Episode 96 – Treasury’s Gift To The Fed with Robert Hockett

Macro N Cheese – Episode 96
Treasury’s Gift To The Fed with Robert Hockett
November 28, 2020

 

[00:00:00.060] – Robert Hockett [intro/music]

Mnuchin made his, on the one hand, disgusting, but on the other hand, to my eyes, highly welcome announcement. I just immediately wrote something up in Forbes again and said, look, here’s what we do now. We can actually do with MLF and MSLP what we should have done in the first place.

[00:00:18.540] – Robert Hockett [intro/music]

It’s possible that Mr. Biden realizes “I’m 78 now, I’m really not going to benefit all that much by getting yet more credit card industry money, I’m probably going to gain more now by being able to leave a noble legacy than I could have done before. So why don’t I focus on that rather than just making Clinton apparatchiks happy or industries happy?”

[00:01:26.670] – Geoff Ginter [intro/music]

Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:34.530] – Steve Grumbine

All right, folks, this is Steve with Macro N Cheese. I’ve got Bob Hockett joining us again. And Bob needs no introduction. Bob is just really a brilliant resource to have associated with us. And I’m so happy to call him a friend. And today we’re going to talk about this thing that Mnuchin did with the Fed and the CARES Act and taking away the special provisions that allowed for some of the more interesting programs that came out of the CARES Act. But we’re going to talk also about the CARES Act and we’re going to touch a little bit about how the Treasury selection of Janet Yellen impacts our futures. And with that, Bob, welcome to the show, sir. Thank you so much for joining me again today.

[00:02:19.920] – Robert Hockett

Absolutely great to be with you again. You’re always among the most stimulating conversations I have. So thank you for making time for me again.

[00:02:26.730] – Grumbine

Thank you, sir. I really appreciate it. I don’t say this lightly. It is a true pleasure because I learn so much from you. And this is an episode that we got a lot of requests, not only on Twitter from our followers, but from people within our team that just didn’t understand what this whole Mnuchin thing meant. And then your article, The Gift, the unintentional gift that Mnuchin left us, basically.

It took a senior level understanding of what’s going on to really understand the parameters and what this all means. So I guess what I’d like to do is start with what is the CARES Act? Eight months into this pandemic, it seems like we’re no closer to any kind of meaningful relief anyway. So, set the stage for the CARES Act and what this change means.

[00:03:18.510] – Hockett

Sure, so, I’m going to start with a flip observation and then be a little bit more serious. So the flip observation is that the CARES Act was not probably intended to be what it became, but it very quickly became a smokescreen. It morphed into being a way of making it look as though both Congress and the White House wanted to do something serious about the pandemic and also about the economic slump that was the immediate consequence of the pandemic.

And again, it actually did have the potential to function that way. And that’s why I say it wasn’t really intended to be a smokescreen or a scam. In other words, I think a lot of the Congress members who signed on to it certainly took it seriously and thought that it was going to work and hoped that the Treasury Department, Mr. Trump’s Treasury Department, would implement it in good faith.

That was probably a silly expectation, but it was kind of all they had to work with. So, I think it was intended well, at least by many who voted for it. But it ended up being misused and used as a scam, I think almost from the get-go by the Treasury Department. Now, the less flip characterization would essentially be to explain what I just said. So let me say just a couple of quick things and then I’ll stop and we can go back and forth.

So the first thing to note, just as important background condition, is that the Fed itself has the authority to act on its own initiative to address crises of various kinds. Usually, it works through Section 13 of the Federal Reserve Act. That’s often referred to as the exigent circumstances provision of the Federal Reserve Act. First of all, that language is used in the provision, but then also that most of the time when the Fed itself initiates some new program or some new facility under the Section 13 authority, it is precisely in order to address a perceived exigent circumstance like some kind of an emergency.

The last time that we all experienced the Section 13 authority in a big way was back during the 2008, 09 crash. And a lot of the facilities that were innovated at that time were initiated by the Fed using that Section 13 authority. The problem, as you’ll remember – you and I are at least old enough to remember this 12 years ago, was that all of those facilities that were pioneered under Section 13 at that time were used to rescue big banking institutions, big Wall Street institutions, essentially.

And while that was perhaps necessary, it certainly was not sufficient to deal with the actual underlying problem. It would have been much more effective, and you would have gotten a two-fer, in fact, if you had gone straight to the mortgages, right, straight to the underwater mortgages and stopped the foreclosures, kept people in their homes, written down those debts and so forth. But we didn’t do that. The Fed didn’t do that. It basically just rescued the banks instead, which is a bit like stopping the bleeding or addressing the symptom rather than addressing the disease.

But at least it did something, and we all became familiar with Section 13 that way. Now, the other authority that the Fed can do things under that would be relevant, at least for present purposes, is Section 14.  Section 14 essentially enables the Fed to monetize all sorts of debt instruments, all sorts of short term debt instruments, which is essentially a way of providing liquidity. It’s a way of providing money to entities that need money in a pinch.

That’s all it is to monetize those instruments; and the actual Section 14 authority is very, very broad, there’s almost nothing that the Fed can’t buy under Section 14. The only restriction really that’s meaningful in Section 14 is that the paper that the Fed purchases is meant to be six months or less in maturity. In other words, these loans, so to speak, are meant to be very short term, six months. But there’s nothing in the provision that prevents rollover of that kind of debt for as long as necessary in a pinch.

So that authority is there and could have been used and could be used even to address the economic difficulties that are resulting from the COVID pandemic. So that’s the legal background condition. Now, a kind of behavioral background norm becomes relevant here at this point, too. And that is that generally, the Fed prefers not to take the initiative even when it has the authority to do so. Generally, the Fed, just in order to preserve its own political legitimacy and not be controversial or not attract the unwelcome attention of people like Ron Paul or Rand Paul or Paul Ryan or God knows who else, prefers to kind of hang back and wait for Treasury to request that it do something or wait for the Congress to request that it do something.

And that’s an important thing to keep in mind, to understand the CARES Act and the significance of it, but also to understand the significance of Mnuchin’s basically misuse of the CARES Act and then his withdrawal or his announcement last Thursday that he plans to basically wind down those CARES Act programs. So what the CARES Act did last March, essentially the best way for us, I think, to read the CARES Act is Congress basically made that request, if I might put it that way, although in this case, it made it a mandate, an order.

But it was essentially Congress is taking the initiative so that the Fed could then start acting without fearing that it’s going to attract unwelcome attention by taking an initiative. So the CARES Act basically said, “Look, we want the following programs to be set up and to run.” And the programs, most of them involve the Fed providing a great deal of liquidity, a great deal of money, to distressed entities of various kinds. As usual, the distressed entities in question included big banks and big corporations and the like, the usual suspects, just like we saw in 08 and 09.

But what was a salutary addition this time around that we didn’t see in 08 or 09 was small businesses, for one thing, and then also states and state subdivisions like municipalities of various kinds and certain kinds of utility authority, like the Metropolitan Transit Authority in New York, for example, the MTA. And what the CARES Act said was, “Look, we want the Fed to provide liquidity to those sorts of entities, too. And furthermore, we want the Fed to provide that liquidity support to tribes and territories, not just states and not just state subdivisions, but also Native American tribes and territories like Puerto Rico and Guam and so forth. And the way we want to structure it is as follows.”

Now, the structuring provision was a bit of a gimmick, kind of silly, actually, just to put on an appearance, which turns out, I think, to have been a mistake in retrospect. That was pretty obviously a mistake even at the time, but at least it looked like it could potentially be a harmless mistake. So Congress sort of wanted to structure things to make it look like they were creating a bank with the Fed being the bank, in fact, or at least the Fed operating the bank, and then with the Treasury Department acting as the equity holder in the bank.

So to sort of explain that just slightly more, the way we think of bank or one way to think of a bank, at least, that is to say a private sector commercial bank, is as an entity that basically levers up off of shareholder equity in making its loans. Right? So if you or I were to buy shares in a commercial bank like Chase, we would be equity holders in Chase. And then the loans and the other investments that Chase makes are going to be a multiple of all of that equity that’s put into it.

That’s essentially the way capital regulation functions. The word capital, unfortunately, has many, many meanings in financial context and in banking context. But when we’re talking about capital regulation, the capital in question is basically shareholder equity, along with a few other categories of subordinated debt and that kind of thing. But basically what capital regulation does is it essentially prescribes that the asset portfolio of a bank is going to be a multiple of the shareholder equity that’s put into the bank.

So what Congress did to the CARES Act was to say, “OK, let’s make something that looks kind of like a public bank. We can call it the Bank of Uncle Sam,” and in this case, the equity investor instead of you or me, Steve, investing in Chase is going to be the Treasury Department, investing in a so-called SPV, a special purpose vehicle. And then the Fed itself is going to be allowed to lever off of that equity, basically to lend out a multiple of that equity that’s been put in by Treasury.

