EconBuff #43 with Ryan Mattson
Dr. Ryan Mattson talks with me about recent changes at the Federal Reserve Board of Governors. Dr. Mattson walks us through why he does not expect this to cause changes in the balance of power at the Board of Governors. We discuss the interaction between the FOMC and the Board of Governors. Dr. Mattson argues that the Federal Reserve System is top heavy, with the Chair of the Board of Governors and the Board itself wielding disproportionate power. We then explore the dynamics of the interactions between the regional districts of the FED and the top of the FED system (Board of Governors and FOMC). Dr. Mattson addresses the nature of representation at the FOMC, and we investigate whether the people atop each FED district represent the people of the regions they preside over. Finally we explore negative interest rates and whether this mechanism can force banks to put liquidity into the system when the banks might not otherwise want to do so.
Photo Credit: Encircle Photos
Transcript
Stitzel: Hello, and welcome to the EconBuff podcast. I'm your host, Lee Stitzel. With me today is Dr. Ryan Mattson. Ryan is a professor at West Texas A&M University and a research associate at the Center for Financial Stability. Ryan, welcome back.
Mattson: It's great to be here. And I'd just like to say before this podcast begins that my views are my own, and not those of West Texas A&M and the Center for Financial Stability, and probably not those of --- not yours as well literally. But yeah.
Stitzel: Yeah. We'll see.
Mattson: Yeah.
Stitzel: It's good to work this out. See if you and I get on the same page here.
Mattson: I'm looking forward to this one.
Stitzel: Very exciting. So, the reason that we're here to talk about Lael Brainard. So, Brainard took office as a member of the Board of Governors for the Federal Reserve System in 2014, in order to fill a term going through 2026.
Mattson: Yes.
Stitzel: And in ’22 she was sworn in as Vice Chair for a term ending in 2026. But she resigned in February 18th of 2023.
Mattson: Hmm mmm.
Stitzel: And so, we --- I wanted to get your opinions on how you see this changing the Federal Reserve going forward; but set us up before you, kind of, get into your opinion why this particular event is so important to talk about.
Mattson: Yeah. So, I mean, let's talk a little bit about Lael Brainard. And then if we can, I'd like to get into just the Fed in general. But the announcement of Lael Brainard as a Vice Chair of the Fed was a bit odd and seen by---at least me and some others and the---people who watch the Federal Reserve as a signal that she was going to ascend and replace Jay Powell once Jay Powell's term was up. It's that whenever these press conferences are held on the reappointment or appointment of a Federal Reserve Chair, they don't mention the Vice Chairs, or they may mention them. But she was at the press conference if I'm remembering this correctly. Maybe (not maybe) I should check that. And you guys can correct me in the comments, but she was she played a role in this. And it seemed to be that, you know, this continues some of the Fed tradition of wanting stability. We want people to know that Jay Powell is going to finish out the second term for sure. But we also want people to know that if he does not, [then] this is the person that we will then reappoint. And there’s always some kind of speculation of who's going to be next, but it's usually pretty obvious who's going to be next. But now she has stepped down and is no longer at the Federal Reserve in order to go up. That doesn't mean she can't be appointed as the Fed at the end of Jay Powell's term, but usually the Federal Reserve Chair comes from the Board of Governors or this group of people who votes on Federal Reserve policy. So, her stepping down is a significant event, and I think deserves a little bit of attention, and a little bit of analysis.
Stitzel: So, why is it that the Board of Governors is so important? So, for our listeners out there---I don't think they're going to have a sense of, like…
Mattson: Yeah.
Stitzel:…the Federal Reserve System structure. And they’re probably going to recognize a name like Jay Powell. They’re probably going to understand that he's the Chair of the Board of Governors, you know. But maybe we're not going to have a sense of---so why is that spot on the board of Governor so important?
Mattson: Yeah. So, the Federal Reserve is this very complex bureaucracy. So, let’s start off with what the very fundamental nature of the Fed. This is, by the way, is our third National Bank. The first Bank of the United States was, of course, designed by Alexander Hamilton. I believe there's a line in a musical about it somewhere. I can't quite remember. But yeah. We didn't like that particular iteration, or politicians and bankers didn't like it because that they felt it was too centralized. And so, they got rid of the First National Bank. The Second National Bank---it seemed to be a little too decentralized, and Andrew Jackson vetoed its renewal. So, we've killed our central banks before, right? I mean, this isn't the Bank of England that has a 500-year history of and stability. But the Federal Reserve really started in 1913, and as I like to joke with my students, what we did is we took, you know, we were concerned about it being too political, and then concerned about it being too financial in terms of being on the side of the bankers. So, we took the worst of both worlds. As Americans like to do, you know, with Congress we have, you know, the worst of [legislative] laws, and Presidents [with] the worst of executive power, and we're hoping it balances out. So, the Fed is not it is a central bank, but it's not a public institution. It's not beholden to a lot of the regulations and laws that other institutions connected directly with the federal government have like this Treasury and things like that. The President does appoint the Fed Governors and then Congress approves them and the Chair as well. But the Federal Reserve tries to maintain a certain amount of independence. And this, kind of, a bit of a joke thing, but something that helps my money and banking students, at least as I see fit, I like 90s references. I'm an old guy. I think we've talked before about there's a Simpsons reference for everything. So, I say, you know, imagine Mayor Quimby, who, you know, is, kind of, a corrupt mayor. I mean, well-meaning but corrupt, and then Uncle Scrooge, and you're combining those two and that's the Federal Reserve. And this a good thing actually, because we want those two balances. So, the Board of Governors is the decision-making body of the Federal Reserve, and this is located in Washington D.C. So, I guess we're going to start at the top here, and it's got a Chair, two Vice Chairs, and then all in all there should be seven members. We were at a unique point before the recent appointment of Lisa Cook and Philip Jefferson, where we had empty seats, giving a bit more power to the other voting members. But now, we've got a more, well at least we had a more, balanced FOMC before that. So, we have Jay Powell the Chair, Lael Brainard the Vice Chair, Michael Barr is also a Vice Chair but in charge of different aspects of it, Michelle Bowman, Lisa Cook, Philip Jefferson, and Christopher Waller. These people are appointed to what should be 14-year rotating terms. Sometimes they fill out a different term. Lisa Cook, for example when she was appointed, was filling in for a term that is up, I believe, in another year. So, she’s up for reappointment in another year. What they do is they look at all this economic data that comes in from the district, and we'll get into those in a second. And they make a decision about what they want to do with the Federal Reserve's asset balance sheet. And I’m being careful with my language now, I think, as you can tell. Because I think, you know, usually---I'd say [that] oh, the Fed funds rates---they make decisions about the Fed’s asset balance sheet, which will then be a decision about the federal funds rate and other reserve requirement rates and discount rates. So, when we talk about raising rates, these are the people who have the most power in that decision. So, Leo Brainard is seen as a potential vote that is now off of the committee. So, her voice on previous decisions will no longer be heard. She’s working at The White House now. So, now we have six members, including the Chair Jay Powell. But we also do have some other people, which we'll get into a bit. So, someone needs to be appointed. There needs to be someone coming in, and that Vice Chair role needs to be filled. And there's going to be some uncertainty on that. So, I can keep going, and let me do one last one.
Stitzel: No.
Mattson: I see you got a question but let me.
Stitzel: Go ahead.
Mattson: Let me have one last thing.
Stitzel: O.K.
Mattson: These votes tend to follow the Chair. On very few occasions you will get a dissenting vote. And a lot of the press around Lael Brainard seems to have been that she was a potential dissenting vote on the Open Market Committee. That however is---it's just not true. When you look at the Federal Reserve Open Market Committee votes, whether (they're) we're going to vote to raise rates, or we're going to vote to contract the asset balance sheet, she would more often than not vote with the Chair. And I'm willing to bet people can go and check me on this that she voted with Jay Powell a lot more than she voted against him. The votes I've seen against that she voted on were related to mergers and who comes into the Federal Reserve as a bank.
