Earlier this month, Fed Chair Janet Yellen visited Capitol Hill to deliver her semiannual testimony on monetary policy before Congress. Representative Huizenga of Michigan used the opportunity to ask Ms. Yellen if she thought less banking regulation would have led to a faster economic recovery. Her response? “No, I don’t generally agree with that.”
Former Fed Chair Ben Bernanke dismissed the notion of a housing bubble in 2005 when he told CNBC that “we’ve never seen a decline in house prices on a nationwide basis.” Mr. Bernanke compounded this error in 2007 when he testified before the Joint Economic Committee that the impact on the broader economy and financial markets of the problems in the subprime market seemed “likely to be contained.”
Alan Greenspan, Ben Bernanke’s predecessor, explained to a Jackson Hole audience in 2002 that an asset bubble is difficult to identify until after the fact–that is, “when its bursting confirmed its existence.”
Is it a surprise that the leaders of arguably the most powerful institution in the world are so detached from reality?
Not if you’re Danielle DiMartino Booth. The former Dallas Morning News columnist and Wall Street veteran who spent nine years at the Dallas Federal Reserve as an adviser to Richard Fisher understands the Fed and its inhabitants all too well.
In her bestselling book, Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America, Ms. DiMartino Booth describes how tunnel vision, arrogance, liberal dogma, and abuse of power contribute to a toxic culture and disastrous policy.
I spoke with her recently on The Power & Market Report (transcript below).
Transcript (edited for readability)
Albert: My guest today is Danielle DiMartino Booth. She’s the founder of Money Strong, LLC, and the author of a brand-new book, Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America. She’s a former columnist at The Dallas Morning News and is very well-known for the role she played as an adviser to the Federal Reserve Bank of Dallas. Danielle, thank you very much for joining me on The Power & Market Report. How are you?
Danielle: Great today. How are you, Albert?
Albert: I’m excellent. And congratulations on the book. It’s doing extremely well already in Amazon Bestseller. So congratulations on that.
Danielle: Thank you. I’m really gratified and humbled by how well the book has been received. It’s very exciting.
Albert: Your book has accompanied me everywhere I go for the last couple of days. And when my son—I have a 3-year-old son. He saw me carrying the book. He looked at the cover and you have a picture of the Eccles Building on there, just got a nice shot of this cover. He says, “Daddy, is that your office?” And I said, “No, no. I don’t work at the Federal Reserve” and I’m going to tell my wife “if something ever happens to me, make sure my children know that I never worked there.”
But you did and you had very noble intentions. And it’s a very unusual story because you’re not a Ph.D. economist. I like to say you have marketable skills. You worked in fixed income. You’re a great writer. You had a very successful column. Can you talk about the story of how you transitioned from that career into the adviser role at the Fed and why you did it?
Danielle: Well—so it helps to back up a little bit and understand that after 9/11 and I did work in the fixed income market and it had a profound effect on me and I ended up moving to Dallas to be with the man I would marry. And when I left Wall Street, I signed a noncompete and agreed to leave the industry for a little while which is how I ended up going from Wall Street to a newspaper in the first place. And leaving Wall Street as CDOs and subprime mortgages were starting to be hatched really gave me a perspective on (a) the fact that I was happy because there was no more compliance in my life, but (b) how dangerous the situation was brewing in the subprime market and that’s what caused me to write some very critical things about housing and about Fed policy feeding it and about Alan Greenspan, and that is what put me on the radar screen of Richard Fisher.
So, when he came calling, being that he also was not a Ph.D. in Economics, he was like me. We’re finance-oriented people who started on Wall Street. That’s when he came calling and ended up having me become kind of his market intelligence person. Before every FOMC meeting, I would come up to New York City and I would ask around the trading desk and what-have-you, you know, “what’s going on, tell me.” And it was akin to the role of the priest because people were delighted to tell me exactly what was happening in the market. I would report back to Richard Fisher and off he would go to the FOMC meetings armed to the teeth.
