WEBVTT 1 00:00:21.480 --> 00:00:23.800 Hello, and welcome to Western SIP. Today we're going to 2 00:00:23.879 --> 00:00:28.199 be having a fun and really sort of different experience. 3 00:00:28.879 --> 00:00:31.280 I received an email from a publicist, as I often do, 4 00:00:31.719 --> 00:00:34.520 inquiring as to whether or I'd be interested in talking 5 00:00:34.600 --> 00:00:39.479 to Aman vergi amon Is. He's a lot of things. 6 00:00:39.520 --> 00:00:43.079 He's he's a lawyer, he's an economist, he is a 7 00:00:43.119 --> 00:00:45.479 brilliant guy, and he's and he has a book coming 8 00:00:45.479 --> 00:00:47.200 out and the link is available in the show notes, 9 00:00:47.200 --> 00:00:48.600 so if you want to pre order it, I already 10 00:00:48.600 --> 00:00:51.079 have mine. You can go ahead and click that link 11 00:00:51.119 --> 00:00:53.320 and take care of it. And we're going to talk 12 00:00:53.359 --> 00:00:55.960 about a lot of stuff, but really what the conversation 13 00:00:56.079 --> 00:00:57.759 is going to focus around is going to be bubbles 14 00:00:58.119 --> 00:01:01.359 and having a conversation about how how financial bubbles happen. 15 00:01:01.719 --> 00:01:02.399 What is a. 16 00:01:02.359 --> 00:01:05.799 Bubble and what should we be on the lookout for today, 17 00:01:05.840 --> 00:01:07.599 because a lot of you are thinking, oh my gosh, 18 00:01:07.640 --> 00:01:09.680 what was AI a bubble? This is a question that 19 00:01:09.719 --> 00:01:12.280 I asked him as well. And so we're going to 20 00:01:12.319 --> 00:01:14.599 have that conversation and I think it's a little bit 21 00:01:14.599 --> 00:01:17.400 of a different interview, but it's still very illustrative in 22 00:01:17.439 --> 00:01:21.159 our overall goal of increasing the importance of history and 23 00:01:21.239 --> 00:01:24.239 history education. So I hope you enjoy it. Without further ado. 24 00:01:24.239 --> 00:01:41.400 After a couple of quick messages, here's the interview. All right, 25 00:01:41.480 --> 00:01:44.000 welcome back, And as I said before in the introduction, 26 00:01:44.359 --> 00:01:45.760 I'm sitting down with somebody a little. 27 00:01:45.560 --> 00:01:47.439 Bit different today. This is Aman Virgie. 28 00:01:47.480 --> 00:01:51.079 We're going to talk about some of his experiences during 29 00:01:51.120 --> 00:01:53.840 the two thousand and eight recession, the crash that revolves 30 00:01:53.840 --> 00:01:56.040 around the Lehman Brothers, and really get into a little 31 00:01:56.040 --> 00:01:59.120 bit of economics, which, as you guys know from listening 32 00:01:59.159 --> 00:02:02.519 to the show, is some that's of intense interest to 33 00:02:02.599 --> 00:02:05.359 me and obviously of interest to you since you're listening 34 00:02:05.400 --> 00:02:09.000 to this right now. So I want to just kind 35 00:02:09.000 --> 00:02:10.400 of jump in and see if you can set the 36 00:02:10.439 --> 00:02:16.080 stage for us. You graduated from Harvard Law School, you're 37 00:02:16.159 --> 00:02:20.159 working at Lehman Brothers, and what position were you in 38 00:02:21.199 --> 00:02:25.199 when two thousand and eight starts to hit, Like, what kind. 39 00:02:25.120 --> 00:02:26.840 Of information do you have access to? 40 00:02:27.680 --> 00:02:31.199 What is your overall impression of what's starting to happen, 41 00:02:31.680 --> 00:02:35.039 as what we know is the recession is beginning to unfold, 42 00:02:35.120 --> 00:02:35.719 just beginning. 43 00:02:37.319 --> 00:02:40.199 Yeah, sure, let me give you just my background to 44 00:02:40.199 --> 00:02:41.919 make sure we got the timeline right. So I worked 45 00:02:41.919 --> 00:02:45.319 at Lehman Brothers in the late nineteen nineties, so this 46 00:02:45.520 --> 00:02:49.280 was probably ten years before the two thousand and eight crash, 47 00:02:49.439 --> 00:02:51.759 and then it went to law school at Harvard, and 48 00:02:51.800 --> 00:02:53.840 I was on my way back to Wald Street naturally 49 00:02:53.840 --> 00:02:57.479 got a job offer from Peter Teel, who I knew 50 00:02:57.520 --> 00:02:59.759 from I was an undergrad at Stanford when he was 51 00:02:59.800 --> 00:03:02.199 at the law school, so we didn't exactly overlap, but 52 00:03:02.240 --> 00:03:04.520 we ran in a lot of the same circles. So 