Stitzel: So, I think you've, kind of, covered, kind of, what the Board of Governors is and what it's doing. And I think that's really good. And you, kind of, opened up two different potential directions to go from here, right? And one is, kind of, talking about the history and the political economy behind this. But I want to, kind of, explore this voting angle, right?
Mattson: Hmm mmm.
Stitzel: So, the fact that we have a dissenting or not dissenting vote would be one very obvious, almost like, crude measure. But a process, like, that you could have a lot of input, and at the end of the day, kind of, yeah the votes all come out pretty…
Mattson: Hmm mmm.
Stitzel:…you know, lots of unanimous votes, or lots of votes with very few dissenting opinions. But a lot can happen behind closed doors. And you can have a voice like Brainard…
Mattson: Sure.
Stitzel:…that's coming along, and it's like, O.K. we're not really voting against things that often. But it can essentially be like a dissenting opinion in the room, right?
Mattson: Right.
Stitzel: It can, kind of, be pulling back on the reins of the way that everybody else wants to go. So, what is it? Give the listeners a sense of---what would it even mean to be a dissenting vote? Like what would somebody that in that situation, what kind of, you know, school of thought are they coming from? What kind of opinions are they holding? What kind of things would they prioritize…
Mattson: Yeah.
Stitzel:…their concerns about one area over a different, right? So, everybody’s obviously thinking about doves and hawks. Is that…
Mattson: Yeah.
Stitzel:…kind of categorization…
Mattson: That….
Stitzel:…that you're talking about? Or are there some other things?
Mattson: That would be the immediate categorization that I would talk about. With the Federal Reserve, you don't want to think about Republican or Democrat. You want to think about hawk or dove, because Alan Greenspan, for example, was appointed and reappointed by both Republican and Democrat Presidents. The same with Ben Bernanke. The same with Jay Powell, who was appointed by Donald Trump, and reappointed by Joe Biden. So, what are hawks? And who are the hawks, and who are the doves, and what do they believe? So, hawk is a generally a term for a macroeconomic policy maker who focuses on inflation. They believe strongly---and I’m being very, very vague, obviously people have, you know, different kinds of pins with this [and] I'm going to the most foundational level here, [is] they care---about inflation. They want a stable inflation target, which we've all agreed is 2%. Now, you can still be a hawk and say: well, maybe it's 4%. But you're a hawk saying we need to stay on that inflation target. If we're at 2% and the target is 4%, then it's too low. If the target's 2% and we're at 4%, then it's too high---that kind of thing. A dove is a macroeconomic policy maker who is very concerned with---I’m (I was) going to say unemployment, but actually, and let's really delve into this, they are concerned with---output and GDP.
Stitzel: Hmm mmm.
Mattson: Now, that is a big umbrella term because that can include [wage and job growth under a category of GDP]. For example, if we're going to say that Lael Brainard was dovish, [then] she may go---like, let's say she votes for Jay Powell, but then as a Board of Governor she has the right to go---before the media and say: well, I voted this way. But let me explain why I think maybe I would have also dissented---maybe wages aren't growing fast enough. Maybe job growth is higher than we expected. All of this falls under a category of GDP. Now the hawks and the doves are the two kind of back-and-forth views that you'll get from the Federal Open Market Committee. However, the hawks always win, at least since Paul Volcker, who really, really, I think, brought in the inflation hawk strength after 1979-1980. The hawks have had a very oversized influence. And I think that is a good thing, because I at least come from a school thought [that] hey, the central banks got one job. Let's have them worry about inflation. And that's the one thing I get concerned when they worry about other things. But I want them to do a good job with inflation.
Stitzel: And you're fairly mainstream in that?
Mattson: And I'm fairly mainstream. That's the general orthodox view of things. I'm not out in the out in the weeds on this.
Stitzel: So, let’s…
Mattson: Yeah.
Stitzel:…kind of explore that just a moment.
Mattson: Sure.
Stitzel: Right. So, and you can expand on the Volcker thing, right? But if I were to encapsulate that in just a few sentences, it's this idea that, you know, Volcker comes along and, sort of, saves the day in the case of inflation by willing to do things…
Mattson: Yeah.
Stitzel:…that people around him and people preceding him in particular were not really willing to do. And so, that becomes a very visceral lesson…
Mattson: Yes.
Stitzel:…in inflation fighting. And I can't think of how the doves could have a situation where they could come in and save the day in terms of output and create a visceral episode of which to hang their hat on. And so…
Mattson: Oh, this is good.
Stitzel:…it becomes a very difficult. It becomes a very difficult, like, debate to win.
Mattson: Yes.
Stitzel: Right? Because you can, kind of, always be bludgeoned by the hawks with the Volcker era…
Mattson: Right.
Stitzel:…inflation episodes.
Mattson: So, I think, maybe there was a missed opportunity for the doves with COVID. I think that is where a central bank becomes very, very concerned with outputs opposed to inflation. Now again, I can even make this hawkish and say: look, we had severe disinflation, almost deflation, maybe even deflation during COVID-19. You could have made the argument [that] look, we don't want to worry about stable prices right now. We want to worry about the fact that we're on a huge, massive economic lockdown. And so, we need to worry about---now here's why I'm not saying unemployment, right? Because we couldn't put people back in jobs, because we didn't want to spread the virus. And this where I say the doves are concerned with---output. We wanted easy payments. We wanted easy money. We wanted people to be able to pay for groceries, people to be able to continue aggregate demand spending. Because if that economy contracts, and we go into that deflationary spiral, then you can make the argument that O.K. who cares about 2% inflation right now. You know, we're worried about getting people food and avoiding breadlines like the Great Depression. What Volcker did---for those of you who don’t know in 1979-1980, we were facing what's called stagflation. So that was the idea that we had very stagnant GDP growth, or you could say very high unemployment. And we had large inflation. And the previous Federal Reserve Chair was unwilling (or unwilling or unable) to contract the money supply and raise those interest rates. And the FOMC votes---and this where the FMC becomes, again important---that was one of the largest dissensions among the FOMC, because they voted against the Chair. And that is where markets were looking at that and thinking: well, why are they voting against this guy for the policy, but he's pushing through this other policy? So, that Fed Chair didn't last. Paul Volcker is brought in. Paul Volcker does, what is at the time, an extremely unpopular thing, and really at any time an unpopular thing. If your credit card rate goes from 14% to 30%, [then] you're not going to be happy. If, you know, you're on the on the market for a house and, you know, interest rates last year were, I don't know, 5%, and then this year they're 14%, [then] you're not going to be happy with that.
Stitzel: Everybody likes easy money.
Mattson: Everybody likes easy money.
Stitzel: You and I have had these kind of conversations, right? We---I've never met a banker that didn't think easy money wasn't the answer at all times.
Mattson: Sure. Sure. Yeah. It's really hard to make that decision. And that's why we have the FOMC. That's why we have this, kind of, balance of, you know, a Quimby and Scrooge McDuck; because what we want the central bank to do is to have a certain amount of independence, so they’re not just writing checks for the government, and inflating all of our currency.
Stitzel: Can we? Can we go back real quick?
Mattson: Yeah.
Stitzel: Your Quimby/Scrooge McDuck idea is---on one side they're not listening to political pressures and they're doing what they want, and on the other side their inflation hawks?
Mattson: Yes.
Stitzel: O.K.
Mattson: Yeah. Yeah. We want them---the issue with having, say, a Chair who’s a hawk and having an outsized power with the Chair. I'm not gonna---the Chair obviously has a lot of power, but he doesn't have all the power. Having that inflation hawk in and in and in works until, say, you get a dove. And then what happens if you get a dove, and they're able to override the FOMC---or they push an inflationary policy when they should be pushing a contractionary policy, when it may not be popular, but it may be the medicine the economy needs---so the FOMC provides that input and balance to that.
