 This is Mises Weekends with your host Jeff Deist. Ladies and gentlemen, thank you for joining us once again on Mises Weekends. I'm your host Jeff Deist, and we are joined this weekend by a special guest, Nomi Prins. A name you may or may not be familiar with, but if by any chance you are not, please go to her website, NomiPrins, N-O-M-I-P-R-I-N-S.com to find out more about her. She is a very prolific writer. She's written several books, both nonfiction and actually historical novels about stock market crises and the Fed and central banking. And she knows what she speaks of having been a managing director at Goldman Sachs and also worked at the former Lehman Brothers. She appears with some degree of frequency on all the various talking head shows and the financial shows on cable. So we're very pleased to be joined by Nomi this weekend. So first of all, thank you for being with us. Oh, thank you so much, Jeff, for having me on. Well, let me just throw this out. Our audience, which we are always expanding, hoping to expand, is mostly anti-fed libertarians. I don't want to put words in your mouth. So can you tell me, would it be safe or accurate to describe you as an anti-fed person from the left, a left populist? How would you describe yourself? That's interesting. Because I have an affinity towards libertarians that want to get rid of the Fed, which is why we're talking also, I think, as well. I am a left-wing person, progressive, but I also have done a fair amount of studying analysis. I even spoke at the Fed last year about how the dangers of the way in which the Fed was A constructed and B has evolved over history, in particular history of the last almost now decade. But since the financial crisis has really been destabilizing for not just markets, but for our economy as a total. And so one of the perspectives I've come from, which is actually different from a lot of people on the progressive side or on the left, is that the Fed actually isn't a democratic body. It really wasn't designed to help the greater populace, the citizens of this country, or even small businesses of this country. It was designed by bankers to be for bankers, and that's how it has operated. Though again, in the past almost decade, it has done that on steroids, and that's dangerous. Well, I have to say from my perspective, it seems like inherently the most anti-democratic institution, one can imagine. I mean, who are these people out there who think it's democratic? Well, this is, again, this goes back to many progressives. And in particular during this election period, it's been interesting to see how people that really never even talked about the Fed come out sort of in support of how it is helping the economy. And that's largely been a story that has been created out of Washington and by this administration. And it is the Democrat administration of Obama. I mean, honestly, it could probably have been a Republican administration as well that would have been supporting the Fed if it was doing what it was doing during these eight years, which was basically funneling liquidity into the banking system. So you could take credit for that either way if you want to look at the economy as having improved or not, and any administration in power wants to believe it improved. So the story that has happened out of this administration has been that since the financial crisis, everything that has happened has solidified our economy, that the numbers are better, the job figures are better, that the banks are stabilized, and in fact are better regulated than they were beforehand. And I know that's really true. And where the Fed comes in is for the last, as we know, and you, I'm sure, have discussed here many times, has created a bottom of zero for rates. It has bought back Treasury bonds, which effectively the Treasury Department has created in order to be sold through the banks back to the Fed. So it's not even a situation where the stats being taken out of the market. It's being created in order to go back to the Fed's books to be able to contain rates at the zero levels at which they are. And the byproduct of that is it also enables banks that have also sold some of their more toxic assets to the Fed in return for loans or in return for keeping rates low, have been able to value securities they have left on their books at higher levels than they would otherwise have been without these low rates. Because if you're evaluating any type of security with any kind of a fixed or floating income as a bank, it's going to evaluate higher if there's a buyer for it, which has been the Fed, or if rates are low, then its prices are going to go up. In other instances, that's what's happened and that's distorted bank health appearance as well as obviously having all this extra free money floating around the markets which has created market bubbles, asset bubbles, and risk bubbles. Well, it sounds like a cynic might call this corporate welfare in the form of a moral hazard, wouldn't you say, for these companies and these banks? Yeah, it's corporate welfare. It's financial welfare for the banks, as we also have seen in the last eight years or so that this process has been ongoing. The larger banks, the big six banks in this country have become bigger. So if we look at in totality JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley, collectively, they are 30% bigger in terms of their asset pools than they were before the crisis. So it's been a benefit to them by a lot. I mean, just imagine as like a normal citizen running a small business and all of a sudden you actually do have the government helping you increase the assets of your business by 30%. That would be pretty awesome. But that is not what happened. This happened to a very select group of very powerful institutions who wrecked the economy and took advantage of the financial system and committed crimes. So it would be like, as an individual small business, you would