53 00:03:04.560 --> 00:03:06.680 when he started PayPal, he offered me a job, and 54 00:03:06.759 --> 00:03:09.319 eventually I ended up at PayPal in two thousand and 55 00:03:09.360 --> 00:03:12.120 two and beyond. But I did stay very close to 56 00:03:12.159 --> 00:03:14.360 a lot of my colleagues and friends at Lehman Brothers 57 00:03:14.400 --> 00:03:16.919 who had worked there during those late during that period 58 00:03:16.919 --> 00:03:19.280 in the late nineteen nineties when I was there, and 59 00:03:19.319 --> 00:03:20.919 so I got a pretty good glimpse of what was 60 00:03:20.919 --> 00:03:23.639 going on between two thousand and two and two thousand 61 00:03:23.639 --> 00:03:27.960 and eight, And was also a finance lead at PayPal, 62 00:03:28.039 --> 00:03:29.800 so we were working in the capital markets and working 63 00:03:29.840 --> 00:03:32.719 with investment bankers all the time. PayPal went public in 64 00:03:32.759 --> 00:03:35.439 two thousand and two, got acquired by eBay, and I 65 00:03:35.560 --> 00:03:38.759 was on the finance team and was chief financial officer 66 00:03:39.000 --> 00:03:43.199 at eBay in the North America business when it all 67 00:03:43.240 --> 00:03:45.240 went down in two thousand and seven. In two thousand 68 00:03:45.240 --> 00:03:47.080 and eight, so I'd say I got a pretty good 69 00:03:47.120 --> 00:03:49.280 front row seat to the show and then a little 70 00:03:49.319 --> 00:03:51.479 bit of backchannel with just colleagues and friends of mine 71 00:03:51.520 --> 00:03:51.919 on the street. 72 00:03:53.759 --> 00:03:56.000 So, you know, for a lot of us who lived 73 00:03:56.000 --> 00:03:59.000 through two thousand and eight, I think there was it 74 00:03:59.080 --> 00:04:03.000 seemed like, you know, you're sort of classic Iceberg breaking 75 00:04:03.120 --> 00:04:05.759 scenario where it seems like everything's going to be okay, 76 00:04:05.840 --> 00:04:08.680 there's some tremors on on the horizon, and then all 77 00:04:08.719 --> 00:04:11.759 of a sudden things start to fall apart, very very quickly. 78 00:04:12.840 --> 00:04:16.720 But as someone who was more on the inside, did 79 00:04:16.759 --> 00:04:20.519 you have a sense that things were moving in a 80 00:04:20.639 --> 00:04:24.360 rapidly negative direction before maybe it was starting to hit 81 00:04:24.759 --> 00:04:27.000 the broad media or did it come as just as 82 00:04:27.079 --> 00:04:29.920 much of a surprise to you as to everybody else 83 00:04:30.000 --> 00:04:31.959 the way things started to all of a sudden, very 84 00:04:32.040 --> 00:04:33.319 quickly unravel. 85 00:04:35.120 --> 00:04:38.079 I would say there were warning signals probably in two 86 00:04:38.120 --> 00:04:41.040 thousand and five, two thousand and six. You kind of 87 00:04:41.079 --> 00:04:43.519 have to know what to look for and what to 88 00:04:43.560 --> 00:04:45.639 listen to. I had the benefit of working on the 89 00:04:45.680 --> 00:04:48.800 trading desk at Lehman Brothers, and so I was trained 90 00:04:48.800 --> 00:04:51.480 on the fixed income side and the bond side. And 91 00:04:51.519 --> 00:04:53.800 when you're in the fixed income side and you're valuing 92 00:04:53.800 --> 00:04:56.879 cash flows and understanding assets and how they trade, you 93 00:04:56.959 --> 00:05:00.000 pay attention to different things than you do on the equities. 94 00:05:00.360 --> 00:05:02.839 And I loved financial derivatives. I was actually a trader 95 00:05:03.000 --> 00:05:06.040 of financial derivatives and between nineteen ninety six and nineteen 96 00:05:06.079 --> 00:05:08.720 ninety eight, so that's where I got my training. And 97 00:05:08.839 --> 00:05:11.040 is I think as early as two thousand and six, 98 00:05:11.639 --> 00:05:14.399 you began to see things like spreads on some of 99 00:05:14.480 --> 00:05:19.240 the securities that were securitized by real estate bonds, by 100 00:05:19.800 --> 00:05:24.120 commercialized debt obligations, so very very difficult, very hard to 101 00:05:24.199 --> 00:05:26.759 understand things that you know, most people don't really pay 102 00:05:26.759 --> 00:05:30.160 attention to. But if you do look at securitized bonds 103 00:05:30.199 --> 00:05:33.160 and those trading spreads and how those how those CDO 104 00:05:33.240 --> 00:05:35.639 spreads were moving around, you could see as early as 105 00:05:35.639 --> 00:05:37.120 two thousand and six that there was a bit of 106 00:05:37.439 --> 00:05:40.639 a credit risk. And then it just accelerated and became 107 00:05:41.319 --> 00:05:43.800 it hit the popular imagination probably in two thousand and seven, 108 00:05:43.839 --> 00:05:46.160 when it began to defect equities and real estate prices, 109 00:05:46.160 --> 00:05:48.160 and it began to see the defaults coming. So I 110 00:05:48.240 --> 00:05:50.160 was probably about a year I had just in terms 111 00:05:50.199 --> 00:05:51.480 of my understanding of the market. 