Stitzel: So, but---let's go back, because of that exact thing that you're saying. So, COVID comes along. Here's an opportunity to prioritize dovish concerns.
Mattson: Hmm mmm.
Stitzel: I’m proposing that even if they did aggressive things that would put easy money into the economy, they then would not get the kind of credit that Volcker got at the time that he fought inflation, even in an episode as big as COVID in terms of its economic ramifications.
Mattson: A little bit. And this why COVID’s a great example. Because O.K., they did push dovish, right?
Stitzel: Right.
Mattson: And now, but in two years later, what's inflation? We're far off target here. So, Jay Powell comes out of COVID. Jay Powell and Lael Brainard come out of COVID, and, you know, the economy still seems fragile. So, they maintain (not huge) asset balance growth. They maintain low interest rates.
Stitzel: But the big thing is they didn't let stuff for a loss.
Mattson: Yeah. They didn't let stuff roll off. So, if you're driving down I-27 and you're doing 90 mph and, you know, you realize: oh, I really need to slow down. O.K., they took the foot off the gas, but they didn't put the foot on the brake. So, you know, we're not quite sure what we’re hurtling towards here. They did not begin contracting, actually contracting, the asset balance sheet until this year. So, you know, I'm not sure why people are surprised inflation is still high right now, because they haven't really enacted the policy except in December and January lately.
Stitzel: I think there's just a lot of misinformation…
Mattson: Yeah.
Stitzel:…about inflation. And I've had you and others including Rex Pjesky about…
Mattson: Yeah,
Stitzel:…inflation several times. I think you just have a couple of things where we've heard people say to us---you know, you and I stand into the hall having this conversation and somebody says---well, you know, inflation was 8% [and] now [is] 6%. Does that mean inflation has gone down? It's, like, well no. That's still 6% growth rate.
Mattson: Yeah. Yeah.
Stitzel: So, I think there's a there's some---and maybe we could get into expectations, but that's not really, kind of, the goal of this podcast. So, I'll leave that to you, what you want to say or not say there. You know, but I think what inflation is, and how it works, and what to even expect from it…
Mattson: Yeah.
Stitzel:…it is a little muddled for a lot of people.
Mattson: And I think the thing about expectations in the FOMC is that we've had this expectation the Federal Reserve will take care of inflation. I don't think, you know, from my lifetime perspective in the 90s, the aughts [2000s] and the teens [2010s], [is that] we all, kind of, take for granted [that] the Fed is going to focus on inflation. And now, there's a question that maybe they're not.
Stitzel: Is the Fed dovish right now?
Mattson: No.
Stitzel: Since 2020 still dovish.
Mattson: The Fed is---well O.K.
Stitzel: Since 2020. I'm saying it's a really recent term.
Mattson: O.K. probably more dovish than it has been. But we’re still---I would say they're not being very good hawks. Maybe that’s a better term for it because…
Stitzel: So what's driving that? They're just trying to balance things? They just feel?
Mattson: They are trying to balance things. They’re trying to balance.
Stitzel: They're trying too hard for a soft landing? What's happening here?
Mattson: We're trying too hard for a soft landing, and this GDP growth is not what we are expecting right now. And then a lot of things coming out is going to be---and this where I think that, say, some of the misinformation on Brainard is coming in. She behaves very well like a hawk. I don't see hers as that much of a dove. I see her as a dove in talk, but not much in action. The FOMC places that pressure on itself to be hawkish. So, even if you get a dove like Janet Yellen---and I say Janet Yellen’s a dove going from for her San Francisco Fed presidency; [because] when she was President of the San Francisco Fed, all of her research was on unemployment and output, she was seen as a potentially dovish Federal Reserve Chair. And she came in and her first statement was: inflation, inflation, inflation [and]---she turned into a hawk. So, the FOMC has this ability to turn these people kind of hawkish. There is some speculation we’re going more dovish, because we have two new members---Lisa Cook and Philip Jefferson. Jefferson, first of all, is from what I I've seen of his CV [is] a career economist with the Federal Reserve Board [and] also a professor---very, very hawkish, I think, still. Lisa Cook would be the argument where this kind of a different voice coming in---different background from other people. But her---I believe her dissertation work was with Eichengreen and Romer who were very orthodox macro economists, very…
Stitzel: And what’s her education?
Mattson: Her education---Berkeley, right?
Stitzel: Yeah. But what is she even a PhD economist?
Mattson: She's a PhD economist.
Stitzel: O.K.
Mattson: Yes. Her research tends actually more towards a mix of both micro and macro.
Stitzel: O.K.
Mattson: And that's the thing else that makes her a bit different in (how she) how we view the role of the FOMC. Ben Bernanke was a professor. He was an academic much like Lisa Cook, but he was considered (or is considered) a much more orthodox academic, right? I mean, he wrote all these papers in the 80s about inflation targeting and transparency. So, Lisa Cook would be potentially, the argument we could say [is that]: oh, the Federal Reserve Board is going to vote more dovish, but she hasn't yet. So, we have this person who people are unsure how is she going to vote, and she's voting very predictably according to how the Chair votes, and how other people at the FOMC vote.
Stitzel: So.
Mattson: Now that's only four months but…
Stitzel: Lisa Cook comes from Biden's cabinet, right?
Mattson: She comes from Michigan State University before that.
Stitzel: Was she not?
Mattson: She was an economic advisor for Biden.
Stitzel: Yeah, the economic advisor.
Mattson: She wasn’t in the cabinet.
Stitzel: She wasn't in the cabinet O.K. So, I was I was thinking. Well, this what I was trying…
Mattson: Hmm mmm.
Stitzel:…to say is that she was she's coming from Biden's economic advisory. But that goes back to the that Quimby thing, right?
Mattson: Yeah.
Stitzel: So, now the Fed’s getting people straight out of---should.
Mattson: Yeah.
Stitzel:…that raise alarm bells why or why not for.
Mattson: So, yeah. I mean, and so Lael Brainard is going to Biden's cabinet, right? Is there too much? Is there too much interplay with this?
Stitzel: I mean, if I---let’s take this out of the Federal Reserve. When you see people going back and forth between big pharmaceutical companies in the FDA…
Mattson: Yeah.
Stitzel:…everybody sets off alarm bells because…
Mattson: Yes.
Stitzel:…they just go back and forth.
Mattson: Yeah. Yeah.
Stitzel: Right? And so, let's talk regulatory capture for a minute.
Mattson: Sure. So, let's take a look at you can take a look at both---actually let's take a look at Alan Greenspan. There's an interesting case. Before he was Fed Chair, I mean, you would---because he's always, kind of, the weird one, right? The odd duck, very, almost Libertarian economist. But you look at his career at the Federal Reserve, and he looks very much like Paul Volcker, who is a Democrat. [He] worked a lot with Jimmy Carter. [He] worked a lot with other Democratic candidates after he was the Federal Reserve Chair. One of the designers behind the---was the American Recovery Reinvestment Act, but it was over one of---the bailout plans and TARP for 2009-2010, and Ben Bernanke, a lifetime Republican also, you know, generally considered very aligned with the George W. Bush Administration. But they all look about the same as Federal Reserve Chairs. They all vote almost the same way that you would expect them to have voted over a 35–40-year period.
Stitzel: Yeah. Because they showed up on day one and were told their job was---fight inflation.
Mattson: Right, which, you know, I think this goes to the kind of, brilliance of this 1993 paper that came out that proposes something called---you know I was going to get there to---the Taylor Rule; because this nice, simple formula seems to track really well with all of these different economists. You know, I…
Stitzel: So, how much of that is, kind of, what you’re describing?
Mattson: Yeah.
Stitzel: Some, kind of, educational background and whatnot?
Mattson: Yeah.
Stitzel: If I get appointed to the Board of Governors tomorrow, and make my way up to Fed Chair…
Mattson: Yeah.
Stitzel:…I am not going down as the Fed Chair hula-inflation…
Mattson: Right.