have committed a crime, be that rigging your markets, lying to your customers, faking your taxes, whatever it is you might have done. Got fined for that crime as the banks have done to multiple billions of dollars and then got subsidized for that crime by the Federal Reserve. And obviously it doesn't happen in greater America. That happens because of the relationship between the Federal Reserve and the banks. And that was a relationship that goes back to history. When I wrote All the President's Bankers, which was the last book I wrote, I actually went to Jekyll Island where the Federal Reserve was first conceived in 1910 by a senator, by Nelson Aldrich and a bunch of bankers who were connected in some manner to the Morgan Bank, which was the largest bank in the country, at the time the most powerful, the most politically connected, as J. P. Morgan Chase is today, which is a legacy bank of the Morgan Bank. And that was one of the ways in which the Federal Reserve got conceived and then the concept of it got mixed and watered down and watered up and so forth along the years until it was passed as an act in the end of 1913 under a democratic presidency. But the idea of the Fed that was sold to the public versus the idea of the Fed that was created were two different things, even back then, even at its conception. The idea sold to the public was it would provide credit to the country when the big banks couldn't in the event of a crisis, in the event of a panic, a country to undergo a panic in 1907, some years before the Federal Reserve was created, and that this money would basically be used among other things for farmers of the country, which was a big group of people that needed credit when credit was tight and so forth. And none of that happened. What happened was, of course, instead that these banks were subsidized over the years, they in turn helped the government subsidize wars and so there was a quid pro quo in terms of the largest banks in the country, their political connections to Washington and so forth. But history is very clear on why the Fed was created and what history is less clear on is the extent to which the Fed is overstepped, even the reasons for which it was created in the wake of this financial crisis and ongoing with no appearance that anything's going to change because at this point they're going to catch 22, you raise rates, you tank the economy or the global economy, everyone who basically has to pay back the debt that they borrowed in dollars if the dollar goes up if rates go up. And we're in this really bad situation where the behavior of the Fed or in connection with the government, in connection with these banks has created a very unnatural, artificial marketplace in the economy. Well, that's interesting. Let's go back to the justification for the creation of the Fed. What you're saying in terms of its original raison d'etre sounds a lot like what we might call a right populist perspective if we get today from, let's say, David Stockman, who's not an Austrian, but he says the Fed was supposed to be a backstop. It was supposed to be a banker's bank. And when banks run afoul through their own mismanagement of liquidity or solvency issues, then if they go to the Fed, it ought to be a penalty window, not a discount window. Does this make sense to you? Do you agree with this? Well, that is a very fair way of making the Fed operate. If we were to do that, that if the banks really need money, just like if people really need money, if you need to get a loan at the last minute, if your credit is bad, you will be paying more interest for that money. In the case of the banking system, because of this evolution of what we now consider too big to fail, the biggest banks today were the biggest banks 100 years ago, 100 plus years ago when the Fed was created. To an extent, the evolution of the banks that were at the meetings, the initial meetings for the Fed or reserve, were basically the same banks that operate today, JP Morgan Chase. Back then, there was people from the Morgan Bank. There was people from the Morgan Bank that ultimately became Morgan Stanley. Goldman Sachs was the one bank that wasn't involved in the Fed conception, but sort of worked its way into availing itself of the discount window in the beginning of the financial crisis when it became a bank like those big banks. But the evolution and what was sold, there was a Republican government in place when these meetings first happened in 1910 and also 1912 under Howard Taft, who was a big proponent of the Fed, and Nelson Aldrich, who was the senior senator from Rhode Island, pushing for the Fed, and also Republican and many of the bankers who were Republicans as well. There was a populist kind of Republican appeal within Washington, but it was still supported by the bankers and supported by senators who were connected to the bankers. For example, Nelson Aldrich's nephew, Winthrop Aldrich, became the head of Chase for a couple of decades, not long after the period where the Federal Reserve was created. He was in Chase and it was in a period of depression, but the point is he had been in Chase for a very long time, so the families, the connections really go back politically and financially and have continued within the largest banks for multiple years. The Rockefeller family and the Aldrich family got married to each other back in the turn of the last century and the Rockefeller family, and this is not a conspiracy, this is just an actual fact, or the Aldrich family was running Chase for a good 50 or 60 years and there was another family, the Stillman family, was running Citigroup or what was then National Citibank that became Citigroup for multiple decades. They had these basically Cree families running Wall Street, having very tight political connections as well, so that's why it really happened. The idea that it would funnel through money into the rest of the country was the pitch, and it was a