112 00:05:52.600 --> 00:05:55.079 So as the market information starts to come in and 113 00:05:55.120 --> 00:05:58.240 I have to imagine, you know, this was back you know, 114 00:05:58.319 --> 00:06:02.959 under the Bush administration and George W. Bush Right, I 115 00:06:03.279 --> 00:06:07.560 would have to imagine that he has intelligent people in 116 00:06:07.600 --> 00:06:10.759 his staff as well, who maybe can see some of 117 00:06:10.800 --> 00:06:16.079 these problems coming along, Like why wasn't there more of 118 00:06:16.120 --> 00:06:20.800 a reaction if you can speculate from the administration. I mean, 119 00:06:20.839 --> 00:06:23.639 it seemed to the average user, I think it seemed 120 00:06:23.680 --> 00:06:25.560 like they were caught a little bit flat footed by 121 00:06:25.639 --> 00:06:26.279 what happened. 122 00:06:27.680 --> 00:06:31.199 Yeah, I think they were. So this is a this 123 00:06:31.240 --> 00:06:33.600 is a great question. Why didn't the government see it coming? 124 00:06:33.639 --> 00:06:37.519 And was it a failure of regulation? And if so, why, 125 00:06:38.079 --> 00:06:41.040 And this is a topic I'd go into and great 126 00:06:41.120 --> 00:06:43.600 death and one I had a bit of a as 127 00:06:43.639 --> 00:06:45.360 I say, a front row seat, but also a little 128 00:06:45.360 --> 00:06:48.160 bit of backchannel sitting there. But in retrospect you get 129 00:06:48.160 --> 00:06:49.959 to you know, you get the benefit of being a 130 00:06:50.079 --> 00:06:52.160 Monday morning quarterback, so you can you can break down 131 00:06:52.199 --> 00:06:54.439 the video and look at all the things that could 132 00:06:54.439 --> 00:06:56.399 have should it would have happened. And I covered this 133 00:06:56.480 --> 00:06:58.680 in great detail in a chapter on my new book, 134 00:06:58.839 --> 00:07:01.399 which is called The History of Annational Bubbles, and it 135 00:07:01.480 --> 00:07:04.279 comes out in early next year, and one of the 136 00:07:04.319 --> 00:07:07.160 chapters was on the subprime bubble. I think it really 137 00:07:07.160 --> 00:07:10.240 started back in nineteen ninety two. There was a law 138 00:07:10.279 --> 00:07:14.160 passed by the federal government. This was passed by a 139 00:07:14.279 --> 00:07:18.560 Democratic Congress but signed by President Bush Senior, and it 140 00:07:18.600 --> 00:07:21.480 was called the Federal Housing Enterprises Financial Safety and Sound 141 00:07:21.560 --> 00:07:24.120 Is Act, and it began to for the first time, 142 00:07:24.279 --> 00:07:27.560 direct Fanny May and Freddie Mack to deploy money that 143 00:07:27.560 --> 00:07:31.480 they were spending to stabilize the mortgage market into LMIs 144 00:07:31.600 --> 00:07:35.439 or low and middle income households, which are basically households 145 00:07:35.480 --> 00:07:38.000 that are at or below the median income in the 146 00:07:38.040 --> 00:07:41.720 neighborhood that they're in. And these quotas began at thirty percent, 147 00:07:42.240 --> 00:07:44.720 and then Bill Clinton takes over, and then the quotas 148 00:07:44.720 --> 00:07:47.720 bidon't expand from thirty to forty to fifty percent. By 149 00:07:47.759 --> 00:07:50.399 two thousand and seven eight it was fifty six percent. 