Stitzel…run amok.
Mattson: Yeah.
Stitzel: So, I mean, there's, kind of, an element where I think we're almost back to that Volcker…
Mattson: So.
Stitzel:…the hawks…
Mattson: Yeah.
Stitzel:…have won and the doves really can't gain a foothold.
Mattson: There's that political, and I don't mean political, like, Republican [or] Democrat, but that political---how the system is working within the Fed---pressure. And the pressure seems to be towards the hawks. And yes, we can, in certain extreme situations, see dovish behavior happening. But, you know, that I think the joke that you and I had---maybe three or four years ago when, you know, four or five years ago when Jay Powell was a point, and we were wondering who it was, I would joke with you that, you know---[is] they could appoint Ivanka Trump, and in two years, not two years, [but] two weeks, she’s going to be an inflation hawk.
Stitzel: Hmm mmm.
Mattson: And it---whoever you are going into the FOMC, it changes because people respond to those incentives. They respond to the requirements of the job, the pressures of the job, and the pressures of those around you. The dissenting votes that I see---that I’ve seen happening in the past year, and every now and then there's one token dissenting vote, and the most recent one I can remember---comes from James Bullard, who is part of this, I guess the second arm of this FOMC, but the district Presidents also vote in turns on this. And James Bullard had a turn actually. He was last year. Excuse me, he's with the St Louis Fed and they're not voting this year, but they're voting last year. He voted against Jay Powell’s interest rate rise of, I think it was, 25 basis points at the time. And he put out a statement that said: I voted against this not because I don't I think we should keep rates low, [but] I voted against it because rates are too low, and they need to be higher. So.
Stitzel: So, you say the hawks say that is not enough?
Mattson: Yeah. The hawks are dissenting among themselves right now, as opposed to any kind of dovish argument that we need to, you know, really stimulate the economy. I think they're all looking for a soft landing is it?
Stitzel: So, you've painted a picture kind of going in two directions.
Mattson: Yeah.
Stitzel: One is---the Chair of the Board of Governors tends to get what he or she wants.
Mattson: Tends.
Stitzel: There's a lot of power there.
Mattson: Yeah.
Stitzel: And there's not a lot of dissension going on. And a lot of times even when there is…
Mattson: We haven't talked about New York yet, so we got to get to that too.
Stitzel: Right. Well, O.K. Actually I, kind of, this is, sort of, the direction.
Mattson: Yeah.
Stitzel: I don't know if that's exactly where I was setting you up to go. But just, kind of, where does the decision-making power come from in the Fed? Is the FOMC versus the Board of Governors---you've, kind of, talked about that a little bit---is there a lot of policy shaping that can happen from anywhere else in the Federal Reserve System? Or is it the Board of Governors follow what the Chair wants and the rest of the Fed system just falls in line?
Mattson: Yeah. So, the Federal Reserve is made up of the Board of Governors and we are district 11. The Dallas Fed district---which has Texas, New Mexico, and Louisiana---and I bring this up to say that these are, kind of, the regional representation. So, of these member banks, they get one, two, three, four, five votes on the FOMC. So, you have the Board of Governors getting their seven. The districts get five. And those five change over with one exception---and that is the New York Fed President always votes in the FOMC. So, really you have four of the districts rotating out. So, St Louis voted last year. Dallas is voting this year.
Mattson: So, the listeners are jumping to the conclusion that the Board of Governors comes into the FOMC meetings and just beats up on the rotating…
Mattson: Right
Stitzel:…cast of…
Mattson: On the rotating cast of…
Stitzel:…the district Presidents.
Mattson:…the district Presidents, which partially yes and partially no, depending on how deep you want to get in this episode. We can talk about how the district Presidents are appointed and the Board of Governors has a role in that too. But that's O.K. These are---Lori Logan, who's our new [Dallas] Fed President, has a chance to go to the FOMC and represent the interests of the Dallas Fed District of Southern New Mexico, Northern Louisiana, and the State of Texas. But John C. Williams also, who's her former boss of the New York Fed. She was appointed to Dallas from the New York Fed.
Stitzel: O.K. so wait let's talk.
Mattson: Yeah. Yeah. Yeah,
Stitzel: All right this where…
Mattson: Oh yeah.
Stitzel: Right. We're all…good Democratic Republic…
Mattson: Yeah.
Stitzel:…fans here, right? Everybody listening to this is going to come from---that's how governance works. This is how representation works. And then, you're going to go through and say now we've got a person representing Texas, parts of New Mexico, and what'd you say parts of Louisiana?
Mattson: And Louisiana. Yeah.
Stitzel: And she’s coming from New York?
Mattson: Yes.
Stitzel: So, walk me through that.
Mattson: Right.
Stitzel: How is this person representing our West Texas…
Mattson: Right? I mean this….
Stitzel:…economic concerns about oil and gas…
Mattson: Yeah.
Stitzel:…agriculture.
Mattson: And again, as the child of the 90s I have to admit, you know, my first response to hearing this news was New York City. You know, the old salsa commercials, right? O.K. But…
Stitzel: Does anybody know what you're talking about?
Mattson: No.
Stitzel: Listeners put in the comments if you know what he's talking about.
Mattson: But let me now say, looking into Laura Logan's career, [that] I'm actually pretty pleased with this appointment, and I think this going in a good direction.
Stitzel: So, if I remember right. Your knee-jerk reaction was not like this.
Mattson: My knee-jerk reaction was not. And that is, I guess, my regional bias on things. So, let's talk about what a Dallas Fed President looks like. Lori Logan was born in Versailles, Kentucky. She has a bachelor’s…
Stitzel: Better than New York I suppose.
Mattson: Yeah. Bachelor’s from Davidson College. Master's in Public Accounting MPA? No, Master's in Policy Administration from Columbia University. Correct me in the comments guys. She worked as a representative for the Fed at the Bank for International Settlements. So, she's represented the U.S before within, kind of, the international banking system, and she was the System Open Market Account Manager for the FOMC at the New York Fed. Now, what that means is when Jay Powell says, you know, release the Fed funds, you know, when he says O.K., let's flood Yakovich’s hit. Let's flood the market with money as much money as we possibly can---$4 trillion dollars. John C. Williams as that permanent voting member of the New York Fed supports it. And he's also the one who executes it. So, the New York Fed being the largest district---so for good reason being the largest district---then is the one responsible for what goes on with the asset balance sheet and the Fed funds rate. And Lori Logan was the person under John Williams who then made this happen, made all of that work. Now, of course, there's a lot of people involved in this. But she's now our Fed President, so I'm trying to figure out where she's coming from. This was August 22nd, 2022 when she came in. She has begun a large tour across the state of Texas, and several universities on a speaking tour, and talking with people, and talking with community banks. And from what I've been hearing has been very open to discussing concerns of community banking [and] what's going on in the regions here. So, as a Dallas-Fed President, she is learning quite a bit about our region, and I think doing a good job of transitioning in.
Stitzel: So, let's talk about…
Mattson: So, hopefully when she goes to vote, she will in that way represent District 11. But look, her background as she was at the New York Fed for a long time under John C. Williams---and Powell and Williams tend to vote the same way---so I have no illusions that Lori Logan is going to be a dissenting vote, which can be a good thing [or] can be a bad thing. Yeah.
Stitzel: Yeah. Not necessarily advocating that she has to be a dissenting…
Mattson: Yeah.
Stitzel:…vote all the time or something like that, right? Like, one of the things about Fed policy is the stuff that we've been talking about so far---Board of Governors, FOMC activity, etc.
Mattson: Yeah.
Stitzel:…All right this national level stuff.
Mattson: Yeah.
Stitzel: Right. But one of the things is---if you're from somewhere, you’re one of those people. You're from a particular place. You’re of that people in that place. Does that make sense?
Mattson: Yeah.