And the so-called equity itself was a congressional appropriation. So Congress says we’re going to appropriate this much money, we’re going to give it to Treasury to quote-unquote “equity invest” into an SPV, and then the Fed is going to lever off of that and lend out a multiple of that equity base and in that sense, structurally replicate what a private sector bank like Chase does, right? Now, again, that’s just a gimmick. It’s kind of stupid, right? [sarcastic] “Let’s make it look like a bank.”

[00:11:32.511] – Grumbine

[Laughter]

[00:11:33.330] – Hockett

Right? There’s no need to do that. Presumably, it was for public consumption, but even that’s kind of idiotic because the public doesn’t understand this. Mr. John Q or Ms. Jane Q. Public probably doesn’t know much about how the internal workings of banks go. Right? They probably don’t know that. Oh, there’s shareholder equity and subordinated debt and the bank levers off of that in constructing its asset portfolio. Most people don’t know that, they don’t have to know that, there’s no need. It doesn’t matter really for most people’s daily lives.

So why Congress would think it’s important to make this look like that is a little bit beyond me. But for better or worse, they decided to do it that way. But here’s the sense in which it became a problem. What it ended up doing is it effectively put Mr. Mnuchin in charge of the programs, even though they projected it all as a cooperative arrangement between Mr. Mnuchin on the one hand and Mr. Powell on the other, the Fed and Treasury working together, kind of in the way that Mr. Bernanke and Mr. Paulson worked together at the end of 08.

And then Mr. Bernanke and Mr. Geithner worked together once Mr. Obama took office at the end of January of 09. So they like to project this image of the Fed and Treasury working in tandem in a crisis. I guess they figure it projects a cooperative working relationship, which then instills or reinforces confidence on the part of the public that our principal authorities, our fiscal and monetary authorities, know what they’re doing and they’re working harmoniously together.

And that’s all, again, fine as far as it goes, but the problem with it was that really it effectively gave Mr. Mnuchin a veto power over the actual functioning of these programs. And what began to happen almost immediately, as soon as the programs were up and running basically by the beginning of April, was for about a month or two, things looked kind of promising, and you and I, of course, talked about this at the time, that some of these new programs were really game-changing, at least in potential.

And the two that you and I talked about before that I think were most important and most potentially game-changing were the MLF and the MSLP. Right? So the MLF, as you know, is a municipal liquidity facility, which is a means of basically providing liquidity support to states and their subdivisions. And then the MSLP is the main street lending program. And there the idea this is basically four distinct facilities that were all designed to help small businesses that were facing a crunch in the midst of the pandemic.

And these were potentially game-changing and wonderful and potential in the sense that this was the first time in modern history, at least, that the Fed was actually acknowledging that there’s something called Main Street and not just Wall Street, and also that we have these subdivisions called states and cities, not just the federal government. And it was kind of important that that happened for a couple of reasons. It was important that we noted states and their subdivisions because we basically didn’t have a federal government by this point.

The Trump administration was just spectacularly incompetent, not even really compos mentis when it came to handling the pandemic. We just did not have federal instrumentalities any longer because the guy who’s nominally in charge of all that stuff, Mr. Trump, is basically just not mentally composed. So the states and the cities were having to play that role. They were standing in for or stepping in for our federal agencies or administrative agencies that normally would be doing that stuff.

And since we federally fund federal agencies, well, it sort of made sense that we should federally fund state and city entities if they are now functioning as our de facto federal agencies. Right? So MLF was, I think, significant in principle, at least partly for that reason. And then, of course, the potential significance of the main street lending program is even more obvious. You and I, of course, were regularly denouncing the fact that the Fed was only helping out Wall Street and not Main Street back in the last crisis in 08 and 09.

I know you and I were conspicuous in our denunciations of that focus back then. And the MSLP is effectively the Fed’s recognizing, oh, yeah, you guys were right. I don’t know about us, but yeah, that’s right. We could have done that and we’ll do it this time. And so that was all cool. But what happened almost immediately was that, first of all, Mr. Mnuchin sort of insisted on very draconian terms being imposed for access to these facilities. And one of the results is even to this day, there have only been two takers when it comes to the MLF. Right?

Only the state of Illinois on the one hand, and the New York MTA that I mentioned before, the Metropolitan Transit Authority, have actually availed themselves of MLF financing. And the reason is the terms are ridiculous. Right. First of all, they apply penalty rates when it comes to what you have to pay for using the facility, which is completely absurd. It’s a category error. It’s like asking what color the number seven is. The whole point of penalty rates is to deal with the moral hazard problem raised by too-big-to-fail banks when we rescued them.

And it’s probably not surprising that the Fed had too-big-to-fail banks on its mind since the last time it used the 13.3 exigent circumstance authority to come up with new facilities was in 08 and 09, and it was all for too-big-to-fail banks. But last I checked, cities and states didn’t actually cause the crisis in the way that too-big-to-fail banks caused their own financial difficulties by undertaking reckless lending or reckless investing or bubble inflating behavior. So they didn’t cause the problem.

And the states and cities also were not responsible for the Trump administration’s incompetence. So it’s ridiculous to pretend that there’s a moral hazard problem here that we have to sort of mitigate with penalty rates. Another ridiculous condition was to say that we have to charge market rates. Well, that was absurd as well, because there was no market rate. The market rate was not an exogenously given quantum, It was an endogenously determined policy variable.

The Fed was making the market rate in effect because one of the things, of course, that occasioned the Fed’s going ahead and opening up the MLF was the fact that the private sector municipal financing markets, the so-called muni market, had frozen. And as you know, if you want to give a numerical expression to the idea of a frozen market, another way to describe it is as a market with infinite rates. Basically, you had to pay an infinite rate to borrow off of the muni market because it was just a mathematical way of saying you couldn’t borrow on the muni market. There just was none.

So there was no market price. And that means the only sense in which there was a price in the markets once the Fed introduced MLF was the sense in which it was a Fed determined rate. The Fed made the rates less than infinite by pledging to backstop those markets through MLF. So just impose a market rate requirement was another, I think, really wrongheaded idea. Another terrible idea was to say that you needed bond ratings.

You already had to have ratings of your municipal bonds or your state bonds by a rating agency. And that was absurd because, of course, most of the hardest hit cities and states didn’t have a history of borrowing on the muni markets in the past. So, of course, they didn’t have ratings. So you’re kind of saying if you haven’t borrowed in the private sector muni market before, you simply don’t have access to this facility, which again, was absurd, completely contrary to the purpose of the MLF and then there were various other problems as well, like arbitrary population thresholds and of course, no availability at all to tribes or territories.

So I and others were saying, what gives? Some of us have connections over on the Fed board or over at least in the Fed building in D.C. and connections at the various regional Feds. Because, as you know, Steve, I used to work at the New York Fed. And when I would call up to say, What the hell are you doing? Pointing at the New York Fed, which is administering the MLF, it pretty quickly emerged that it was Mr. Mnuchin. He was the holdup. He was the one preventing these things from actually functioning in the way that they were meant to function, meaning in turn that they were just basically window dressing. But Mr. Powell didn’t want to come out and say, fuck you, Mnuchin, you’re really effing this up because he wanted to project an air of comity, c-o-m-i-t-y rather than e-d-y.

[00:19:02.950] – Grumbine

[Laughter] He just accidentally got the comedy part, right?

[00:19:05.570] – Hockett

Yeah. So he basically just had to suck it up. And I think in his defense, in addition to sucking it up in order to preserve an appearance of collaboration, I think he probably also harbored hope, as many of us did, that Congress would pass a sequel to the CARES Act, which is called the Heroes Act. And there was some hope up until the end of July, at least, that that might be passed.

And that would have been better in any event, because what Heroes would have done would have been basically to appropriate significant federal money simply to grant it to the states and cities, rather than forcing the states and cities to borrow from the Fed even on generous terms. So we ended up basically never ending up really getting a fully operational MLF. It still has only these two takers I mentioned before. Similar story – I won’t go to the same degree of detail because it’s basically the same story – when it comes to the Main Street Lending Program, which is broad brush form.

Main Street Lending Program had similar flaws, let’s say, right from the get-go. And the principal upshot of that was that the MSLP has functioned primarily to help out cronies of the Trump administration or well-connected firms, small businesses that aren’t well-connected, that don’t have lots of cronies, and let’s be frank, I mean, if you’re a small business, you probably aren’t terribly well connected. That’s part of why you’re small. Right?

So basically, MSLP ended up helping firms that were significantly larger, I think, than what was intended by Congress and significantly better connected in cronyism. And it’s not without significance in that context that Mr. Mnuchin was also the principal force preventing any sort of transparency when it came to where the loan money went for most of these programs, not just for MSLP, but also for the programs that were explicitly targeting larger firms.

Mnuchin has been conspicuous in his attempting or acting to prevent any sort of revelations to the public of who the recipients have been. And usually, if you try to hide stuff like that, it’s because you got something to hide. And I think knowing Mr. Mnuchin’s background and knowing the background and foreground for that matter of his boss, Mr. Trump, we can pretty well guess what that means. Right? So these programs have just not been what they were meant to be, even from the get-go. They weren’t. That ultimately gives us the reason or tells us, in effect, why the news of Mr. Mnuchin’s planning to discontinuing these things last week is actually good news.