Albert: Now the way you describe it in the book though, it doesn’t sound like it, the position, started as a glamorous role. They didn’t come in and say, “Be Richard Fisher’s right-hand man,” and you weren’t parking the cars but you weren’t exactly in the inner circle either.
Danielle: No, no, no, no, no. I came in in the lowest possible rung, if you will, especially for my age and experience and resume and what-have-you. But you mentioned nobility earlier and I felt it was just a tremendous privilege to be asked to come into the Federal Reserve in any capacity, though I quickly learned it was anything but a welcoming place. It was something of a rude awakening. And when I left to go on bed rest with my twins, that is kind of when I started communicating directly with Richard Fisher and that was kind of in mid-2007 when things really started to click in terms of my eventual role as one of his closest advisors.
Albert: Amazon describes this book as an insider’s unflinching exposé of toxic culture within the Federal Reserve. I thought that was a great description, at least of the first part of the book. I mentioned that I’ve been carrying this book around with me as I go about my own business and, at one point, I was in the DMV, Danielle. I recently moved and I had to go get driver’s licenses and stuff, and I’m reading your book while I’m in the line and I can’t help but notice the similarity between what I was reading and what I was seeing, meaning your observations when you first went to the Fed, the complete absence of urgency, sort of a condescending attitude to outsiders, a disconnect with the real world, compensation and benefits not commensurate with the real value outside of that building. It just goes on and on, the cafeteria, the art on the wall.
I haven’t been to the Dallas Fed, but I’ve been to the Houston branch of it, and it is just amazing. I mean it is restaurant-quality food, beautiful art on the wall. It’s not a Capital One Café with Peet’s coffee and Wi-Fi. This is a luxury setting. And then you mentioned the stampede to the exit at 5:00 pm. It just seems like the DMV with 1000 Ph.D. economists. Can you talk to the viewers about what you saw there and what a change it must have been from the culture that you were used to?
Danielle: Well, I mean—you know, there’s a scene in the book that really does paint the picture, if you will, because I compare how it felt. You know, the first time I walked on to a trading floor at lunchtime and you can smell the red meat that’s being delivered to the traders who were gorging themselves on it and I compare that to this quiet, sterile, almost hospital-like antiseptic type of library setting at the Fed when the crisis was brewing and taking hold. When I joined the Fed, this was when housing was rolling over and things were really starting to happen. I came in and my hair was on fire. It’s like, “Oh my gosh, the world is ending.” And I got there and there was this—it’s all good. There was no sense of alarm. Quite shocking, quite, quite, quite shocking. Total culture shock for me.
Albert: And it’s almost like this hermetically sealed environment because what’s interesting is you started—if you look at sort of the evolution of the crisis, you started the crisis in fixed income. I believe with Credit Suisse, people were pitching you—
Danielle: Oh, yeah.
Albert: –on these CDOs and you’re asking who’s going to buy this equity tranche. And then you saw the whole thing unfold from inside the Fed and that’s what really struck me is just the complete isolation of it all.
Danielle: I went from witnessing the creation of the toxicity inside the organization I was working at Credit Suisse. It’s interesting Bloomberg Business Week magazine while I was at the Fed ended up doing a story on one of these CDOs that was underwritten by Credit Suisse. It got into the fraud at Countrywide and it took a deep dive and it was so bizarre for me to see that years later long after I’d left Wall Street. But to see it laid out like that and I had constant flashbacks, you know, who would buy that equity tranche, and in the end, of course, everybody wanted the equity tranche. It was the hottest ticket in town.
But again, inside the Fed, as these toxic securities were blowing up—they were blowing up at Landesbank in Germany. They were blowing up in totally unrelated places which screamed systemic risk. It was just like nothing to see how folks move on.
Albert: And they seem to be immune from outside influence. You were a columnist and so—I mean you’re getting inundated with public feedback every day or every week on your columns; whereas, if Ben Bernanke starts a blog, they’ll shut off the comments because they’re not interested. Isn’t that a big problem? Just the fact that they’re so isolated from what’s going on in the markets.