Stitzel: And so, if you're getting (O.K. we're getting) a New York bureaucrat come and run the Dallas Fed, that begins to, I think, make you question. What is the (what is this) institution that is the Dallas district?
Mattson: Yes.
Stitzel: In particular, it's an extension of the national. It's an extension of New York.
Mattson: Yes.
Stitzel: It is not. And right, obviously I'm not saying that this individual going around and talking to different community banks is somehow a bad thing or anything like that. But that doesn't make you a Texan.
Mattson: No. No. So, and this is where I think---and I think so we talk about my knee-jerk reaction---I am a regionalist. What can I say? I've been in Texas too long. But keep in mind that we're not just Texas in District 11. We're also New Mexico and Louisiana. Kansas City Fed is not just Missouri---it's Oklahoma City. Dallas Fed is Houston, it's El Paso, [and] it's San Antonio. The appointment procedure, I think in terms of serving the regional interests, helps put a bit of a helps put a bit of distance between being too federal and being too local because….
Stitzel: I don't belabor this point, right? But that's exactly the part that I'm questioning…
Mattson: Right.
Stitzel:…is representing regional interests.
Mattson: How did she get the job, right?
Stitzel: Yeah. Because she got the job…
Mattson: Why?
Stitzel:…based on a lot of experience at the New York branch.
Mattson: At the New York branch, right? And Robert Kaplan, the previous Dallas Fed President, while I would say, you know, rock-chalk-Jayhawk, go KU, because he got a BA from KU. But also, I remember he got his master’s from Harvard. He's working at Goldman Sachs for a long time. He had a more, kind of, national and federal level career. The people that chose Lori Logan are the stakeholders within the district. And this is where maybe we need to take a bit of a dive into the bureaucracy. And I've gotta---I'm sorry I have my notes here, because keeping all this stuff in gets a little bit hard, even as long as I've been teaching this. There we go. The board---the Dallas Fed has a board of directors---[is] made up of nine members. Three of these members are professional bankers. So, these are people who are from Texas, New Mexico, and Louisiana. The vast majority of them---you can go on to the Dallas Fed page and see who they are, and they rotate every now and then. But these are generally people who are part of banks in Texas, financial firms in Texas, and they all have a (they do have a) very diverse background. There are three industry leaders, and that can be from either labor, agriculture, [and] consumer interests. Now, hey. We're in District 11. So, energy is going to be a big deal, right? Energy and finance are a big deal. These people are supposed to represent, kind of, the---instead of the financial system but the---real economy side effects, right? Main Street, right? Main Street versus Wall Street. These are, you know---they’re supposed to give their input on how things are in District 11 not within the financial system. But then, we also have three appointees of the Board of Governors. So, the Board of Governors also gets three people on this committee. Got nine members on a committee. I'm gonna hold up my hands for my sake. Sorry. Sorry Lee, but this just so I can keep track of the numbers.
Stitzel: We don't have any video here.
Mattson: Yeah.
Stitzel: So.
Mattson: So, three guys. Three guys, or well, three ladies or gentlemen are going to be appointed by the Board of Governors. So, we can think of that---O.K. they're going to watch out for the interests of the Board of Governors, right? They're---we can accept that right? O.K. it's who they are, it’s what their job is. We have three people from industry who are from here. O.K. Are from here “from District 11.”
Stitzel: Was gonna say are they from here?
Mattson: Yeah. Yeah.
Stitzel: But ostensibly they should.
Mattson: You can look them up. And they're, yeah, they're from here. And then, you've got…
Stitzel: I bet if you look them up all their addresses are in either Dallas or Houston. So, there's that.
Mattson: From my memory---I saw a lot from San Antonio.
Stitzel: Oh, that’s interesting.
Mattson: And I know for sure one guy from El Paso too. So, that’s interesting. You should [have] three people. Three people. And then, the other three people should be bankers from the area. Now before Dodd-Frank, that meant---and there's the caveat, right? That meant there were nine people voting. And the Board of Governors had, maybe, a 33% influence on the decisions. The Board of, sorry, Board of Directors---these directors appoint a President. Six of them seem to be local people and they vote for that. After Dodd-Frank, Congress in its infinite wisdom decided that and, you know, I go back and forth on how good a decision this was. But after Dodd-Frank, Congress decided that the people that the Federal Reserve were regulating should not be the same people on their Board of Directors. So, they decided that those professional bankers should not get a vote, or at least not an official vote. So, you have a committee of nine who choose the Dallas Fed President. But only six of them are voting, and three of those six are appointed by the FOMC. So, the FOMC went from having a 33% choice to a 50% choice.
Stitzel: O.K. So, but you're saying Kaplan before Logan?
Mattson: Yeah.
Stitzel: Wasn't not, is not, you know, properly a Texan or Louisianan or New Mexican?
Mattson: We’ll have to look that up. But yeah. I mean, he was very he's…
Stitzel: Right.
Mattson:…so national, yeah. A lot of these Fed Presidents tend to be.
Stitzel: There's, kind of, this idea here that's like----O.K. if all this sounds really nice in theory, there's lots of Main Street representation. There's lots of Dallas, not Dallas, [but] you know, regional…
Mattson: District.
Stitzel:…yeah, district, district…
Mattson: District representation.
Stitzel: Regional levels. See now, that's a ---that’s not a 90s reference. There you go…
Mattson: Yeah. Yeah.
Stitzel:…coming into the future, into the present. And O.K., all this sounds really nice in theory, and then you get a bunch of district Presidents that are all, you know, from the…
Mattson: Yeah.
Stitzel:…national part of the system.
Mattson: Hmm mmm.
Stitzel: And then it's like----it doesn’t matter how nice it sounds in theory if all the results keep coming out this way.
Mattson: I mean, I guess you'd always argue Austan Goolsbee at Chicago Fed, right? He's been from Chicago, but I mean is he? University of Chicago. He was at the University of Chicago. But before that, he was Barack Obama's CEA advisor, right? Council of Economic advisors, definitely a national name. Yeah, this a top-heavy organization.
Stitzel: O.K. This exactly what I was driving at.
Mattson: Yeah. So, for example, if the Dallas Fed people---let's say Dallas Fed is District 11---is seeing low inflation and low output growth. [Meaning], where Lori Logan would look at that and say: oh, you know, what we probably should vote for [because] we have low inflation [and] we have low output---we should probably vote to lower these interest rates. And let's say on a national level, we have high inflation and higher output growth. Well, she'd be in that case a dissenting voice. However, let's face facts. The FOMC on a national level wants to deal with the macro-economic aggregates---[i.e.], the inflation rate of the U.S, not the inflation rate of Texas---so they will vote particularly in that way. Now, Lori Logan may through her report mention this, that within District 11 we have these issues, and we need to bring that into account. But the Fed's got one job, and that one job is inflation. And does she want to be a dissenting vote on that when she knows she's going to lose, and potentially---and there may be (there is) some political why'd you’d----be the dissenting vote there. I think with Jim Bullard’s vote, for example, I think was very political on the part of the Fed. Because then they could say: hey, we are concerned about inflation. Look how concerned we are. We've got one guy saying we need to raise interest rates even more, but I don't see very many dove votes.
Stitzel: So, you've painted it, right, a clear picture. And I would like to interject at this point, right? The things that the Fed are doing are extremely blunt instruments.
Mattson: Yes.
Stitzel: I mean they're economy-wide. I mean, they’re international in a very real sense.
Mattson: Yes.
Stitzel: You can't finally target. It's not a scalpel, right? You can’t finally target, or let the let this monetary policy that we're instituting, let that affect Oklahoma City and not Dallas.
Mattson: Exactly.
Stitzel: I mean, it's just it's not even possible.
Mattson: Well, the districts can provide---what's the word you and I argue---granular, a granular view on things.
Stitzel: Yeah.
Mattson: They can, kind of, give that micro-outlook. This may happen within this district.
Stitzel: So, let me say this really quickly, and maybe this is not really for you and me to argue about, right? But macro in general, and aggregates in particular, has its own kind of problem.