pitch that was then adopted by Woodrow Wilson when he became a Democratic president in 1912. He adopted that pitch and sort of sold it to the American public, so the idea would not be that the Fed was being created for the banks, but that it was being created for them. Well, it sounds like the FBI's about to kick your door down with their dogs out there, but this is so interesting though. I mean, fast forward now to the modern situation. I think you're really well qualified to talk about this unholy nexus, this revolving door between people who work at the Fed, people who work in the Treasury Department, and people who work on Wall Street at places like Goldman Sachs. There seems to be a nexus and we sense as Americans that it's not right, but we don't understand it. Right. The idea is that it has its legacy history and we see it unfolding more now, which is that if we just look at this crisis, it's just a window. Going into the crisis, the Treasury Secretary for George W. Bush was Hank Paulson, who had been the CEO and chairman of Goldman Sachs during the time in which a lot of the types of securities and credit-related securities that were eventually deemed to be toxic or were toxic as they were being created, but were shown to be toxic in total, were being manufactured and sort of ignored it. You had as the head of the New York Fed, which is one of the 12 groups of the Fed that is the most powerful, the most connected to Wall Street in fact. I mean, it's right there. It's right next to Jake Morgan Chase. It's right next to where Goldman headquarters was and so forth. You know, these are all within walking distances of each other as well. Tim Geithner. Now, Tim Geithner being the president of the New York Fed, Hank Paulson being the Treasury Secretary, that was a very powerful combination of people. One was a Democrat, one was a Republican, one had come from inside Goldman Sachs, one had come from inside Washington. But collectively, the two of them were architects of a bailout that again disproportionately helped the banking system through the Federal Reserve. Now, we publicly know the bailout to have been a very small $700 billion TARP fund that was passed by Congress, but that was only a very minor portion of all of the benefits and aids that were given mostly through the Federal Reserve and in conjunction with the Treasury Department to the banking system. So the people that came from the banking system supported the banking system through the Treasury Department and through the Federal Reserve. They just kind of all helped their friends. Again, not a conspiracy. These are just how the events ought to be unfolded. Now, Tim Geithner went from the New York Fed to becoming the Treasury Secretary for Obama. It should also be noted he had been a deputy Treasury Secretary under Bill Clinton during the time at which Wall Street was deregulated and Glass-Steagall, which was the act that had basically separated people's deposits within banks from these more risky types of speculative bets that we ultimately had to bail out. He was effectively someone who had been front row seat on that, as had been Robert Rootman, who was the Treasury Secretary, Bill Clinton, who was the co-CEO at one point of Goldman Sachs. So again, it's not only, and this is really kind of key when you look at the history of now, these people do revolve in and out of Wall Street and in and out of Washington. More like crucial to us than their actual physical presence in their spots is the ideologies that follow them. So the ideology of Tim Geithner, who was a more junior Deputy Secretary of Treasury in Bill Clinton's administration, followed him through the New York Fed, followed him into Obama's administration as a Treasury Secretary, and enabled him to stand back and say, yeah, we actually can use our government and our federal reserve system to benefit this small group of firms that had so much collective power over the finances and the economy of the country. So it's the people and it's the way they think and the entitlement of that thinking that allows them to step between private and public office and use one to benefit the other before considering the benefits or the negatives to the rest of the population or the rest of the economy. I mean, that's music to our ears that it's a systemic or an ideological problem rather than dependent on what person you put in or what reform you place. Speaking of the crash of 08 and the tarp bailout that you mentioned, do you agree with David Stockman that what he calls the Blackberry Panic would not have spread to Main Street, USA that if we had allowed some of these firms that lacked liquidity to cover their margin calls if we had allowed them to go under like we did layman that the country as a whole would have been okay? Well, yeah, I totally agree with that. Not only would the country have been okay, we could have, for example, as a country, as people in government, I wrote about this and it takes a pillage, we could have, for the amount of money that we, i.e. the Federal Reserve and Treasury Department has spent has created a debt and so forth to subsidize this flawed system that has been allocated into it could have used a fraction of that to basically even save the subprime market which was basically the kernel of all the toxic assets that were manufactured on Wall Street sold throughout the world leveraged against and so forth. So if we had just taken, basically it was a half a trillion dollars worth of subprime loans that were under water, right? There was 14 trillion dollars worth of toxic assets that were created. There was about 140 trillion dollars worth of sort of money sloshing around between borrowing and leveraging into those assets. So you take a half a trillion dollars and you create 140 trillion dollars in junk or loans for junk. And that was basically what was being quote, saved. Have we even taken a half a trillion dollars and just bought out all