150 00:07:50.800 --> 00:07:54.040 So it was really the Clinton presidency the Bush presidency, 151 00:07:54.279 --> 00:07:57.759 both parties of Congress that were pushing these quotas, and 152 00:07:57.839 --> 00:08:00.439 Fanny and Freddie what they were doing was deploying capital 153 00:08:00.480 --> 00:08:03.279 into it became the subprime bond market. And that's I 154 00:08:03.319 --> 00:08:06.319 think something that took both parties by surprise. They didn't 155 00:08:06.360 --> 00:08:10.240 realize how quickly the subprime bond market was expanding. Between 156 00:08:10.240 --> 00:08:12.639 two thousand and one and two thousand and seven, there 157 00:08:12.639 --> 00:08:14.319 were there were not a lot of defaults in the 158 00:08:14.360 --> 00:08:16.800 subprime bond market, even though that that market was a 159 00:08:16.800 --> 00:08:18.639 little in niche industry when I was a bond trader 160 00:08:18.680 --> 00:08:21.720 in the nineteen nineties. It multiplies by ten x by 161 00:08:21.720 --> 00:08:23.959 the time it get to the middle of the two thousands, 162 00:08:24.199 --> 00:08:27.800 but it didn't. It didn't default because the quality the 163 00:08:27.800 --> 00:08:30.720 mortgages weren't high, but that wasn't immediately apparent. And then 164 00:08:30.759 --> 00:08:33.440 interest rates were held down by the FED between two 165 00:08:33.440 --> 00:08:36.600 thousand and two and two thousand and six at historically 166 00:08:36.679 --> 00:08:38.519 very low interest rates, so they kind of kicked the 167 00:08:38.519 --> 00:08:41.480 can down, you know, down the street a little bit, 168 00:08:41.519 --> 00:08:44.039 and eventually it metastasized in two thousand and seven, and 169 00:08:44.080 --> 00:08:46.039 I think it's fair to say took everybody by surprise. 170 00:08:48.279 --> 00:08:49.120 That's interesting. 171 00:08:49.159 --> 00:08:53.360 So the initial idea behind this policy seems to be 172 00:08:54.159 --> 00:08:58.559 from my perspective, you know, well intentioned. I guess I 173 00:08:58.600 --> 00:09:02.200 could say, you know, let's try to or individuals who 174 00:09:02.799 --> 00:09:06.720 you know might otherwise be able to get their mortgages serviced. 175 00:09:07.240 --> 00:09:12.000 To me, that makes sense. So from your perspective in 176 00:09:12.080 --> 00:09:14.919 the financial game, where does it go wrong? Like I'm 177 00:09:14.919 --> 00:09:18.279 always interested in, like why don't policies achieve what we 178 00:09:18.399 --> 00:09:20.440 want them to? And this seems to me to be 179 00:09:20.480 --> 00:09:26.159 almost a quintessential moment where a policy clearly just missed. Like, 180 00:09:26.240 --> 00:09:28.639 I know, I can see the goal, I understand the 181 00:09:28.720 --> 00:09:30.960 direction that it's supposed to go in, but it doesn't 182 00:09:31.000 --> 00:09:31.840 go that direction. 183 00:09:32.480 --> 00:09:33.440 Why do you think that was? 184 00:09:35.360 --> 00:09:37.639 Well, if you think about the as you said, the goal, 185 00:09:37.879 --> 00:09:40.679 if the goal is just simply to increase home ownership 186 00:09:40.720 --> 00:09:44.559 among middle class individuals, that is, that seems on the 187 00:09:44.559 --> 00:09:47.320 face of it to be an admirable goal and maybe 188 00:09:47.360 --> 00:09:50.000 something the government should be pushing. Now, there are different 189 00:09:50.000 --> 00:09:51.919 ways to do that. If you look at how the 190 00:09:52.799 --> 00:09:55.600 different countries in Europe have approached that problem, or Canada 191 00:09:55.759 --> 00:10:01.200 or Japan, they haven't subsidized loans to low come families. 192 00:10:01.240 --> 00:10:04.039 What they tended to do was either they built housing 193 00:10:04.799 --> 00:10:07.559 in Europe to something called social credit housing, where you 194 00:10:07.639 --> 00:10:11.200 basically build build housing and make it available to low 195 00:10:11.440 --> 00:10:16.080 LMI individuals or families in certain neighborhoods. You could also 196 00:10:16.080 --> 00:10:19.000 subsidize those individuals directly and give them a credit towards 197 00:10:19.000 --> 00:10:21.960 a purchase of a home. But only in really four 198 00:10:22.000 --> 00:10:27.000 countries did the policy become subsidized banks or direct financial 199 00:10:27.039 --> 00:10:30.879 institutions to give loans to people who wouldn't otherwise qualify 200 00:10:30.960 --> 00:10:33.840 for them very easily. And those four countries were the US, 201 00:10:34.240 --> 00:10:38.360 the UK, Spain, and Ireland. Canada didn't do it, Japan 202 00:10:38.360 --> 00:10:40.600 didn't do it, Germany didn't do it, France didn't do it. 203 00:10:41.279 --> 00:10:43.080 