Mattson: Right.
Stitzel: This is a really rich and deep topic for another podcast. So, I'm not going to ask you to get into that. Just the listeners need to know [is that] we’re taking macro and aggregates and what the Fed's overall goal is as a given. But what I would like you to comment on is---so then, what are the districts doing? Why have a District 11?
Mattson: So.
Stitzel: Other than to collect information.
Mattson: Sure. Sure. Yeah. I have a---there we go. Actually, the main function of these district banks is clearing checks, issuing/withdrawing currency, administering any discount loans to banks that are in distress, [and] they evaluate any expansions and mergers. So, we recently had Happy State Bank was bought by some other bank. But they were from, I seem to remember, they were in the Atlanta Fed District. So, the Atlanta Fed and Dallas Fed would have had to get involved on that, and evaluate is this bank going to be too big? Can this go forward? And they said: yeah, it's fine. You get the information from industry, and you examine the banks. And I think for you and I---I think I should point this out---they hire a whole lot of research economists. So, they keep food on our table quite a bit. That is kind of the function that we have for these district banks. And I think you know as an aside the concept of the blockchain. I know a lot of people talk about Blockchain. I just want to bring this up in terms of helping to contextualize what the Fed does. So, cryptocurrency has a Blockchain, where there's a ledger that keeps track of all these transactions, and it's a decentralized ledger. At least that’s what’s said, [so] we can argue whether it's decentralized or not, but fine. The Fed is a centralized ledger. The 11th District keeps track of that financial activity going on there. If I write a check to my parents in Tulsa, Oklahoma that clears both the Dallas Fed and the Kansas City Fed, because both of our banks are members. In terms of, you know, the membership of banks, they can decide that as well. There's a really interesting story about Fourth Corner Credit Union, which again, maybe a whole other podcast there. But this is something interesting to bring up. Located in Colorado where recreational medicinal marijuana is very legal according to state law, all right? So, they want to become part of the Fed system. They fly to Kansas City, which is in Missouri, and according to state law in Missouri, recreational and medicinal marijuana not so much legal. So, the Fed can't bring them in. That's an interesting political discussion for later.
Stitzel: Is that the barrier there because the…
Mattson: Yeah.
Stitzel:…it's not legal federally either.
Mattson: It's not. Yeah. But the---I believe when they argued that they argued about Missouri state law, because the workers of the KC Fed would end up handling money. If it would have been an illegal operation in the State of Missouri---and that's money laundering. Or wait---money laundering or trafficking? Yeah. Yeah. Anyway, either way.
Stitzel: The government's never done any money laundering.
Mattson: So, of course not.
Stitzel: Can't be having KC Fed…
Mattson: Come on.
Stitzel:…employees…
Mattson: Come on.
Stitzel:…do it for them.
Mattson: Yeah. So, that's what a district Fed does. It is more mechanical. And yes, they, you know, if we want to talk about the hierarchy and the bureaucracy, they enact what is decided at the FOMC.
Stitzel: O.K. So, we're evaluating Logan…
Mattson: Yeah.
Stitzel:…down the road…
Mattson: Hmm mmm.
Stitzel:…and we say: O.K. is she doing what this region needs her to do? Her national, I'm sorry, her National FOMC voting pattern is irrelevant to that?
Mattson: Yeah. If she maintains the plumbing at the Dallas Fed, if she maintains the issuing/withdrawing of currency and bills, [and] administering of the discount loans, [while] she provides good information to the FOMC, [then] that is a good Fed President. Whether she is a dissenting vote or not, probably doesn't mean anything for you and I on a daily basis. Maybe for someone who’s an inflation hawk, [then] they may care about that. But I'm not sure you and your listeners are as hawkish as I am.
Stitzel: I would guess that we are.
Mattson: Probably, maybe.
Stitzel: I'm certainly in similar hawk territory as you.
Mattson: Yeah.
Stitzel: I don't---I can't speak for the listeners in that regard.
Mattson: Yeah.
Stitzel: But most people hate inflation quite a lot…
Mattson: Yeah.
Stitzel:…which is why it's easy to be a hawk. By the way that's another thing that we haven’t talked about why it's easy to be a hawk.
Mattson: Yeah.
Stitzel: But hey, what got us to this conversation is---right, I set us up with here's the Chair and the Board of Governors and the FOMC, and then, here's the system. And where is the conversation happening? Where is the pushback happening? And you've already said a couple times [that] the Fed system is very top-heavy.
Mattson: Hmm mmm.
Stitzel: But now, we’re describing a---way in which again, right, and the listeners to this podcast are going to be fans of---representation in a Democratic Republic style, [and] that's not what the Fed is.
Mattson: Well, yeah.
Stitzel: So, talk to us about that kind of.
Mattson: Sure.
Stitzel: So, where's that conversation happening? Where's that---where is that pushback? It is basically just in the Board of Governors?
Mattson: That---the main point of pushback is going to be within the Board of Governors. And I would say, you know, where that encounter point is between the district Presidents and the governors; because I feel the governors generally tend to vote as a monolith. They tend to agree this where we're going, and that's, I think, their job. That's the incentive structure that’s set up. Any dissenting voice would come from the districts. But let's face it, those five votes that could be a dissenting vote are actually four; because I don't think New York Fed is going to dissent unless there is more (unless there are some) serious problems at the Federal Reserve.
Stitzel: New York is unique, right?
Mattson: New York is unique. Yeah.
Stitzel: New York might be the one region for whom the national picture virtually is the regional picture.
Mattson: Right. Yeah. And they would, I think, be the ones, if there is an actual pushback, I think you would see it at the New York Fed vote. I think that, you know, Jim Bullard voting no because of this, or Austan Goolsbee voting no because of something else, or Lori Logan voting no because of something else, you know, that would be----hey, the Fed wants to point something out in kind of the details of what it's going to do. The signal that they want to send is---we care about inflation and we're going to do that. And they want people to expect 2%. Price stability is what the Fed wants. 2% in and of itself is meaningless. It could be 4%. It could be 3%. We don't care. The main thing is if they expect 2%, and----if they don’t expect, if who do I mean by [the term] they, excuse me---if firms, banks [and] consumers all expect 2%, they will behave expecting 2%. And the economy will produce price signals that are credible and informative. If I expect 2%, and my boss or I expect 2%, and my boss agrees with me and he gives me a 2% raise, and inflation is 8%, now suddenly my boss and I have got to have an awkward conversation. Or I’ve got half an awkward conversation with my family about my career choices. And that leads to…
Stitzel: Or at least your day-to-day, budgetary decisions.
Mattson: Right. Yeah. That leads to volatile changes in the patterns of behavior that the Fed does not want to see, and honestly that we don't want to see either.
Stitzel: So, and that, you know, in that sense the other districts what’s coming down from, you know, macro-level monetary policy----it's a given…
Mattson: Yeah.
Stitzel:…to the districts, right?
Mattson: Yeah.
Stitzel: That's an input. It’s not a variable to be tinkered with.
Mattson: So, you know, maybe something the Fed is doing upsets the Board of Directors at the New York Fed. Let's say, not John Williams, not the Chair, but the Board of Directors, right? The nine people who are supposed to be administering the New York Fed. And let's say also the San Francisco Fed and the Chicago Fed are similarly upset about something. There is a mechanism through which, through, you know, the Board of Directors can talk with their President, and that President can bring that up to the FOMC. Now that being said, this does look top heavy, right? It would take a lot to move up from the district level and change policy at the top. It doesn’t take a whole lot to change policy at the top and go down, right? Because the Chair is going to say something. New York Fed is going to say: yes, let's do it. Vice Chairs are going to say: yes, let's do it. So, what else are the district’s going to say? Well, nationally that's a good policy. But I don't know. Maybe people in Texas, Louisiana, and New Mexico can deal with higher rates. Maybe we want some higher rates. Maybe we don’t. I'm sure that the Fed takes these into account, but it's a macro focus.