Basically, Mnuchin has been the problem all along with these Section 13 Fed programs. On the one hand, we can view him as being wrongheaded and miserly and cruel and uncaring and so forth and saying we’re going to discontinue these things now, even though they haven’t done what they were meant to do. But the flip of that is to say, well, he’s basically saying, I’m going to butt out. I’m not going to fuck this stuff up anymore, because he’s out.

And furthermore, he basically got under Powell’s skin in doing that. You, of course, noticed last week that Mr. Powell did something quite unprecedented for himself and something very, very rare as an historical matter for the Fed, which is that almost immediately after Mnuchin’s announcement, the Fed announces that they think it’s a mistake for these programs to be discontinued. That almost never happens. But the good news about that is it means there’s no longer apparently any belief in the need to carry on a pretense of comity or a collaboration between the Fed and the Treasury.

And that means the Fed might very well now be more inclined to do what it could have done all along, which is just to use the Section 14 authority that I mentioned before and just do this stuff on its own authority without thinking about the CARES Act and to do it right, because it no longer has to worry about Mnuchin’s not liking their optimizing it. So, for example, what we could do at least until January 21st when the new administration takes over and beyond that, if need be, is to do MLF right.

So do MLF with no penalty rates, with no market rate requirement, with no bond rating requirement, with no artificial population thresholds. With none of that crap, right? Just do it right. And furthermore, they can extend the maturities. They had already extended the maturities of the eligible paper from two years to three years, which, by the way, is anything but a liquidity facility, right? Usually, when you hear liquidity, you’re thinking in terms of six month paper, maybe one year paper, max. But you’re never thinking two or three year.

[00:23:17.410] – Grumbine

Long term. Right.

[00:23:18.650] – Hockett

So we’ve already thrown the idea of liquidity out the window when the Fed announced on April 27th that it would accept three year paper. Thirty six month paper. Well, as long as we’re doing that, why don’t we make it five year or 10 year or just say as long as we need to. So we could do that as well. Basically, we could get MLF right. And as you know, I think I’ve written countless times now in my Forbes column about what it would be to do MLF right. The other thing that we can do with MLF to get it right that we haven’t done so far is to spread the fucking thing. You know, I’ve been writing Spread the Fed all over the place.

[00:23:50.520] – Grumbine

Yup.

[00:23:51.250] – Hockett

And the idea here is that, look, again, why would the MLF be administered entirely out of the New York Fed? Again, you know me, Steve, and you know my background with New York Fed. And, you know, I love my old colleagues there. Most of the people I used to work with there are still there. They’re still wonderful. They’re very serious minded public servants. They’re brilliant people. They work hard as hell and not really looking out for the interests of Wall Street.

They’re looking out for the interest of the country, including the disadvantaged in this country. But the fact is that a kind of shoestring staff, they’re only, what, 10, 15, maybe 20 people over there right now working on this. And there’s no way that you can expect them to be able to quickly process loan requests from Billings, Montana, and Tyler, Texas and Pensacola, Florida, and blah, blah, blah. It’s easy enough to see why we’re doing it out of New York. It’s because that’s what we did in 2008 and 2009.

So New York has a track record with administering programs of this kind. But that’s silly because, of course, the programs in 08 and 09 were for Wall Street. And as you know, the New York Fed is two blocks off of Wall Street. So, yeah, of course, it made sense to do it that way in 08 and 09, even though it made no sense to do it only on Wall Street. But this time around, as long as we’re admitting that it’s not going to be just Wall Street, it’s also going to be Main Street, then we should administer the MLF out of all of the regional Feds and that’s the Spread the Fed idea.

So basically, San Francisco Fed can handle all of the cities and states in the northwest. Dallas Fed can handle the cities and states in the southwest, Atlanta, the southeast and so on and so forth. And the same holds for the Main Street Lending Program. That’s administered entirely out of the Boston Fed. And back in my New York Fed days, I had a lot of collaborations with Boston Fed people and I’ve done some collaborations with Boston Fed people since, as well.

And even though I wasn’t an employee over the Boston Fed, I can attest from my more limited experience that they’re pretty serious minded people, too, and they’re pretty able and competent and thoughtful, public spirited people. So it’s not a slag or a denigration of them to say that it’s a bit silly to expect them over in Boston to totally be able to process loan requests from Tonya’s Tractor Repair in Tyler, Texas, [laughter] and Hank’s Hardware over in Pensacola. Right? Just ridiculous.

So that should be spread, too, right? That should be the Atlanta Fed handling Hank’s Hardware, and it should be the Dallas Fed handling Tonya’s Tractor Repair. That should all be done that way, too. So I call that Spread the Fed. A beautiful thing about that, too, that probably sounds like Trump “it’s a beautiful thing” [laughter] To me, it is kind of beautiful that if we do that, if we were to spread the Fed, we would be restoring the regional Fed banks to their original purpose in the first place. Right.

A lot of people don’t really know about the fact that we have a Federal Reserve system. And when they do know that, they kind of wonder, well, what’s the point of these regional Feds? You’ve heard a million people refer to something they’ll call the Federal Reserve Bank. That’s just not a thing. There’s nothing called the Federal Reserve Bank, but there is the Federal Reserve Board. And then there are, of course, the various regional Federal Reserve banks like that of Dallas, that of Boston, that of New York, that of Atlanta, so on.

So there’s a reason we have that kind of two-tiered system, and that’s that these regional Fed banks were originally meant to function as basically regional development finance assistance operations. They were like regional development banks. That’s a slight overstatement if we think of a development bank as making long term investments.

But they were a bit like that because they were at least making short term liquidity provisions to aid small firms and startups in various underdeveloped regions of the country back in 1913 to get started and to grow and to scale up and to spread and thereby, of course, develop the entire economy evenly across the entire continent, rather than just having a developed economy in the Northeast and then let everything else languish. And then the role of the Federal Reserve Board was to coordinate these various regional activities, to keep it all on the same page and to oversee credit aggregates economy-wide.

To make sure that there wasn’t an excess growth in credit in some regions and then underprovision of credit in other regions. So you need an oversight authority. That’s what the Federal Reserve Board FRB was. And then the regional Federal Reserve banks would do the actual liquidity provision through the so-called discount windows or discount facilities. Now, if we Spread the Fed in the way that I’m describing here, we can, in effect, reinstate that original vision, that original mission of the regional Feds.

And in so doing, we would be restoring the original mission of the Fed itself making it basically a kind of public development bank that federated because we have a continent-spanning republic. And it would be actually kind of a wonderful thing and it would be an amazing silver lining then around this dreadful pandemic if it were to turn out that… Well, one good thing that the pandemic did is it basically led the Fed to rediscover that it should be spread.

I’m gonna sound like Muhammad Ali, [laughter] Spread the Fed to rediscover it should be spread! He was my hero as a child. Needless to say, any time I could vaguely channel him, I’m delighted. But anyway, if the pandemic leads the Fed to rediscover something like its original mission, which it now has the wherewithal to do, and it even has the foot in the door already through the MSLP and the MLF, then that wouldn’t be a bad thing.

So what I’ve been pushing, and I’ll close on this and then we can go back and forth, is what I’ve been pushing ever since the evening after the afternoon that Mr. Mnuchin made his, on the one hand, disgusting, but on the other hand, to my eyes, highly welcome announcement, I just immediately wrote something up in Forbes again and said, look, here’s what we do now. We can actually do with MLF and MSLP what we should have done in the first place. There’s no reason we can’t do it under the Section 14 authority.

When the Biden administration takes office at the end of January, it could always reinstate the Section 13.3 programs and do them better because presumably Yellen would be a better administrator than Mnuchin was. But it could also just hang back and do nothing and just let the Fed stay in the driver’s seat using its Section 14 authority. And depending on who the Fed chair ends up being in the longer run, that could end up being a better way of doing it. It just depends. I think Powell probably has the guts now to be willing to do this on his own initiative.

But if he’s not, I wouldn’t be surprised if Lael Brainard replaces him once his term expires and then maybe she herself would be ready to do this. But either way, even if they’re not, even if neither Powell nor Brainard is ready to do this, my guess is that Yellen will be willing to work with them on optimizing these programs. Maybe not to the full degree that I would like to see, but at least to a degree significantly farther than what Mnuchin was willing to do. So that’s my story, my friend. [Laughter]

[00:30:12.490] – Grumbine

And what a story it is, Bob, I got to tell you, man, I don’t know how you pulled that off, but that was epic. I want to parse a few things that you said there if you don’t mind, because I tried to keep up. And let me just be fair. I have the pleasure of working alongside of people like you and listening to these talks and have heard some of these things at different times and am able to ingest and digest the content. But there’s some things that I’ve seen people really scratching their head about.

And one of the things you came back to was monetization of debt and liquidity and taking the short term debt instruments and turning them into liquidity. These terms are terms that I see frequently bastardized by a lot of the alternative media, in particular folks like Jimmy Dore, who bring Dylan Ratigan on and say The Fed just printed millions of dollars and trillions of dollars. Printed, printed, they printed. And I know that these terms are lazy.