And so look at where the two thousand and eight 204 00:10:43.159 --> 00:10:47.519 bubble hit disproportionably, It was those four countries where the 205 00:10:47.840 --> 00:10:51.600 subprime bubble happened. You had a proliferation of lower quality loans, 206 00:10:51.720 --> 00:10:55.480 a massive increase in housing prices, followed by the collapse 207 00:10:55.519 --> 00:10:58.759 in housing prices and the compromised collateral that resulted. I 208 00:10:58.799 --> 00:11:00.879 was living in Canada, grew up in Canada, so I 209 00:11:00.879 --> 00:11:03.080 had a pretty good you know, my mom and dad 210 00:11:03.120 --> 00:11:05.279 own a house in Canada and they were looking at 211 00:11:05.320 --> 00:11:07.879 the US. I remember watching them and talking to them 212 00:11:07.879 --> 00:11:10.799 about the US housing bubble and Canada the housing prices 213 00:11:10.840 --> 00:11:12.440 went up a little bit, but not a lot, and 214 00:11:12.480 --> 00:11:14.840 it never had the same shakeout that the US did. 215 00:11:15.240 --> 00:11:17.279 So that's that's a pretty good clue as to how 216 00:11:17.279 --> 00:11:19.759 to do it. Like maybe Canada and Germany and France 217 00:11:19.799 --> 00:11:22.320 and Japan were onto something and in the US there 218 00:11:22.320 --> 00:11:24.200 were not. And I think what happened was in the 219 00:11:24.279 --> 00:11:26.919 US by the late nineteen nineties, Fanny and Freddy they 220 00:11:26.960 --> 00:11:29.600 became market leaders in mortgage lending, and they were telling 221 00:11:29.600 --> 00:11:32.840 originators that they wanted more of these loans from lower 222 00:11:32.840 --> 00:11:35.360 income households. And if you're a bank and you've got 223 00:11:35.360 --> 00:11:37.480 Fanny and Freddy that are your two biggest clients saying 224 00:11:37.480 --> 00:11:40.120 I want more of these loans from low income households, Well, 225 00:11:40.759 --> 00:11:42.679 what do you do? The banks had to lower their 226 00:11:42.720 --> 00:11:46.000 underwriting standards, and Fanny and Freddie were buying loans with 227 00:11:46.240 --> 00:11:49.039 a loan to value of ninety percent, ninety five percent, 228 00:11:49.399 --> 00:11:51.840 ninety seven. By the time you got to two thousand 229 00:11:51.840 --> 00:11:54.600 and seven, they were buying mortgages with zero down and 230 00:11:54.639 --> 00:11:57.120 all these unusual payment features like no down payment or 231 00:11:57.159 --> 00:12:01.720 teaser rates, negative amorization features that stuff just never happened 232 00:12:01.720 --> 00:12:04.360 in Canada where you didn't have players like Fanny and 233 00:12:04.360 --> 00:12:08.039 Freddie moving down credit. So it is it is, I think, 234 00:12:08.120 --> 00:12:11.120 just a matter of unintended consequences and not thinking through 235 00:12:11.159 --> 00:12:14.120 all the implications. And then once the policy gets rolling, 236 00:12:14.240 --> 00:12:16.240 it's really really difficult to roll it back because you 237 00:12:16.279 --> 00:12:20.000 have politically motivated interests that want to maintain the status quo. 238 00:12:22.279 --> 00:12:22.960 That's interesting. 239 00:12:23.000 --> 00:12:25.399 I mean, anybody who's a little bit older as I 240 00:12:25.399 --> 00:12:28.759 can remember, you know, purchasing a home before two thousand 241 00:12:28.799 --> 00:12:31.960 and eight, Yeah, one in two thousand and six, and 242 00:12:32.240 --> 00:12:34.639 it was kind of like, you know, write down what 243 00:12:34.720 --> 00:12:36.879 you think you weren't on a cocktail napkin, you know, 244 00:12:36.879 --> 00:12:38.840 and just we'll just kind of give you credit for that. 245 00:12:38.919 --> 00:12:41.440 I mean, not maybe not quite to that extent, but 246 00:12:41.519 --> 00:12:45.120 like I mean the standards where you could tell the 247 00:12:45.240 --> 00:12:50.039 market difference post two thousand and eight. You know, as 248 00:12:50.080 --> 00:12:52.440 you're talking, like part of me starts to think, you know, 249 00:12:52.440 --> 00:12:54.919 we're looking at these countries, looking at Canada, We're looking 250 00:12:54.919 --> 00:12:56.960 at you excuse me, the United Kingdom of Ireland, Spain, 251 00:12:57.000 --> 00:12:59.320 the United States, And then I'm thinking about this policy, 252 