Stitzel: All right. So, let's go back to Scrooge and Quimby.
Mattson: Scrooge and Quimby. Yeah.
Stitzel: Should the whole banking system, let alone the central banking system, should that become more decentralized and less interconnected…
Mattson: Ooooh.
Stitzel:…because then that sledgehammer….
Mattson: That’s a good question.
Stitzel:…does become more like a scalpel.
Mattson: Oh, that's a good question.
Stitzel: This might not even be possible.
Mattson: But yeah.
Mattson: Just as a thought experiment. Let's think about that. O.K., something and my memory on this is not great. So again, feel free to---do people still say flame someone in the comments? Is that a troll? Anyway, I'm old.
Stitzel: Did anybody ever say flame you in the comments?
Mattson: Yeah didn't they? It was all right. Well anyway, let's suppose in the 1980s, if memory serves me correctly, as these interest rates were really going up, a lot of banks found it no longer advantageous to be part of the Federal Reserve System, and they began to drop out. Now, the way that the Federal Reserve can control the money supply is through the transmission mechanism. They push money to the primary dealers, who, I mean, just think of the biggest banks in the world that have branches in the U.S. The Fed says: here's $4 trillion. I'm overly simplifying, but here, O.K. Here's $4 trillion dollars. Lend to other banks. And so, then, you know, they give this money to Citibank, and Citibank then lends to Happy State or Amarillo National Bank. Now the problem in 2008, and the ensuing Great Recession, and the stagnation afterwards is that these primary dealers got the money and then held onto it. Because they're not---let me preface this, there's nothing wrong with that in their decision. There’s nothing illegal about it or unethical about it. They are banks who are looking out for their bottom line in profits. So, if they get that extra capital, extra reserve, and things are going wrong, and they want to hold on to it, [then] they're perfectly within their rights to hold on to it. So, then that doesn't trickle down as the transmission mechanism should be doing. Now with COVID, what ended up happening is the Fed took a more active role, because in 2008-2009 they saw the primary dealers were not pushing as much liquidity. Then the Fed got more and more involved. And that looks more and more like a centralized banking system than I think many banks are comfortable with right now. We have had a long run trend since the 1980s of fewer and fewer commercial banks. Our banking system is becoming---through for whatever reason, becoming more---not quite monopolistic, but less competitive. At bigger banks are holding more of those assets. We have these questions of “Too Big To Fail.” You know, when we’re talking about 14,000 banks (commercial banks) existing in the early 1980s versus 400 banks existing now---that's a lot of lost banks that didn't (we didn't/we don’t) see competitors coming back in. The transmission mechanism may function less well if the Fed has fewer options of which banks decide when to loan and when not to loan. So, the Fed could conceivably become more engaged in direct lending; but that would put them in direct competition with Amarillo National Bank, with Citibank, [and] with Bank of America, which I don't think the Fed wants to do. That being said, it could happen...
Stitzel: So…
Mattson:…once they could decide this.
Stitzel:…have we seen banks leaving the Federal Reserve System lately?
Mattson: No. I mean, what we've seen is just banks failing and mergers and acquisitions. So…
Stitzel: Right. So, the Fed wants to, sort of, be able to come along and, you know, they want to put money into the system, that they want the banks. And if the banks sit on it, they then want to have some mechanism to kind of squeeze those banks. If you’re not in the Federal Reserve System, can you be squeezed?
Mattson: You can't be squeezed if you're not in the Federal Reserve System; but then, you don't have access to the emergency funds. Now, this goes to that really interesting point that I don't see discussed much lately. But maybe it's going to come back in vogue---negative interest rates. So, when a Federal Reserve Banker says something about negative interest rates, they don't mean that you're going to go and deposit your money in the savings account to get -0.5%. That’s not what they mean. You'll probably still see positive or above zero interest rates. The negative interest rate would come at the Federal Fund's interest rate or reserve interest rate level. So, if the Fed gives Citibank $500 billion dollars and says: lend, and Citibank says: no, then the Fed can say: well, if you don't want to lend, [then] we're going to charge you interest on these reserve account balances that you hold. And then Citibank will say: O.K. sure, that's better than nothing. Right? Or well, they'll say sure to either holding on to it and paying it, or they'll say sure to lending it out depending on the level of that negative interest rate there. That can be conceivably one tool.
Stitzel: It had never occurred to me why that might not work, right? Because if I'm the Fed, and I push----whatever, pick a number---$500 billion dollars in, and Citibank gets their $500 million of that…
Mattson: Yeah.
Stitzel:…as money they didn't have yesterday, and they're like, O.K. and now we're gonna start charging you…
Mattson: Yeah.
Stitzel:…then Citibank’s gonna go: O.K., so…
Mattson: Yeah.
Stitzel: I'll get $500 million minus interest. And it hadn't occurred to me that might not work very well. What's your take on that?
Mattson: Well sure. I mean, well, Citibank could certainly sit down and say: you know what? Forget this! But we're not going to be part of the system.
Stitzel: Or even if even if they stay in the system, like, it's money that that showed up out of the…
Mattson: Yeah.
Stitzel:…Federal Reserve System a minute ago.
Mattson: Yeah.
Stitzel: And it was $500 million. Now it's just $495 million.
Mattson: Yeah.
Stitzel: That doesn’t really go on their balance sheet as a loss of $5 million dollars.
Mattson: No, it doesn't really. I mean, what Citibank has to make a decision on is---all right, we got this $500 million dollars. What profit can we get from it? And in 2009-2010, it was really risky to lend, right? I mean, you didn't know who was a good borrower. You didn't know who was a bad borrower. I can completely understand Citibank saying: you know what? Negative interest doesn't sound so bad. I'm just going to hold on to this, pay the penalty, and if there's a run-on deposits, [then] I have all these reserves that I can pay, and I’m fine. You can say the same thing about the beginning of COVID, where, you know, there really was this concern about, you know, getting the money out there, it could have been.
Stitzel: So, even with a negative interest rate?
Mattson: Yeah.
Stitzel: Right. So, one of the problems ---right, you accurately, I think, described one side of the problem---in which is O.K,. I don't know who to lend to, right? But there's this other side of the problem is----and I don’t know what the valuation of some of the assets that I currently am trying to count as capital against my liabilities.
Mattson: Yeah.
Stitzel: I don't know what that is. Well, money that the Fed put in to into the system---even if it were on negative interest, which at the time it wasn't, but----even if it were negative interest, [then] that’s a known value…
Mattson: Sure.
Stitzel:…that then counts to my capital weighing, counterbalancing my liabilities. What number? What number negative interest would have to happen to offset that kind of benefit in a crisis?
Mattson: Well, and let me add to that, all right? Let's say you’re getting negative interest, but let's say we have large amounts of deflation. So, suddenly that negative interest may in real terms…
Stitzel: Yeah.
Mattson:…actually pay more and not be a bad investment. I mean, the transmission mechanism depends on the incentives of the Fed and these banks lining up. And Citibank runs on a profit incentive. And they should---they're a private bank. That's supposed to be their lane. That's supposed to be what they do. I don't want City Bank worrying about monetary policy. I want Citibank to survive so my deposits get interest. They may not have that incentive to actually lend. And we saw that in 2008. And in 2020, let me throw another thing out there. Let's say there is negative interest. But let’s also say there's a global pandemic, and banks---let's all go back to March of 2020 where we---don't know how to deal with this. Should we wear a mask? Should we not wear a mask? Is walking in the park safe? So, you're telling me that you're going to be able to make $500 million dollars’ worth of loans without people going into offices and signing paperwork? I mean, it may be that the banks cannot lend. You know, instead of, say, this, you know, maybe this tax subsidy argument, we may have a quota argument now suddenly. I mean, not, you know, a quota and for real, but just you have a hard stop on the amount of assets or any amount of loans you can make, because you cannot physically get there to sign the paperwork. That all is possible that this transmission mechanism can certainly fail. And the Federal Reserve in 2008 did quantitative easing, and that was seen as actually, fairly controversial. Ben Bernanke, kind of, got in hot water with the Senate for buying 10-year Treasury bonds, which now it's just: oh yeah, the Fed bought more 10-year. Sure, why not? Quantitative easing is now very, very much accepted. During COVID-19, the Fed guaranteed these Payment Protection Program loans, right? And they came very dangerously close to just direct lending, you know. I think you and I joked once about the “Fed-it Card,” right?