I don’t really know what I’m talking about, terms, kind of terms, but they’re important terms because then that’s what we get hit with. And the average person repeats these things because the truth is more challenging to say. So what does it mean to monetize debt and what does it actually mean when you say short term debt instruments versus long term debt instruments? Could you just do a quick synopsis of that?

[00:31:38.890] – Hockett

Yeah, I’m happy to do that, Steve, that’s actually a great question, because the proper answer to it, I think, could maybe help dispel a lot of confusion in a lot of people’s minds and also to make something that initially strikes people as being recondite or obscure or difficult and more immediately accessible to them, because it’s actually hard to imagine many things that would be simpler than this. The financial services industry, of course, likes you to think that it’s more complicated than it is because then they can make a lot of money selling their putative expertise to you. But it’s actually incredibly simple.

So basically, any lending activity is debt monetization activity. It’s kind of that simple, right? You can also think that this is basically swapping any kind of lending is swapping. What do I mean by that? Well, if you go to the bank and you take out a loan, there’s a swap that you enter into. Basically, you give your promissory note to the bank because that’s the last thing you do. You might have noticed is you sign something called a promissory note.

You convey that promissory note of yours, which is a debt instrument. It’s a claim on you for repayment according to some schedule. So you swap your debt instrument for Fed debt instruments called Federal Reserve notes or dollars. More likely, you’re swapping for its fiduciary equivalent or its bank account equivalent. But it’s basically the same thing. It’s dollar bills, in effect. And as you and I talked about before, you read across the top of the dollar bill, it says Federal Reserve Note.

It’s kind of interesting, isn’t it, that the word note figures in that phrase Federal Reserve Note across the top of the dollar bill and then the word note also figures in your promissory note that is signed Steven Grumbine. So in effect, what you’re doing is you’re trading a Steven Grumbine note for a Federal Reserve note when you borrow. Now, why might we call that particular swap monetization? Well it’s pretty straightforward.

Your money, your promissory note, in other words, can’t be spent anywhere except with your close friends, right? If you write an IOU to me, you can quote-unquote, “spend” that IOU on me or with me, or you can pay me with your IOU because of course, I recognize your IOU as money, in a sense. Right? I’ll accept it as payment for something in effect, because I know you and I trust you. But because you and I know relatively small circles of people compared to what Uncle Sam or who Uncle Sam knows, who the Fed knows, if we really want full fungibility of our promissory notes, that’s to say full spendability of our promissory notes, we have to convert them temporarily into public promissory notes.

And that’s what the Federal Reserve Notes are. So you’re monetizing your promissory note only in the sense that you’re trading in temporarily an unspendable promissory note for a spendable one. Now, you can generalize that basically to any provision of liquidity or any lending that goes on. If the Fed monetizes a municipality, let’s say it’s the municipality of Columbus, Ohio, if the Fed purchases bonds that are issued by Columbus, Ohio, those bonds are basically just Columbus’s promissory notes. Basically, if Columbus were Steven Grumbine, Steven Grumbine’s promissory note would just be Columbus’s bond instrument.

And the Fed is just doing what the bank does in a case like this. It’s basically, again, converting the unspendable promissory note that is the Columbus bond for a spendable promissory note known as the Federal Reserve Note, better known as the dollar. So once again, an unspendable note is being swapped for a spendable one. That means then, that the unspendable one is being, quote-unquote, monetized. Now, two more points, and then I’ll stop again.

First is, you can see immediately then why it’s bullshit to say that this is just the Fed printing money. The Fed isn’t printing money, the Fed is swapping. It’s swapping one instrument for another. And any lending authority, be it the Fed or private sector bank, is only going to do that swap if it looks as though it’s a good bet, so to speak. In other words, it’s going to accept the Steven Grumbine promissory note only after it’s done a credit check on Steven Grumbine and satisfied itself that Steven is likely to repay according to the schedule that’s all sort of laid out in the terms sheet of the loan.

And similarly, if the Fed monetizes a Columbus, Ohio, bond instrument, it’s only going to monetize it in that way. It’s willing to do that lending operation after it has satisfied itself that Columbus, Ohio, is good for its obligation, i.e. that it will be able to pay off that bond instrument according to the schedule of payments that is all written into the term sheet that accompanies that bond instrument. So it’s never printing money, it’s always swapping one instrument for another.

And the only reason we call that monetization again is because the swap is done so that an entity that issues non-spendable instruments can trade them in for spendable ones, for whatever purpose, usually to invest in some way to engage in some sort of productive activity that it needs initial capital to start up in the first place because it has to buy materials or rent out a facility at which it can produce what it’s going to produce or what have you. So that’s the first point. 

Second point then finally gets to your question about the liquidity matter. It’s basically just a terminological convention that we typically call a short term swap of the kind that I’ve just mentioned, a liquidity provision or an active liquidity provision, whereas if it’s a longer term swap, it’s called a provision of lending or just lending. So we basically call it providing liquidity, if we do a short term swap; and we say we’re lending, it was a longer term swap.

But this is basically just a convention, like we say that, OK, if the Grumbine promissory note that he’s taking over to the bank to swap for dollars is a promissory note that involves Steven paying back his debt within six months, then basically he’s seeking liquidity support from his bank. Right? You’re basically getting some liquidity or liquidity infusion, we might say, from your bank.

Similarly, if it’s for a year, it’ll count by most people’s reckoning as liquidity support that you’re receiving from the bank, which is another way of saying that we’re basically lending to you short term because you only need the money to get over some very brief hump, some hump that you’ll be over within six months or 12 months. If, on the other hand, you’re taking out the loan for five years or 10 years or whatever then we call it a loan. And it’s just basically longer term, it’s basically just a temporal difference.

And then to complicate things a tiny bit further, the dividing line between liquidity support on the one hand and lending on the other isn’t even as sharp as that sort of rough characterization that I’ve just given suggests, because what I just suggested makes it sound like, well, it’s kind of categorical, right? It’s liquidity if it’s six month or 12 month and then it’s lending if it’s not. But a complicating factor that provides a little bit of a gray area between those two categories is the possibility of rollover.

So, as you know, some loans can be rolled over. In other words, the lending institution, whatever it is, whether it be a public sector institution or private sector one, instead of holding you to the obligation to repay at the end of the six months or at the end of the 12 months, it might say, well, we’ll just renew this loan. So we’ll give you another six months or another 12 months, and then it might renew it again six or 12 months after that. And the longer you rollover, of course, the closer the liquidity support comes to looking basically just like long term lending.

Now, we don’t generally do that because if you know in advance how long you need the money for, then you can contract for that length of time. You can contract for a longer term loan if you think you’re going to need more time and contract for a shorter term loan, if you think you’re only going to need that shorter amount of time. But we all recognize that here in the real world, contingencies sometimes arise or things change or some unexpected development might occur.

And we need a certain amount of flexibility in our practices and our institutions and the things that we do basically to enable ourselves to respond to changed facts on the ground, at least from time to time if changes like that occur. And you can view the institution of the rollover or the practice of rolling over as being just that, it’s just a way of saying, OK, sometimes we’ll roll over short term instruments if something comes up where it looks like it would be better to let Steve pay this back in two years rather than one year.

And we do that sometimes. And the Fed itself can do that with its own facilities. But that’s basically the story in a nutshell. And that’s all that monetization amounts to. It’s just a swap of a spendable debt instrument for a non-spendable debt instrument. And it’s a temporary period. Short term, if it’s just for a short period, it’s liquidity provision. And if it’s for a longer period, it’s called lending.

[00:39:57.110] – Grumbine

Thank you, thank you, thank you for that. Bob, one of the big things that’s coming up right now as part of looking at the CARES Act and rent being put on hold to student loans being put on hold till the end of the year. I know there was a petition that went out. Some eight hundred thousand people signed to tell Biden to eradicate student debt now. He has the ability to do that now. Talk to me about that in terms of what we just discussed.

[00:40:29.210] – Hockett

Yeah, so we have a bit of a hump that we’re going to have to get over. I think basically at least between December 31st and January 21st. And that’s, of course, a best case scenario, assuming that Biden hits the ground running the moment he’s inaugurated and then starts doing the right stuff instantly. We have to do something at the very least about that one month period, which might turn out to be a somewhat longer period.

There are various things that we can do to get ourselves, I think, over that hump. One thing we can do right away is for the Fed to do what I mentioned a moment ago. Mr. Powell could just come out today and say, “When these things expire, these CARES Act programs expire at the end of December because of Mr. Mnuchin’s announcement, we the Fed will simply exercise our Section 14 authority to provide all of the support that those programs were supporting and more. We’re actually going to do it the way it should have been done at least until January 21st and maybe beyond.” That’s one thing to do.

Next thing to do, anything that Biden will have the power to do by executive order on taking office on January 21st, he should announce now his intention to do. In order, first of all, to make clear to the markets and more importantly, to the people who are immediately affected, that the maximum length of time that they’re going to have a bit of a difficulty is a three week period. And then everything going to be different after that.