00:12:59.360 --> 00:13:01.080 and I'm thinking about things that work and part of 253 00:13:01.120 --> 00:13:03.679 me wonders, like, is it just that the government isn't 254 00:13:03.720 --> 00:13:06.360 willing to assume enough responsibility? You know, we have this 255 00:13:06.480 --> 00:13:10.320 weird partnership between you know, capitalism and private equably, you know, 256 00:13:10.360 --> 00:13:12.679 the private side and the government side, you know, and 257 00:13:12.720 --> 00:13:16.519 here we're trying to accomplish a policy objective which is 258 00:13:16.559 --> 00:13:20.480 laudable that maybe should have just been handled by the 259 00:13:20.480 --> 00:13:23.159 government itself, and instead what we're doing is we're kind 260 00:13:23.159 --> 00:13:25.519 of outsourcing it to private banks. And as you say, 261 00:13:25.600 --> 00:13:28.360 the clients are Freddie and Fanny saying, well, this is 262 00:13:28.399 --> 00:13:30.759 what we want, give us this, and it's just the 263 00:13:31.000 --> 00:13:33.919 outcome is adverse to what we're expecting. You know, what 264 00:13:33.919 --> 00:13:35.279 do you think is the problem that you know, the 265 00:13:35.320 --> 00:13:37.159 government just needed to be more involved. We just needed 266 00:13:37.159 --> 00:13:39.279 to build houses, We just needed to do what Canada did. 267 00:13:39.320 --> 00:13:42.000 I mean, why isn't that an appropriate answer to the 268 00:13:42.000 --> 00:13:43.240 problem we still find ourselves in. 269 00:13:44.360 --> 00:13:46.519 Yeah, I suppose it is. And it's a it's a 270 00:13:46.559 --> 00:13:48.799 debate to be had. It depends a little on what 271 00:13:48.879 --> 00:13:50.720 you think the role of markets are and what do 272 00:13:50.720 --> 00:13:53.720 you think the role of government ought to be. I'm 273 00:13:53.759 --> 00:13:56.519 on the free market libertarian side of this argument, and 274 00:13:56.519 --> 00:13:58.679 in all the bubbles that I will I look at 275 00:13:59.399 --> 00:14:04.360 recurring thing is easy money. Sometimes it's it's very obvious, 276 00:14:04.600 --> 00:14:06.960 like in twenty twenty twenty one, the Federal Reserve just 277 00:14:07.000 --> 00:14:09.240 cut interest rates to zero and held them there for 278 00:14:09.240 --> 00:14:13.919 two years, and that fiscal surplus, and that that fiscal 279 00:14:13.960 --> 00:14:17.840 deficit rather and that monetary stimulus created an excess of 280 00:14:17.919 --> 00:14:22.039 demand over supply. Sometimes it's a little trickier to understand, 281 00:14:22.080 --> 00:14:25.000 like the incentives created and something like Fanny May and 282 00:14:25.039 --> 00:14:28.440 Freddiemac and government direct lending. So you know, it's a 283 00:14:28.480 --> 00:14:31.159 little bit of a tricky balancing act sometimes that these 284 00:14:31.159 --> 00:14:35.480 governments try to try to try to try to manipulate. 285 00:14:35.879 --> 00:14:39.039 But ultimately the something like housing, the market works I 286 00:14:39.080 --> 00:14:41.960 think quite well to develop to do things like build 287 00:14:42.000 --> 00:14:45.480 housing where it's needed, to figure out how to underwrite 288 00:14:45.480 --> 00:14:48.200 loans and provide high quality loans. That the downside is 289 00:14:48.200 --> 00:14:52.360 if you're subsidizing or creating a negative incentive or incentive 290 00:14:52.360 --> 00:14:55.639 for banks to lend to people don't otherwise qualify, then 291 00:14:55.799 --> 00:14:57.679 then you start to distort the market. I think that's 292 00:14:57.679 --> 00:15:00.480 actually the worst. The worst outcome. The better would be 293 00:15:00.519 --> 00:15:03.759 to identified populations at need housing you can help them directly. 