Danielle: They have this dynamic organization downtown, the New York markets desk and, they tried to stay on top of everything that was going on in the markets, but it seems like a lot of the information that came from New York was just kind of like, “Oh, that’s what they do up there,” you know. “We don’t really need to concern ourselves too much with it.” And when I would look at some of the economic briefings that would come out, I would tend to be surprised at how little real world was actually flowing into the analysis that most of these Fed presidents were taking to Washington with them.
Albert: And it sounds like the problem is something that perhaps you went there to help solve and maybe was worse than you even imagined when you started. But here’s an example; you have two Masters degrees and it sounds like you were—you might as well have had a GED the way they treated you and I’m not—
Albert: I’m not knocking high school, but my point is that they didn’t give you credit really for any of your accomplishments up until that point. How did you deal with that? And what were you and Richard Fisher trying to accomplish from Dallas?
Danielle: Well—so, bear in mind, Richard Fisher had been in the administration. He was kind of the chief architect of NAFTA. And before that, he started a hedge fund, and before that, he worked at Brown Brothers. And so, he was certainly not just the president of the Federal Reserve Bank of Dallas. I mean his experience was much deeper than that. But he did have Texas roots and I think that he thought that he could make a difference. And I was really excited to work for him because I thought we could make a difference and, boy, were we wrong.
One of the phrases I use in the book and it’s the most apt description I can try and give you is that we found that the institution was too big to fight. Consider people like Jeremy Stein, a brilliant academic economist from Harvard who happens to be admirably somebody who appreciated the financial markets—the real world, and he stayed for his minimum of 2 years and left. So, it wasn’t just me and it wasn’t just Fisher. It was a lot of real world types who found the institution to be, as I said, too big to fight.
Albert: Now that may have been the case from sort of the internal official channels that you had. But you certainly made a difference on the outside, meaning through the media appearances. Richard Fisher was one of the few people we could count on to come out once in a while and speak frankly. He’s done it a couple times. And I wonder what was the reaction from within the Fed. I imagine that sort of thing as highly discouraged.
Danielle: Not perfectly favorably at all. If you read some parts of the book that speak to, you know, Bernanke’s increasing irritation with Richard Fisher because that’s really what it was. He was increasingly irritated with the man because he was like a cowboy who’d ridden right off the reservation and he was uncontrollable. But you shouldn’t be controlled and it shouldn’t be an objective at the institution to control the thinking and control the thought. It should be an institution where dissent is encouraged, but I found that to be—not to be the case.
Albert: The irony is that they like to talk about their collegial approach and that they invite debate and whatnot, but it sounds like that’s actually not the case.
Danielle: Bernanke made a lot of noise about bringing transparency back to the institution and kind of facilitating the spirit of debate among policy-makers. But by the same token, if you look at, for example, taking the interest rate to the zero bound which happened in December of 2008, their attitude was—we have to provide a united front on this. “Have to.” And this is in the transcript. This is not me saying it. Most of the book is, in fact, not my words. I go ahead and use their words and dissent was just discouraged. I don’t care what they say.
Albert: You make a point in the book talking about the transcripts of the meetings and how these things are massaged and edited and—do they bear any resemblance to the actual policy debates that go on that I guess seemed to happen actually before the meeting? What use are these transcripts that we get of the meetings?
Danielle: Well, you know, I think that it’s quite shocking that I have been told by Fed officials who know more than I do that even the transcripts can be scrubbed here and there, which is just beyond eye-opening. When you consider the fact that they sit on them for 5 whole years which defies explanation, if you ask me, why on Earth an institution that is theoretically accountable to Congress and to the American people—why they should benefit from this cloak of secrecy for 5 years is absolutely beyond me.
Albert: Right. It seems like it’s become just another policy too, another—like forward guidance and other things. Just another way of manipulating the markets to have sort of the market do its work.
