of Trump's politics, but that doesn't necessarily connected in a direct way to these sorts of issues of macroeconomic governance that you're talking about. MARK BLYTH: Exactly. So let's stay with the Fed just for a minute. They are doing much more than we thought possible. Even the Republicans have discovered direct monetary financing on the treasury side, but let's leave that to one thing. Is there anything that the Fed has done or is doing which has genuinely surprised you and made you go, hang on a minute, what's that? ADAM TOOZE: Well, it depends. I mean, I guess it's expanded our envelope. After 2008, we thought of the Fed, as you were saying, as a very activist actor. I mean, what we've seen now is just the disinhibited kind of willingness to take pretty much anything. I mean, so they've bought corporate debt. MARK BLYTH: Right, and then they're buying junk bonds. ADAM TOOZE: Exactly. And then they had to sort of draw a line around that and say, well, it was going to be only investment grade. And then, of course, you create trouble on the line, so then it was grandfathered in stuff, which isn't investment grade anymore, but was investment grade, I think, on the 22nd of March or something. And then it turns out they will buy high yield, but by way of the ETFs rather than the underlying assets. And I don't expect that to stop. And I think that's the thing that's been really surprising is just the utterly pragmatic nature of the Powell Fed. You know, is it ultimately surprising if you take the view that the Fed is in the end, this comprehensive lender of last resort? You know, then it shouldn't be surprising, but you kind of think there were kind of shame boundaries-- you know, there were the kind of taboos that the Fed would not want to violate.