294 00:15:03.799 --> 00:15:05.840 You can, you know, you can sponsor projects or make 295 00:15:05.840 --> 00:15:08.519 it easier to build in certain areas where we have 296 00:15:08.679 --> 00:15:11.799 a need for low income housing, And that to me 297 00:15:11.840 --> 00:15:15.480 seems like a much more constructive role for government in housing, 298 00:15:15.720 --> 00:15:20.159 the subsidization of rents, try to medipulate prices, holding rents down, 299 00:15:20.240 --> 00:15:23.559 rent controls, that these things always have unintended consequences and 300 00:15:23.639 --> 00:15:26.320 never quite achieve the outcomes that you hope. 301 00:15:27.759 --> 00:15:29.519 Well, we get so hyper focused in the United States 302 00:15:29.559 --> 00:15:31.879 sometimes on domestically, you know, what we've done in the 303 00:15:31.879 --> 00:15:33.559 past and so on and so forth. But I think 304 00:15:33.759 --> 00:15:36.320 if you want a good example of what happens when 305 00:15:36.320 --> 00:15:38.679 the government puts its, you know, thomb on the scale 306 00:15:39.039 --> 00:15:40.759 of the real estate market and it goes awry, you 307 00:15:40.759 --> 00:15:43.320 don't have to look much further than China right now. 308 00:15:43.360 --> 00:15:44.279 I mean, they're a. 309 00:15:44.399 --> 00:15:48.720 Pretty unfortunate crisis on folding where it was subsidized far 310 00:15:48.759 --> 00:15:51.080 too much for far too long. But one of the 311 00:15:51.080 --> 00:15:53.080 things that I think I'm kind of interested in asking 312 00:15:53.120 --> 00:15:55.440 you about then is turning to your book for a moment, 313 00:15:55.879 --> 00:16:00.720 is what bubble that you've studied in the past, would 314 00:16:00.799 --> 00:16:05.240 you tell us in America readers right now? 315 00:16:06.000 --> 00:16:07.120 Study this one. 316 00:16:07.559 --> 00:16:09.919 This one's important right now, or this one is the 317 00:16:09.919 --> 00:16:12.919 most illustrative as to where we are because I'm going 318 00:16:12.960 --> 00:16:14.080 to ask you. I am going to ask you some 319 00:16:14.159 --> 00:16:15.799 questions about AYE in just a minute, because I think 320 00:16:15.799 --> 00:16:19.159 there might be a bubble there. But before we get there, like, 321 00:16:19.639 --> 00:16:22.360 what do you think we should be looking at if 322 00:16:22.399 --> 00:16:24.279 we're trying to learn from the past. 323 00:16:25.879 --> 00:16:28.720 Well, the best ones to look to. I do think 324 00:16:28.720 --> 00:16:32.080 two thousand and eight is as interesting and instructive as 325 00:16:32.120 --> 00:16:35.039 a really state bubble. It's also a destructive bubble where 326 00:16:35.039 --> 00:16:37.679 there wasn't a lot of economic value created and had 327 00:16:37.759 --> 00:16:40.960 hugely negative consequences. The other ones that are interesting are 328 00:16:41.000 --> 00:16:44.240 the positive bubble, so the ones that actually do bring 329 00:16:44.279 --> 00:16:48.720 investment into a new acid class and then that finance 330 00:16:48.759 --> 00:16:50.919 is a new technology, the ones that I covered in 331 00:16:50.919 --> 00:16:52.840 the book, or the nineteen ninety seven to two thousand 332 00:16:53.159 --> 00:16:57.600 telecom dot com bubble, which did create a lot of wealth, 333 00:16:57.679 --> 00:17:00.159 and then a lot of wealth was rapidly destroyed from 334 00:17:00.200 --> 00:17:03.000 top to bottom. The NASTAK went down by seventy eight percent, 335 00:17:03.039 --> 00:17:04.720 so there were a lot of people who were burned 336 00:17:04.720 --> 00:17:07.279 by that. But if you consider the lasting impact on 337 00:17:07.319 --> 00:17:10.920 the US, you had the emergence of many the tech 338 00:17:10.960 --> 00:17:14.079 companies that now dominate or landscape. You had Nvidia was 339 00:17:14.119 --> 00:17:18.519 founded at the start of that bubble period. You had Amazon, 340 00:17:19.200 --> 00:17:21.559 which was in ninety five. You had PayPal where I 341 00:17:21.599 --> 00:17:25.359 worked in ninety eight. eBay was ninety five. Yahoo was 342 00:17:25.359 --> 00:17:27.799 founded in nineteen ninety five. Google was founded in nineteen 343 00:17:27.839 --> 00:17:31.000 ninety eight. You also had Salesforce in nineteen ninety nine, 344 00:17:31.039 --> 00:17:33.000 and Broadcom came at the tail end of that and 345 00:17:33.000 --> 00:17:36.400 then even out of the detritus of that bubble. So 346 00:17:36.480 --> 00:17:39.319 the two founders of PayPal were Peter Teel and Elon Musk. 347 00:17:39.400 --> 00:17:42.559 Peter took his profits and then funded Facebook, which was 348 00:17:42.559 --> 00:17:45.160 founded a little bit later, but primarily with Peter's money, 349 00:17:45.519 --> 00:17:47.960 and Elon Musk of Force went on to fund SpaceX 350 00:17:48.000 --> 00:17:50.680 and Tesla, and you bought x, dot