Danielle: The minutes certainly are. I think part of the reason that that were on a tight 3-week schedule, every 3 weeks we get a Fed statement, every 3 weeks that follow, after that, we get the minutes. I think that part of that is just abject outright manipulation of the market in making sure that if for some reason the message of the actual statement is mistranslated, misconstrued by the market, well then they can use the minutes 3 weeks later to clear up any misunderstandings.
Albert: And do you suspect or do you know of any instances where the media is used for that purpose? You know, the media is used to massage the message after it’s gone out.
Danielle: Well, there’s—I mean—again, there were FOIA requests that were made that showed a tremendous amount of conversations between the Wall Street Journal’s Jon Hilsenrath and the head of the New York Fed and Ben Bernanke himself, so that’s not—again, there’s no conjecture here. This is a matter of public record even though it’s public record that had to be requested.
Albert: OK. I want to shift gears a little bit back to what we were talking about at the beginning. You started this journey hoping to change things from the inside. That proved to be rather difficult. There are many of us, me included, who feel that we actually don’t need a central bank. I don’t think, even with your experience behind you, that you’re willing to go that far. Am I correct?
Danielle: You are correct. I’ve been referring all week long to the 1913 original verbiage in the Federal Reserve Act which dictates that the president of the United States should populate the Federal Reserve board with individuals across the diversity of industries and geographies. And I think if you did that, because we do have a globally interconnected financial system that is vulnerable to systemic risks coming from other countries. So I think you need a strong but independent central bank but that is populated by people who can completely radically change the culture of non-dissent.
Albert: I’m going to ask you what’s admittedly a difficult question to answer, but—If the central bank had not been formed in 1913, what do you think our economy would look like today?
Danielle: Oh, gosh. Well, look, JP Morgan himself in 1907 determined that he was not going to live forever. And due to his mortality, the wheels started to come into motion to create the Federal Reserve. So, I think—I think it’s disingenuous to even make an attempt at answering that question because one financial crisis after another, especially with the world wars that came to be, eventually something would have necessitated us following in the Bank of England, the Bundesbank, the Banque de France. We would have eventually, as a developing nation, necessarily brought a central bank into being.
Albert: So you sort of think it was inevitable.
Danielle: Unless we’re going to stay an undeveloped country, which wasn’t going to happen. We were a rising economic superpower.
Albert: Having seen the way it works, do you think—do you think it can be fixed? And how would you fix it? How much power would you need? What would need to change for us to have the central bank that you envision, not the one we have?
Danielle: Well, I—I think that there are some redundant Federal Reserve districts that can go away. I think that there are way too many economists. I think that comes too loud and clear in the book. I think we need to have more practical people who have maybe run pension funds and have been on the receiving end of that policy, businesspeople, CFOs who’ve been encouraged over the years to take out debt and buy back their shares instead of really growing—the companies growing the economy, job creation.
And I think that this supervision needs to be beefed up and hopefully streamlined. We don’t need a bunch of lending system supervisors spread across—sprinkled across the country. I think we need one strong banking supervisor and to have individuals hired. You’re going to save a whole bunch of money when you streamline those research departments. I think we need to pay people who can make sure that banks no longer stay always one step in front of the regulators.
Albert: Do you think that US central banks should be coordinating with other central banks around the world on policy?
Danielle: Coordinating is a very scandalous term, if you will.
Albert: That’s the nicest word that I could think of. But let me give you an example—foreign currency swaps to bail out liquidity and coordinated and staggered QE things like that.
Danielle: No, no.
Albert: Should the Fed be coordinating—?
Danielle: I completely understand where you’re coming from. I would just answer the question by saying that we know—that I think if there’s one thing that we learned about what’s happened globally is that monetary policy can no longer be made kind of a domestic vacuum. You have to be cognizant of what your actions, how your actions are going to affect the global financial system and the global economy. That being said, I think we need to be very careful to make sure that the primary beneficiaries of Federal Reserve policy are Americans and the US economy.
Albert: Do you think we need global supervision of multinational banks or systemically important banks, like Basel?