But beyond that, you can imagine, for example, federal agencies, let’s say, that might begin to process the demands that student loans start to be repaid, that might normally start to issue those demands or process those demands at the beginning of January. They might just sort of hold off, just stay their hands. Because think about it this way – imagine that you’re an official in the Department of Education and you have it within your authority, if the president gives you that authority simply to refrain from collecting on the debt.

And let’s say the only thing that’s preventing your collecting on the debt right now is the CARES Act stuff, the stuff that basically is suspended. You’re collecting on the debt until December 31st. And now you’ve heard from Mnuchin that, well, that suspension comes to an end on December 31st and it’s not going to be renewed, at least not by me, comma, Steve Mnuchin, comma. And so you’re thinking, well, I guess we’re going to start demanding that money, that those payments recommence as of January 1st or January 2nd.

Now, imagine you’re thinking that way, but then you’re also thinking, wait, President-elect Biden is taking office in exactly three weeks. And he’s already said that the first thing he’s going to do when he steps into the White House is sign an executive order telling us not to resume demands for repayment of these debts. Well, what are you going to do in the office?

You’re probably going to say, “This is not going to be at the top of my priority list right now. I just got back from the winter break or winter holiday. It’s like January 3rd or something. I’m back in the office. A lot of emails have piled up over the last two weeks. All this snail mail has come in. I’ve got all this stuff I’m going to do administratively here in my federal office, my DOE office. And Biden has said, ‘like in three weeks,’ he’s going to say, ‘OK, we’re going to keep those payments suspended.’ What am I going to do first?

Am I going to start drafting a letter that’s going to go out to everybody, send it out to the printing office and say, send this to everybody with a student loan that’s federally guaranteed? No, I’m just going to drag my feet on that and prioritize other stuff.” And there’s nothing particularly illegitimate about that, right? That’s just recognizing reality. Why bother with this? Wouldn’t it be a waste of government paid time, so to speak, insofar as you’re on a government salary, wouldn’t you be wasting, in a sense, your government paid salary to be doing something that you already know with certainty is going to be undone in exactly three weeks?

Of course, you’re just going to say fuck that. So in that sense, I think Biden could have a really significant effect even on this hump, as I’m calling it, just by making an announcement. He could do this today. I wish I had his red phone number, you know, I wish I had his hotline. I mean, presumably somebody is telling him this, but I wouldn’t leave it to chance. I’d call up Biden right now. And I’d say, “Hey, Uncle Joe, why don’t you just come out and make this announcement right fucking now?” Right?

So that when these people when all the stuff expires on December 31st and then all these federal employees go back to the office on the 2nd or 3rd of January, they don’t waste our time or their salary money on doing this useless stuff that you’re going to undo anyway. Just make the announcement and then nobody faces any distress at all on that score.

There are various counterpart things, of course, that he could do. Basically anything that the federal government has the power to stay or hold off from doing, and that it is currently holding off from doing, but that Mr. Mnuchin has said he intends for it no longer to hold off from doing after the 31st, we can basically just hold off on doing and continue to do that, if Biden just makes an announcement. And if you combine that on the one hand with Mr. Powell’s stepping up to the plate, so to speak, and being a statesperson, a sort of monetary statesman for a few weeks at least, going to do all of the stuff that we’ve been doing.

But we’re going to do it under Section 14, at least until Mr. Biden takes office. Then that hump will really be less a hump and more like a slight elevation. It won’t even be  a full speed bump, it’ll be just like just a slight elevation of the terrain that immediately comes back down. So it won’t be a problem. We can really mitigate it significantly, I think, if we do that and I’m of course, literally praying that the people in office understand that, see that and do it.

I’m guessing that they probably will. Probably the dilatory tactics that Mr. Trump has been employing over the last few weeks maybe has them irritated or angry enough that they might be willing to give the finger to people that they would otherwise try to placate and hence go ahead and do what he’s doing, but I guess we’ll see in the next few days.

[00:46:23.640] – Intermission

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[00:47:12.660] – Grumbine

So I guess that brings us to more of a current event situation. Donald Trump just now finally doing the wrist-against-the-forehead concession, pseudo-concession, somewhat concession, kind of concession. And the folks that are in charge of releasing transition information and moneys have been given the go ahead to begin facilitating the transition to the Biden administration. Yeah, let me be crystal clear so everybody knows and they don’t think that I’m suddenly becoming someone that I’m not.

I have been insanely critical of Joe Biden. I have not been a fan of Joe Biden. I am not a fan of Joe Biden. I have followed his career. And I remember an awful lot. His history is in black and white. Anybody can look it up. I don’t need to tell you. That said, we’re here now and we’ve got various strategies for pushing the ball forward. I’ve been on the record talking about direct action, organizing labor, any host of things for the progressive movement, and that has not changed.

But that said, you’ve got to deal with what is, and within Congress and within the White House, these are the people that can actually write bills, actually sign bills into law, can actually take direct executive action. And as immovable as we sometimes feel they are because of corporate money and the capture of lobbyists and so forth, it is still in our interest and our purview to pay attention, to be engaged, to understand and have an inside strategy as well, to affect change in any way possible.

So I want to be crystal clear on my position there so that no one thinks that I’m flaking. [laughter] With that said, we are in a position where none of the people that we would have liked to have seen put into these various positions of authority are being put into these positions of authority, and we see someone like John Kerry, who’s got this remarkably long record of not being an environmentalist, suddenly now the environment czar. You’ve got Janet Yellen now just selected to be the head of the Treasury.

Definitely not who I would have selected. I’m interested in your take as a practical matter, what we can expect from a Janet Yellen Treasury, and what this means to these things that we’ve talked about for the last 45 minutes or so. What do you think a Janet Yellen Treasury looks like and what is the impact?

[00:49:51.900] – Hockett

You had a great, great question, Steve. So maybe needless to say, I’ve been speculatively thinking about this stuff a lot and I’ll put my cards on the table as well, from the get-go, and then proceed from there. As you know, up until I’d say March of this year, really up until March of 2020, I was profoundly critical of Biden as well, I mean, to the point that I was indignant that he would even dare run against Bernie, thinking that everybody should just recognize that this should be Bernie’s and that anybody who would even dare run against Bernie is almost a public enemy by virtue of the very fact that they’re running against Bernie.

In other words, my position was, I guess you could say, at the extreme end in a way and I was merciless in my criticisms of Biden. And I think maybe some of those criticisms were even justified. And Mr. Biden himself has sort of changed his tune a bit in light of things that have been revealed to him by the pandemic about the structure of our economic arrangements and other social structures in our society, and also truths about those structures that have been revealed by the outright state murder of George Floyd and then subsequent state clobbering of good faith protesters against state murder of people of color.

I think it’s possible that to some extent – in fact, I personally think it’s probable that to some extent Mr. Biden’s own eyes have been opened a bit by these revelations, in the sense that, like lots of elites, he maybe was in a bit of a bubble before, just didn’t realize how bad things were out there in some parts of the real world. And some of it’s been maybe brought home to him by what’s been revealed.

It’s also possible that Mr. Biden realizes, well, look, I’m 78 now. I’m really not going to benefit all that much by getting yet more credit card industry money in the way that I had to do when I was always running for re-election of Senate. I’m probably going to gain more now by being able to leave a noble legacy, vaguely FDR-ish legacy that I couldn’t have done before. So why don’t I focus on that rather than just making Clinton apparatchiks happy or industries happy?

That’s the rose-tinted glasses interpretation of maybe where Mr. Biden has been moving or how he’s been moving over the last six, seven, eight months. And for the time being at least, I’m inclined to believe that that’s true. Right? I’m giving him the benefit of the doubt, you might say. But again, I don’t want to suggest that I’m completely hooked on that interpretation. I might turn out to be completely wrong in that hope. In other words, my hope might be dashed here. As you yourself know, it’s been dashed in other instances. You’re always the one who keeps me grounded from letting my… 

[00:52:21.470] – Grumbine

[laughs] I try not to be the guy rubbing noses, but .  . .

[00:52:27.710] – Hockett

So far, you know, if I’m candid, I have to admit you’ve always ended up being the one who was right in these friendly differences of perspective, let’s say, you always ended up being vindicated and I’m not. And so as a statistical matter, the overwhelming likelihood is that your continuing skepticism is going to prove to have been warranted. And my yet again, repeated metabolic optimism is likely to prove to have been wrong-headed.

[00:52:52.010] – Grumbine

[laughs] I want you to be right though, Bob. Let me be crystal clear. I would love – I would celebrate to the high heavens – if Biden turns out to be this progressive icon. You can count on it.

[00:53:03.270] – Hockett

Oh, I know. I know. I actually think you have a purer heart than I have. And if he does turn out to be that way, you’ll probably sing his praises even more enthusiastically than I’ve been able to manage thus far. But thus far, at least, I’m singing his praises pretty widely because all the signs that I’m getting at this point are looking pretty good. And I promise I’m going to take this back to your question. Naming names.

[00:53:25.640] – Grumbine

Sure. Yeah.