Com and Twitter 351 00:17:51.240 --> 00:17:53.880 and the Boring Company and everything else. So very in 352 00:17:53.920 --> 00:17:57.359 the long run, a very constructive, productive bubble which has 353 00:17:57.400 --> 00:17:59.799 created a lot more value than was destroyed. And the 354 00:18:00.160 --> 00:18:02.039 one that was interesting was the eighteen forty five eighteen 355 00:18:02.119 --> 00:18:04.880 forty nine UK railway boom, where again you had a 356 00:18:04.920 --> 00:18:06.960 lot of investment in a short amount of period and 357 00:18:07.119 --> 00:18:10.400 overbuild of a technology but ultimately the UK came out 358 00:18:10.440 --> 00:18:12.799 of that stronger then it went in, and then went 359 00:18:12.839 --> 00:18:15.519 on about a twenty five year run where their economy 360 00:18:15.599 --> 00:18:18.960 was expanding and they became the wealthiest country in the 361 00:18:18.960 --> 00:18:21.599 world and really led us into the Industrial Revolution that 362 00:18:21.640 --> 00:18:24.039 also came out of that bubble. So those to me 363 00:18:24.079 --> 00:18:24.880 were really interesting. 364 00:18:26.400 --> 00:18:28.880 So would you say, let's just talk about nineteen ninety 365 00:18:28.880 --> 00:18:31.400 seven to two thousand for a moment. It sounds like 366 00:18:31.400 --> 00:18:33.319 I know the answer to this, But would you say 367 00:18:33.359 --> 00:18:35.839 net positive or net negative? If we have to consider 368 00:18:35.920 --> 00:18:38.160 all the implications of that, It sounds like you're saying 369 00:18:38.160 --> 00:18:39.279 net positive. 370 00:18:39.920 --> 00:18:43.839 I think so. I guess that is a scant assurance 371 00:18:43.920 --> 00:18:47.559 to the investor who jumped in nineteen ninety nine and 372 00:18:47.599 --> 00:18:50.119 then by two thousands had lost her life savings and 373 00:18:50.119 --> 00:18:54.480 her college fund and everything else. But if your question is, hey, 374 00:18:54.480 --> 00:18:56.759 did America benefit, then I would say the economy in 375 00:18:56.759 --> 00:18:59.799 the nineteen nineties was very strong for every single person 376 00:18:59.799 --> 00:19:02.599 who economy, but on average, and then we had a 377 00:19:02.599 --> 00:19:04.720 mini recession in two thousand and one. A lot of 378 00:19:04.720 --> 00:19:07.480 that was the result of the telecom part of that bubble, 379 00:19:07.559 --> 00:19:10.079 not the Internet bubble, and then became out of two 380 00:19:10.079 --> 00:19:12.799 thousand and one, growing and with market leadership and you know, 381 00:19:13.079 --> 00:19:16.200 new technologies that have made in America among the richest 382 00:19:16.200 --> 00:19:17.960 countries in the world today. So I'd say that's a 383 00:19:17.960 --> 00:19:18.559 net positive. 384 00:19:19.640 --> 00:19:22.240 So what's an example of a bubble then that was 385 00:19:22.599 --> 00:19:25.640 decidedly a net negative, Like, can you give me an 386 00:19:25.640 --> 00:19:29.200 example from your research about well, here here's a bubble 387 00:19:29.200 --> 00:19:32.359 that really had no discernible benefit at least to the 388 00:19:32.359 --> 00:19:34.400 majority of people in a society. 389 00:19:35.319 --> 00:19:36.799 Yeah, I can give you a couple. There were a 390 00:19:36.799 --> 00:19:39.960 couple that were very destructive. So eighteen eighty six to 391 00:19:39.960 --> 00:19:43.519 eighteen eighty nine there's an Australian land boom which which 392 00:19:43.640 --> 00:19:45.240 to them feels a lock like the two thousand and 393 00:19:45.279 --> 00:19:48.400 eight two thousand and nine bubble. That's another very negative. 394 00:19:49.279 --> 00:19:53.440 Tulips in Amsterdam was an exciting run sixteen thirty six 395 00:19:53.480 --> 00:19:56.960 and sixteen thirty seven. The tulip prices went from you know, 396 00:19:58.640 --> 00:20:00.960 they went from sixteen thirty six six into thirty seven. 397 00:20:01.000 --> 00:20:03.160 They went up by twenty times and at the peak 398 00:20:03.200 --> 00:20:05.000 of the bubble you could basically buy a house on 399 00:20:05.039 --> 00:20:09.240 the Amstell River with a single tulip, and that tulips 400 00:20:09.240 --> 00:20:11.440 were commanding prices that were three to six times the 401 00:20:11.839 --> 00:20:15.160