Danielle: Look, if Deutsche Bank had blown up a few months ago, it would have been debilitating for our financial system. It would have been debilitating for our economy. It could have triggered unknown types of systemic risks because just the sheer size of their derivative portfolio. So, it’s disturbing to me that the European banking system is in the situation that it remains in because there’s inadequate regulation and supervision. So, I think that if we have to comply with the same standards, then our Chinese counterparts and our European counterparts should have to be in the same boat.
Albert: And then moving on I guess to the US, policy-makers and economists have been clamoring for some type of fiscal stimulus basically since 2009-2010. Maybe they knew that their stimulus efforts on the monetary side wouldn’t be enough. So we’re probably going to get that. It seems like the political environment is such that we will get that. Should monetary policy be coordinated with fiscal policy?
Danielle: I think that the employment mandate at the Fed—to answer your question, I think it should be the opposite situation. I think that monetary policy should safeguard the buying value of the dollar and that the Fed should get out of the business of trying to maximize employment because that has triggered the mission creep that is so toxic and damaging today. So, I don’t think they should be coordinated as much as they should be independent and unrelated.
Albert: Let’s say I had one wish and I use that to make Richard Fisher and you chair and vice-chair of the Fed respectively. What would you do with the balance sheet of over 4 trillion dollars?
Danielle: Well, I would do what was originally agreed to be done when the doves strong-armed the hawks into engaging in further iterations of quantitative easing. They vowed and committed at the time to unwind the Fed balance sheet just as soon as the markets and the economy were on a stable footing. Well, that should have started around 2012. So, unfortunately, we are—
Albert: Can I interrupt for a second? Would you have raised interest rates back in 2012?
Danielle: Oh, yes, absolutely. We were fighting for that rather than fighting about, you know, should it be 10 or 15 billion dollars of tapering. No, no, no, no. We were definitely fighting to normalize interest rates much earlier on. It might have put the economy back into a recession, but we could see the writing on the wall that there was financial instability that was being brewed in the system that would cause problems further down the line. Now, you’re in the third longest economic expansion in US history which suggests to me that we are at risk of going into a recession and we’re at risk of the economic data peaking despite the fiscal stimulus that appears to be coming. So, you almost have to wait until the recession comes and goes to really shrink the balance sheet. But once that does happen, let’s get on it.
Albert: So you’re saying hold steady through the next cycle and try to take care of it on the other side.
Danielle: I mean I think that you can naturally and clearly communicate that this reinvestment business is going to come to an end, but you can only do so much tightening if the economy is going into recession, and you’re talking about strengthening the balance sheet is—that’s active tightening. Cessation of reinvestment will start to naturally take care of that process and I think that that could be a first step.
Albert: I want to close by just talking about your efforts with Money Strong, LLC. You do talk a little bit about your personal life in this book, your background, your upbringing and I think this company is not called “Credit Strong” for a reason. So, can you talk about this company, your upbringing, and the mission I think that you’re on.
Danielle: So, my mission in life is to help educate the American people so that we turn our backs on the culture that’s been encouraged by Federal Reserve policy, that is, trying to create economic growth by generating debt and credit. I think we should go back to being a nation of people who save and invest. It’s not that debt does not have a place, but what’s wrong with saving money for a 20% down payment on a mortgage before you buy that house? Why do you need to have a 3.5% down payment? Don’t buy it if you can’t afford it. Live within your means. Live within your means if you’re a corporation. Live within your means if you’re a country. Let’s just start living within our means again. And I think that that would make us much less vulnerable to one day potentially losing the dollar status.
Albert: Such a contrarian. Good advice though, Danielle. The website is diMartinoBooth.com. Her company is Money Strong, LLC. You can pick up this book, Fed Up. I highly recommend it. I’m halfway through and it’s 5 stars all the way. I guarantee it. Thank you, Danielle, for joining me on the program. I really enjoyed the discussion.
Danielle: Thank you so much for having me. I did as well, Albert. Take care.
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