[00:53:26.600] – Hockett

So the first thing to note is that, as you know, about a week and a half ago, the Biden team announced a bunch of subteams that they’re calling agency review teams. So these are groups of people who are going to review every cabinet level agency of the government, as well as the Fed, with a view to what their problems have been in the last four years and what their personnel looks like now and what their personnel should look like going forward.

So that includes a review team for the Treasury Department, a review team for the Fed, a review team for HUD, review teams for various other federal agencies that I think are near and dear, or at least whose bailiwicks or whose mandates are near and dear to your and my hearts. And when I first gave a cursory glance to these lists of names, I was sort of flabbergasted because right off the bat I saw 10 names that I recognized as people who were actually friends and colleagues of mine whom I respect and think highly of.

And then ironically, about a week later, I looked at these lists again. I thought, I really want to get an actual count, a literal count, rather than just a quick estimate formed on the basis of a quick glance. And so I counted it up and it turned out I know 21 of these people, not ten, 21 people who are quite progressive and who I really, really believe in and think highly of. And I thought, well, what in the actual…WTAF?

How does it come to pass that 21 people whom I know and respect highly are actually on these teams, especially when the teams are named after the election has already been decided in favor of Biden. So he doesn’t even have to kiss up to us lefties anymore to try to get us to make sure to come to the polls rather than hanging back like we did with Hillary in 2016.

And I thought, well, maybe he actually is serious about wanting to come up with some sort of a synthesis, some sort of an administration that isn’t fully what we on the progressive side would want, but also isn’t fully what those in the middle or even on the right side of the party, like Clintonites, would want, but really is legitimately some kind of a mix of the two. Something in between. It almost looks as though maybe he’s kind of serious about that.

And then I started thinking about the next thing to do was to think about some of the actual announced appointments this past week. And of course, there are more to come. And one of them was Janet Yellen, as you noted. Initially it was leaked to The Wall Street Journal yesterday afternoon and then basically ended up being confirmed later in the day yesterday. So it looks like it is going to be Yellen. So what do I think about that? What do I think about collateral positions or positions that are linked up to Treasury and Fed but aren’t themselves Treasury or Fed? I guess a couple of things.

First of all, my absolute dream for a Treasury Secretary would have been Sarah Bloom Raskin – really, really highly regarded by the left, former financial regulator for the state of Maryland, and then, to his credit, an Obama appointee to the Fed. So she was on the Fed board during the first four years of Obama. And then she was appointed number two at Treasury, just below Jack Lew during the second four years of Obama. And that itself actually, I think, spoke volumes about at least the closeted progressivism of Mr. Obama.

If he weren’t closeted, he would’ve made her chair of the Fed, right, or put her as the Treasury secretary. So, as you know, she was one of the three names that was constantly mentioned in the running for the Biden Treasury, and I was really, really praying and hoping it would be her because that would have been totally transformative and game-changing. Sarah is just absolutely brilliant, has the most sincere progressive heart that you’ll find in any public servant, and also has the virtue of being both very financially and economically savvy on the one hand, and also being a lawyer and hence being legally savvy on the other, which is kind of perfect for a Treasury secretary. Right?

That’s kind of what Alexander Hamilton was. He was a financial genius, but also a legal genius. So she would have been great. But I think all of us who are honest with ourselves recognize that precisely because she was best, she would probably not be the ultimate choice. [laughter] So the question then became what’s a reasonable second best, right? For a while you know, there was a really alarming names race, right? For a brief moment, we were talking about this Governor Raimondo of Rhode Island, who would have been a total disaster, total austerian. It would have been monstrous.

I mean, it would have basically in a single stroke, probably smashed all of my recently found hope in Joe’s sincerity about wanting to find a workable synthesis. But happily, her name was only kind of talked about for about three days or maybe two days and then she was gone. Really, it was kind of down to Lael Brainard on the one hand and Janet Yellen on the other. And the betting odds were on Lael. But then it came out a couple of days ago – this was under the radar, so to speak – that the Biden team and asked Brainard to keep her current post at the Fed, not to leave it, which is kind of a signal that they probably have her in mind as the successor to Mr. Powell, that she’ll be the next Fed chair.

And that would also then mean that the only one left for them to be thinking about for Treasury was Janet. And then, of course, lo and behold, it turned out that it was Janet. Now, with Janet, I actually think it’s not necessarily bad news and probably good news. Again, not news to pop a cork over, at least from my point of view. I’m not opening a champagne bottle. But I do think it’s on balance good news for a couple of reasons. One is Janet has been a very effective stealth dove, you might say, when it comes to monetary policy.

She, in other words, has managed quite cleverly to convince a number of conservatives that she might be hawkish or at least she has her eyes open to the possibility of inflation, so that when you’ve even got people like Stephen Moore saying good things about her, that sort of tells you something. And it’s amazing because she’s really, I think, a dove in the sense that she’s never going to go austerian unless you actually see real inflation developing. And she’s smart enough to know and to see and even to announce regularly that there is no inflationary pressure on the horizon.

And she’s basically the most dovish person I think we’ve had on the Fed in recent years, with the exception of Sarah and maybe Lael. Basically Lael, Sarah, and Janet have been the three most dovish members of the Federal Reserve Board in recent decades. And of course, Janet, I think, has been the most dovish Fed chair in living memory, which tells you a lot, I think. I think that’s very, very helpful. And the reason that, on balance then, this ends up being kind of a good portfolio or a good combination of traits for her is that it looks as though we could probably get her appointed to be Treasury Secretary without incident, really.

I mean, we know that at least 14 Republicans in the Senate will approve. We know that Mitt Romney will. We know that Susan Collins will. We know that Murkowski will, and quite a few others. So there’s likely not to be any problem getting her in office pretty quickly come January 21st. And then once she’s in office, I think she’ll be quite dovish because she recognizes this is no time to be thinking, even to be imagining what it would be like to be a hawk or something. Right?

Now, of course, what that also means is that we don’t have somebody like Stephanie [Kelton] named as Treasury Secretary or as Fed board member. But frankly, I don’t think that was ever in the cards. That was never going to happen, because I think that those of us who are very heterodox are never going to be given positions, at least in our near futures not going to be given posts of that sort of stature. But I do think it’s entirely realistic to think that Stephanie herself could end up being named to the Council of Economic Advisors [CEA] or the National Economic Council [NEC].

And I also think it’s entirely realistic that Sarah, who I mentioned before, Sarah Bloom Raskin, could be named to the National Economic Council in particular. Now, traditionally, an economist has been named to chair the CEA, whereas the chair of the NEC sometimes is an economist and sometimes isn’t. So if you ask me for my dream team, what you have is basically Yellen at Treasury, because that’s basically a done deal. You have either Powell or Brainard as Fed chair and it probably will be Brainard, but he could also reappoint Powell, who’s been not bad at all.

It’s significant, by the way, just a quick aside, that Powell was basically an understudy to Yellen. What makes Powell good is precisely the fact that he was a disciple of Yellen. But anyway, so we have Powell, let’s say, or Brainard, as Fed chair and Janet as Treasury Secretary. And then we would have Stephanie, ideally, as chair of the CEA, but at the very least, being somebody on the CEA. And then we have Sarah Bloom Raskin as chair of the NEC. That would be an economic dream team, and what’s kind of interesting is they would all be women in these top positions, which would be a real game changer, of course.

I’d also love to see – you probably know Lisa Cook. She’s a very distinguished and very egalitarian minded and racial wealth gap oriented African-American woman economist, Lisa Cook. And she’ll probably be an important part of this administration as well. And I could see her also as chair of the CEA with Stephanie then being on the CEA. And in some ways, that might be an even better outcome, because that way you’re breaking two glass ceilings.

Not only are you putting a woman in charge of the CEA, which Janet has also been, by the way. Janet used to be chair of the CEA as well. But not only are you once again putting a woman at the top of the CEA, but you’re also putting a woman of color at the top of the CEA. And I think that would be a really helpful move, particularly given the fact that now it’s going to be Janet at Treasury and then maybe Brainard and maybe Powell at Fed, we don’t have a person of color at the top economic post. We just have them in important economic posts.

So if I were Biden and I were thinking about optics and thinking about sending a message about racial equality, ethnic equality, as well as gender equality, and then also sending a signal that, look, I’m going to be the opposite of austerian even while avoiding spooking the markets or avoiding spooking the middle-of-the-roaders too much, I would say, well, now that I’ve named Yellen to Treasury, maybe I’ll put Brainard at the top of the Fed, I’ll put Lisa Cook as chair of the CEA, but I’ll also have Stephanie on the CEA, and then maybe I’ll make Sarah Bloom Raskin the head of the NEC. That, to me, would be an economic dream team, at least within the parameters set by political realism in the current environment.

That would be a really great team, even if we didn’t have the political constraints that we have. But given the constraints that we have, I think it would be just amazing. And I actually don’t think it unlikely. It’s not to say I think it’s highly likely, but I’d give it a 50/50 chance that something really close to that could happen. So my guess is that Stephanie should not, I don’t think, commit to being in Sweden or something next semester. Stephanie should be on hand. I think there’s a really strong possibility that she ends up being named to something and that Lisa is as well, not to mention other folks like Amanda Fisher and some other progressive women economists it’s pretty well known Biden has his eye on as possible picks for various positions.