Stitzel: Yeah.
Mattson: You get that, and the Fed gives everybody, but that puts them in direct competition with banks. Where's the line for us?
Stitzel: Yeah. I think I've said this on the podcast before. But there was---when was this---a couple years ago now at this point where I emailed you and Rex Pjesky and said: O.K. the stuff that the Fed is doing, like, they're nationalizing the banking system. And your response to me was: you just now figured this out? Like, this is what it took. So, this---what you're describing, right, is this system by which we go down that route, you know, to somebody with, you know, with, sort of, neoclassical economic sensitivities like myself, right? This is alarm bells. This is bad. This is the opposite of what makes for a stable economic system. Kind of give the listeners maybe your, if you want to counterbalance me…
Mattson: Sure.
Stitzel:…or if you want to, sort of, double down on that. Give them a sense of----because they're going to be interested in that, right?
Mattson: Yeah.
Stitzel: So, if somebody listening to this gonna be interested---O.K., what's this trend going to look like? And what do economists think of what that increasingly national, increasingly direct action that the Federal Reserve is going to take?
Mattson: I love that question, because then I want to bring back Lori Logan and community banking. So, all right. You have a podcast with Dr. Anne Bartel on monopolies. And you guys go into the issue of a natural monopoly, right? You have some increasing returns to scale. This doesn't have to be an issue of some kind of capture by the state or direct nationalization. There could be something within the financial system, where, hey, you've got increasing returns to scale, and it's easier for bigger firms to jump in and maintain than it is for smaller firms. I think we are in a very dangerous point for community and regional banks, because it is easier for Citibank to survive than Happy State or Amarillo National Bank, based on the fact that they can still bring in deposits. And an easy monetary policy that the Federal Reserve has enacted---relative to Volcker, right it’s all been easy monetary policy----but you could run the trend line on the Fed funds rate, and it's been this decreasing rate through Greenspan, Bernanke etc. What's going on is these low interest rates---yes, it's making it really easier for people to borrow, but it doesn't necessarily make it easier for smaller banks to lend; because those interest rates that are now lower across the board, community banks may not be able to compete on that based on the cost of their deposits. So. you can think of Walmart, right? One of the reasons Walmart expanded---and Walmart's even now having to compete with Amazon---but the cost to providing their products and services or the average total cost is so much lower for Walmart than it is for some local mom and pop store. So, they can compete on quantity and just drive the local store out. The Federal Reserve is through---what I think one thing that people don’t kind of realize the Federal Reserve through----this loose monetary policy is encouraging increasing returns to scale. It is encouraging the survival of big banks to the potential damage and harm to smaller banks. And one thing that I do want to mention---and again, put points to Lori Logan and try and counter my own knee-jerk reaction. I like this tour around Texas, and the talk with community banks; because while we can’t seem to do something about that nationally, we can do something regionally to help support community banks. We can do something regionally to help support those banks that are based in the places that we live, right? I mean, Bank of America's in North Carolina, right? And then Citi’s often, yeah, elsewhere. And that's where, you know, it's important that the Federal Reserve is owned, and the decision-making by banks around here affects what the district does. We do want that. And we want a Dallas Fed President who recognizes that and is responsive to that. And that's the signal I'm getting there at least. Even if she votes for a lot of loose monetary policy, that could disadvantage smaller banks. There are other things you can do at the district side that would help support those (that) competition among trying to help (bring up) smaller banks...
Stitzel: So, the way that I think about
Mattson:…to reverse this trend.
Stitzel: So, the way that I think about this is there’s a systemic risk to having larger, more connected banks…
Mattson: Yeah.
Stitzel:…which might make it less likely that we have failure but makes failure more catastrophic.
Mattson: Yes.
Stitzel: That systemic risk…
Mattson: “Too Big To Fail.”
Stitzel:….is an externality, because there's nowhere in the day-to-day operations----those transactions that are happening---where that becomes a cost.
Mattson: So, let's go in front---and again, I'm not putting on a tin foil hat. I'm not going into conspiracy of trying to, you know, some, you know, forces trying to nationalize banks. All I'm saying is….
Stitzel: Conspiracy theories are in vogue, so keep firing away.
Mattson: Yeah. But let's say we have another, you know, 2008 event, and we go down from 400 banks to 200. And then another one, we go from 200 to 40. And then from 40 to 4. And then at what point do we look at this and say: well, the banking system is no longer competitive. We need to nationalize this like electricity, or not even nationalize, excuse me; because electricity is not nationalized, but we have favored monopolies, right? So, well heck. We already have the district set up, you know, O.K. So, it's, you know, I have to pay Excel for my electricity, unless I don’t want electricity. So now, maybe I have to bank with the Dallas Federal Reserve, because that is the only survivable bank based on, you know, how we have created this kind of volatile “Too Big To Fail” system.
Stitzel: That's a dark future.
Mattson: I mean, yeah.
Stitzel: This is a bad outcome.
Mattson: So, which is why we do support community banks, right?
Stitzel: O.K. So, other than, so. Right.
Mattson: Yeah.
Stitzel: Lori Logan, district, regional. Let's take all that is given. I'm somewhat suspicious. I'm not nearly so…
Mattson: Sure. Sure.
Stitzel: I’m not nearly so positive about that maybe as you are, but you're closer to it. So…
Mattson: Man.
Stitzel: We'll leave that there.
Mattson: Maybe I'm an optimist there. Yeah.
Stitzel: Let's---we're coming up on an hour here. So, I want to bring it in for a landing. So, let's do it this way. What are things that the Board of Governors and FOMC (not the district people [and] not the local people) but---that could happen at the top of this top-heavy mechanism---that could steer us away from that potential, that could get us to more banks, [and] more local economies that are actually going to be sensitive to their regional needs…
Mattson: Yeah.
Stitzel:…from banking.
Mattson: You know what? And I don't know how this going to be taken but expand the primary dealer list. You know what? If the transmission mechanism is going to break, they have about 20 primary dealers. And I'm sure it's much easier to do that. They're all based in New York, and the New York Fed is there. But you know what? Maybe expand that list of primary dealers from 20 to 200, or maybe 400. How many? I mean, how many commercial banks do we have left? Instead of---we push out the this liquidity into the primary dealers and depend on them to push, maybe the Fed needs to go directly to First Bank Southwest or Happy State or A and B. Maybe they need to go directly to them and say: all right, here’s the liquidity we want to push out. Maybe they need to be in on that conversation. But yes, this this a very top-heavy thing. We've got seven Board of Governors [and] 20 primary dealers. Small systems are easier to manage, right? Easier to affect quick change. We don't vote on the Fed Board, but on the other hand, they're very quickly replaced, and they've been remarkably stable since Volcker. So, this is the balance we have to make. But I think the Fed needs to start dealing more directly with smaller banks and community banks and regional banks, and not depend on Citi and Bank of America to trickle down with that.
Stitzel: My guest today has been Ryan Mattson. Ryan, thanks for joining us on the EconBuff.
Mattson: Thanks. Appreciate being here.
Stitzel: Thank you for listening to this episode of the EconBuff. You can find all previous episodes on YouTube at Econbuff Podcast (@econbuffpodcast5834). You can check out our website at www.econbuffpodcast.wixite.com. That's w-i-x-s-i-t-e.com. You can contact us at econbuffpodcast@yahoo.com.
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