[01:03:54.960] – Grumbine

Well, this is definitely a positive way of looking at the future and seriously, I’ve got enough negative in me. If you’d have given me any more, I would have fallen to the side, so [laughter] I was walking with a lean – I’m still walking with a lean. I’m still going to need a cane, but… [laughter] I think it’s important, though, because the average person doesn’t dig into the behind the scenes stuff. It’s just the real quick-hitting… It’s frustration. You’re looking for progress. You feel a sense of confidence. You’re excited and you see the rug snatched right out from under your feet.

I don’t have enough money. I don’t have enough time to organize. The people that do want to organize aren’t focused enough. They’re distracted. How in the world do we ever take this back? And you look back at each one of these moments throughout the history of time and you realize that we don’t win very often. That’s not really our role to win. The people don’t win very often. The people lose, lose, lose. And so you’re just wondering, how do we get a win? I guess this does fall under metabolic optimism, Bob. [laughs]

[01:05:03.240] – Hockett

Yes. Yeah. I might turn out to be over sanguine as ever, but it could very well be that I’m right here or that the optimism will be vindicated.

[01:05:10.440] – Grumbine

I’m rooting for this, Bob. Just so you know, full disclosure, I needed to have a dose of positivity because sometimes you may not want a divorce, but the divorce is coming. You may not want the parent that died yesterday to be dead, but they’re dead. So today we may not have selected Joe Biden to be the one that we wanted as progressives, but he is going to be president of the United States. And now how do we best operate within that framework? And so I really appreciate you giving me some insights here.

[01:05:42.510] – Hockett

You bet.

[01:05:43.480] – Grumbine

Let me ask you, is there anything that we haven’t discussed, as it’s related to this subject, that maybe I didn’t tee up and that would be good for our listeners to consider as we move on from this?

[01:05:57.590] – Hockett

Yeah, so maybe a parting thought – or one half continued pep talk, but also one half game-planning – would be that to some extent we’re talking about this as though it were exogenous to us. And so our role is to decide whether to be hopeful or not while continuing to watch, and then decide whether our hopes are vindicated or not.

But there is, I think at this point, enough remaining protean-ness or indeterminacy or at least undetermined-ness in team Biden, or the Biden administration, that we can, I think, still have an effect on what the outcome ends up being going forward, meaning in turn then, that we ourselves, through our own decisions and actions, can affect the relative probabilities of these things turning into good faith synthesis of progressive and middle-of-the-road administrations on the one hand, versus reverting back to just yet more hopes dashed, on the other hand.

So what I’ve been doing – I think I’ve talked about this – I’m in regular touch with quite a few of the transition people these days, and I’m never ceasing in these conversations to urge precisely the kind of things that you and I have been talking about over the last hour and that I’ve been suggesting might very well happen. And a deep part of my optimism is rooted in what I hear back from those conversations and people’s responses to those suggestions.

And so one thing that I’m doing is I’m trying to urge, as forcefully as I can, what I think you and I would agree to be the best choices everywhere that there’s a choice to be made. And at the same time, though, doing so in a spirit of helpfulness or optimism and emphasizing the good that would come of it and the realism of doing it, and the reasons not to worry too much about pushback from Republicans or whatever.

One aspect of that is, as you know, I’ve been spending a lot of time thinking through things that Biden can do, even if we don’t pick up those two Senate seats in Georgia in January. And the more that we can, I think, lay the groundwork for them, for that team to make them see what they can do, even if they don’t get Republican sign-on, the more realistic doing the right thing becomes to them.

Furthermore, if we could add in that if past is prologue, and if our past history is any guide, the presidents in the past who have come in with a significant head of support and then not been smacked down two years later in the midterms, have been precisely the ones that stuck with their most ambitious agendas and pushed them forward. Reagan did not get smacked down in the 1982 midterms and FDR did not get smacked down in the 1934 midterms.

But Bill Clinton did get smacked down in the 1994 midterms and Obama did get smacked down in the 2010 midterms. Now what was the difference between Clinton and Obama on the one hand, and FDR and Reagan on the other? Well, the two who came later, namely Clinton and Obama, basically compromised on their most ambitious agendas and really settled for half-measures, or even less than half-measures, in their first two years.

And I think that’s part of why their bases then just lost all their enthusiasm at the time of the midterms and that enabled these ridiculous Newt Gingrich type people or Tea Party type people to really give a big slap to Clinton in ’94 and to Obama in 2010. But FDR, you remember, he had these wonderful phrases. Imagine a politician with the gall or I could use a word that rhymes with it that starts with “b” [laughter] but I won’t because I don’t wanna be crude or sexist.

But imagine somebody who had the gall to do what FDR did, which was to say – when people said the bankers don’t like what you’re doing here, he said, “well, I welcome their hatred.” Basically said, “fuck them” [laughter] in the way that a New Yorker Dutch aristocrat might put it: “I welcome their hatred.” [laughter] Obviously the substance of the Reagan agenda was monstrous. But what he did have was the smarts of a decent politician.

Any time Tip O’Neill or others tried to shut down or obstruct his agenda in his first couple of years, he just went over their heads by having his own version of FDR’s fireside chats, going into people’s living rooms over the television, saying, you know, these Tip O’Neill people are really preventing me doing what I promised you I was going to do and what you elected me to do. And then all these people would call in to Tip O’Neill and so forth and say, hey, let him do what he needs to do.

In other words, let him destroy the country after all. And it basically enabled Reagan to do quite well in those midterms. He really didn’t get smacked down until 1986 when he only had two years left to go. And so FDR and Reagan, I think, did it right. They didn’t say, oh, gosh, we’re getting pushback from – in FDR’s case – from reactionaries and Nazis, or in Reagan’s case, from liberals. They just pushed harder and that’s what got them in.

So I hope that Mr. Biden going forward will say we’ll do the same thing. And we can help him. That’s bringing this back to your last question, Steven. You and I can help him with that, in the sense that we say, look, man, we got your back. You stick with the most ambitious version of your agenda, the whole three trillion – plus more, if it turns out that it’s going to be necessary, which you and I know it is.

We say stick with that three trillion and consider going even bigger if it turns out that the three trillion isn’t enough. Don’t settle. Don’t say, Oh, hey, I’ll try to make Marco Rubio happy. Just say fuck him, do what you got to do, use executive orders if you need, but also recognize how much you can do even without executive orders, like the stuff you and I talked about before – spreading the Fed, for example. That doesn’t require any new legislation. Do that stuff and you’re going to win even bigger in the midterms.

In 2022, you’re going to get like 100 more AOC’s in the House, and you’re going to get ÁOC herself, and people like her, in the Senate. And then imagine what you’re going to do between ’22 and ’24. And then of course AOC herself can run for president in ’24 if you, Mr. Biden, want to retire. And off to the races, right? And what you and I can do is we can say we got your back on this, right?

We’re not going to shut up about it. We’re not going to leave you alone to deal with Marco Rubio. We’re going to smack him down like we do already on Twitter or wherever. I don’t mean to overstate the importance of Twitter, of course, but you know what I mean.

[01:12:11.940] – Grumbine

Right. [laughs] Left Twitter is not humanity. It’s great, but…

[01:12:15.670] – Hockett

But we’re going to stay really loud. We’re going to get really loud about this. We got your back and we’re going to be a base in the midterms. We’re going to give you, Mr. Biden, the benefit of the doubt for as long as there actually is doubt. Right? If it ever becomes no longer in doubt that you’re basically still a reactionary, then obviously we would change our tune.

But insofar as there remains doubt, we’re going to give you the benefit of the doubt and we’re going to smack down the reactionaries so as to maximize your capacity to realize the most ambitious version of your agenda that might be realized. And you and I and all of our compatriots, I think, in that sense could have an effect on this, so that, in effect, we endogenize what happens next rather than simply sitting back and making predictions about it as though it were an exogenous variable that we had no control over.

[01:13:00.370] – Grumbine

Let me say this before we close here because this is important. Just today, the headlines read that Biden is already whispering that they need to dull down the Heroes Act and make it even smaller than previous to see if they can negotiate with McConnell. And I’m looking at that and he hasn’t even taken office. This feels a lot like Obama negotiating the public option right off of the table before he even took office.

[01:13:27.950] – Hockett

Yeah.

[01:13:28.420] – Grumbine

So I’m saying this in full candor: my eye is already twitching.

[01:13:35.950] – Hockett

Mine would be on that one, too, my friend. The only reason I suppose it’s not is I think what they’re thinking about at the moment is just the next two months. What can we do between now and January 21st? I think that what’s going to happen on January 21st – this is just predicting, I might be wrong – I think what’s going to happen is that McConnell is immediately going to do to Biden what he did to Obama, which is to say he’s basically going to make sure that the Republicans don’t approve anything.

And I think what that’s going to do – again, this is the hopeful scenario – is that will wake Biden up. He’ll say, look, I’m not going to get any sign-on from these people anyway, these sociopaths. So I’m just going to do everything that I can do without them. If we pick up the two seats in Georgia in January, we’ll basically just have straight votes, straight-line votes in the Senate every time and we’ll have a bare majority.

Kamala Harris whom, as you know, I’m also ambivalent about just like you are, at least as far as her past history is concerned – she’ll be the tiebreaker and we’ll just make this stuff happen. And if the Republicans say, “look at this, they’re running roughshod over us because there are absolutely no Republican votes,” Biden can say, “You said the same fucking thing during the Obama period. And you know it’s bullshit because you know he sought your approval of stuff and you just said no all the time because you basically announced the day after his electoral victory that your mission now was to make sure he’s a one-term president.

I’m not going to fall for it this time. I’m not going to do what Mr. Obama did.” If I were Biden, I’d say this and I can imagine Biden saying this, although we’ll see if he does. He can say, “Look, I do not fault my former boss, President Obama, for having tried to work with you people because you had not proved yourself yet to be completely irredeemable assholes. And so as long as there was still hope that you might come along and do something reasonable, it made sense to try for it, which is what my boss, Mr. Obama, did. But, been there, done that.

I was there for all eight years of that and I saw that we never got anywhere with it. So I hereby say to you, fuck you. I hereby say to you, up yours. I hereby say to you, go fuck yourself. I don’t need you. I don’t want you. I don’t care about you. We’re going to do whatever we can do legally without you. You can either get on board with history or you can continue to be a negative dark horse.

If you do continue on that latter course, you’re going to get completely creamed in the midterms in the same way that your reactionary forebears were, in the midterms, by Roosevelt. In the same way as your Democratic counterparts were, in 1982, by Reagan. I’m going to do that now.” And the funny thing is I can almost imagine Biden doing that because he did have those eight years of experience and he will have people telling him to do that, including me.

[01:16:13.270] – Grumbine

Right. [laughs]

[01:16:13.270] – Hockett

Right? And we’ll see. I mean, again, he might end up just totally disappointing you and me, in which case you and I will just say, once again, seduced and abandoned, yet again. But that’s what I’m going to push for. And what I’m hoping at the moment, is – that thing that your eye is twitching about right now and mine is almost twitching about – he’s just thinking in terms of stopgaps. He’s thinking about between now and January 21st. But after the 21st, if he makes the same mistake that Obama did, then we can’t even come up with a saving explanation in his case. Right?

Again, the charitable interpretation of Obama is that we really hoped that there might be some good faith there. Personally, to be completely candid, I think he should have realized at least within two years – or within four – that, no, these people just aren’t operating in good faith, and so it was a mistake to continue to try to compromise with them even after they already screwed him within his first couple of months of being in office.

But for the fun of it, I’ll give him the benefit of the doubt. Even if we do that for the whole eight years, which is pretty implausible, we can at least say that Mr. Biden has absolutely no reason to expect better from these people. He was right there on site during those eight years of Obama, and there’s no reason for him to think Mitch McConnell is going to act in good faith.

So he should be prepared for them basically trying to stop him. And maybe Mr. Trump will end up being helpful in this context, because if Trump is from the sidelines saying, “I won! I won!” and trying to stoke violence among his various kind of militia-type supporters, maybe that will be the slap in the face that Joe needs to say, oh, man, there’s absolutely no hope getting through to these people, so let’s just govern. We got the majority, or even if we don’t have the majority in the Senate, there’s so much we can do without the Senate anyway, including this three-part, four-part plan that I put out with my New Consensus colleagues last week.

That would be transformative. I mean, massively transformative, in the way that we haven’t seen since the New Deal itself. And none of that requires anything from the Senate at all, even if it would be better to have the Senate to give it some extra oomph. So that’s the way I’m looking at this at the moment. But obviously you and I might both be – and especially I, given that I’m still pretty optimistic, I might be singing a completely different tune by February. I pray that I’m not.

Like you, I hope that the optimism ends up being vindicated here, even though I’m basically 0 for 100 at this point in your and my conversations. [laughter] Again, I willingly admit I’m 0 for 100. And I hope that I turn out to be 1 for 100 by January or February. But if I’m not, you know what I’m going to be doing. You and I are going to be on again. [laughter] And I’m going to be eating crow again. And looking at something else, maybe, to be optimistic about.

[01:18:50.760] – Grumbine

Well, you know what? Let me just say I really appreciate your candor. And I love the fact that you and I have talked privately on the phone about this. I truly want to be a good ally to progress in general, wherever it is. I try my best to be nonpartisan. When I say nonpartisan, I don’t mean giving air cover to the right. I mean within the left space I try to be nonpartisan.

I’m not a team player in terms of Democrats or whatever, but I am a progressive in general and wherever I see progress, I try to elevate it. And I’m not somebody who’s going to bite my nose off to spite my face if something good is happening. And so it is nice to talk with you and have your perspective, the insider perspective, as well as the optimism, because I’m not prone to optimism. I’m prone to pessimism. It’s not because I want to be… I don’t want to be a pessimist. Who wants to be a pessimist? I want to be happy. [laughter]

[01:19:51.540] – Hockett

Exactly. [laughs] You’re a healthy human being. So of course, you want to be happy, right?

[01:19:56.310] – Grumbine

Well, look, I really appreciate you taking the time with us. I would like to have another shot. You have a recent book that’s come out. I’d love to give you a chance real quick to plug your book before we close out.

[01:20:07.950] – Hockett

Yeah. So actually there are a couple that have come out just in the last couple of months, and I’ll just mention them really quickly, just because some of your listeners might find them kind of fun or interesting. The first is a book called Financing the Green New Deal, and then the subtitle is A Plan of Action and Renewal. And that’s basically the book version of the Green New Deal Finance Plan that I put together for AOC’s team. They commissioned it in the spring of 2019, actually early summer of 2019. And then I wrote it up. I put the plan together in about a month in the summer of 2019.

And then Palgrave Macmillan, the publishers of all of J.M. Keynes’s works, approached me because they had heard that I had done this and wanted to know if I wanted to publish it in a monograph form. So of course I said yes. And so that came out at the beginning of Autumn. And then about a month later, a book that I co-authored with dear friend Aaron James, a philosopher friend.

Aaron and I both share a background in philosophy and then we share an interest in matters financial and macroeconomic now. And Aaron is quite well known for a couple of other books that he’s already published. Probably the best known one was called Assholes: A Theory – a wonderful book, by the way. I can’t recommend it too highly. That was published back in 2012, basically giving a kind of philosophic account of what constitutes the asshole, what the essential attributes, the defining attributes of the asshole are.

And then he did a knock-off of it called Assholes: A Theory of Donald Trump, which sort of adapted the lessons of the book to Trump about four years later when Trump won the election. But anyway, a wonderful, thoughtful philosopher who also has an eye on relevant public affairs. So we go back a long way because we got this long term interest in global justice, given our philosophic backgrounds on the one hand and our interest in actual institutions on the other.

And so we decided to do a book on money together. So this work that we’ve just recently put out, co-authored, is called Money From Nothing, and the “from” is quite intentional, instead of “for” nothing. It’s basically a full philosophic account of what makes endogenous money possible. And as you know, our MMT friends constitute one school of thought under the broader umbrella of what we can call endogenous money theories. And so we give a full account of endogenous money and a philosophic account of what makes it possible.

And then we draw a whole bunch of, I guess, what you could call normative lessons or action-oriented lessons from the endogeneity of money and from, of course, the ultimate source of money’s endogeneity, and sketch out a full program of reforms to our financial institutions and structures that would result in a much more just distribution of opportunity, and of material reward, and of enterprise ownership, including employee ownership of firms, and of sensible monetary policy, of course, and of a job guarantee, and of digital wallets for everybody which would function as digital postal banking, you might say, all laid out in the book.

And it’s published by the same press as published by David Graeber’s book, Debt: The First 5,000 Years. And they’re really good at getting the word out. So there seems to be a lot of potential that that book is getting along with the Green New Deal finance book. And happy to talk with you more about those or other subjects, as you know, any time, my friend. You know that I regard you as a national treasure on the left.

I don’t think anybody does more than you do when it comes not only to getting the word out, but to getting the truth out, you know, I mean, the underlying reasons that account for what is the truth’s being the truth. There are a lot of people, I think, well, I shouldn’t say a lot, but there’s a number of people who get, quote/unquote, the “truth out” as far as the surface of things is concerned. But you really are the only one I know who regularly, even routinely, gets the truth out about the underlying structural realities that make the surface truth the truth – that make it what it is.

And in that sense, I think that you’re doing something that nobody else is doing, certainly nobody with the same degree of frequency and depth simultaneously as you do, my friend. So please don’t ever forget that you’re my hero. And the hero of a bunch of ours and please never stop and please know, as I think you already know, I’m always honored and overjoyed to help out with any of these programs any time you want to chat.

[01:24:19.640] – Grumbine

Oh. Amazing. I’m going to leave it at that. Thank you for that. And folks, this was just yet another wonderful episode of Macro N Cheese, with my friend Bob Hockett. This is Steve Grumbine. We’re out of here.

[01:24:38.330] – End credits

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