those subprime mortgages for even those people? And I know that's not a libertarian thing, but if we had just done that, it would have been cheaper, it would have stopped the bloodshed of the toxic assets. Anyone who was still holding too many and a bank that was holding too many should have been allowed to fail. And you actually could have sustained the whole economy without having zero interest rates without people being concerned that they can't have savings accounts with any real value or interest attached to them and so forth. So there were two ways that things could have gone down. In the absence of plugging the subprime loans for people and to contain the entire crisis, the other alternative would have been to let more banks fail and not have this option to have eight years of subsidies, which instead is what have happened. And not only have they had subsidies, they have gotten away with so many crimes. These institutions, just the big six banks I mentioned before have paid over 100 or agreed to pay over $160 billion worth of fines for actual illegal activities, not simply related to the subprime mortgage market, but rigging the foreign exchange market, rigging the LIBOR rate market from which mortgages are priced and so on and so forth. So there are a number of other things and their leaders get away with doing that and their companies continue to be to be maintained by effectively the government through the Federal Reserve. So I believe they should have been allowed to fail. I believe some of the subprime mortgages could have also been contained far more cheaply and we would have a much more honest economy. I believe it would be healthier. I believe it would be more authentic. The values in the market would be the values in the market. There wouldn't be as much debt floating around to basically sell through the Fed to subsidize these low rates. Companies wouldn't be buying back their stock at these kinds of intense levels, which would mean that, again, that the values of their stock would be more realistic and they would have to basically produce more or innovate more in order to have higher values rather than simply buy into them. I mean, so many things would be healthier and more real if these banks have been allowed to fail and if they're also been, in my opinion, a separate subsidy for actually the mortgages of individuals who have been screwed by these banks. Isn't that incredible, ladies and gentlemen, to think of we could have literally paid these people's mortgages? Think how much healthier those people and their individual lives in our country would be. I noticed recently that CNN, of all places, had aired a program about how and why the Fed is not political. It almost seemed like there's a charm offensive going on here because, frankly, monetary policy in the Fed have never been campaign issues really before Ron Paul 2008. So talk about this. Talk about the politicization of the Fed or the perception that is politicized. What's interesting is that the Fed has been political since its inception. It was created by politicians and bankers. I mean, you can't get much more inside the Beltway than that. That's what happened. I mean, just that story before that, the history of it was that Nelson Aldrich, the senator, couldn't even make it up to Washington from Jekyll Island after the first meeting because he actually was sick. He had been hit by a trolley car on Madison Avenue visiting his banker son before this meeting ever happened. And it was two bankers that went up to present the initial plan of the Fed to senators in Washington. So I mean, it just goes on and on. So the idea that it's not a political body is rather odd. It is a body that is focused on the financial system. It's focused on the largest banks, but the largest banks are also political, right? I mean, you have all of these, aside from the robbing door individuals that we just talked about, the ideologies that all of these individuals are bent on preserving in terms of using the government to help themselves and to let themselves off when they commit crimes. I mean, these are all political activities, i.e. they are only affected if politicians are involved. And those politicians could be the president. Those politicians could be Janet Yellen, who is appointed by the president and endorsed by Congress. Yes, there's a technical check and balance on that. There's never been an appointee that has gone through to be head of Federal Reserve. There's certainly been ones that have been batted about before that point, but it has been presented to the Senate that has not gone through. If anything, Ben Bernanke had a problem with his reappointment, but everybody gets through. That's a political decision. That's politicians in Congress choosing to take someone that is involved in their system and put them through and have them be in charge of a body that supports the political financial system. So this is a long way of saying that there's so many different avenues of politicization of the Fed from its inception to today. It's hard for me to really understand why one wouldn't think it was political, but also that this is not new. So the fact that Donald Trump has kind of brought it up is saying most recently that it is a political organization and I think that has created this extra flag for the idea of it being a political organization. I think that's just wrong simply because it's been a political organization for a really long time. Well, ladies and gentlemen, let's not forget that Congress created the Fed statutorily and presumably inherent in that it has the ability to regulate the Fed in any manner up to and including repealing the Federal Reserve Act. Naomi, you have written about a subject that absolutely fascinates our listeners which is central banking and foreign policy. There's a long-standing libertarian critique of not just the Fed but all central banks that they are war financiers. Can you talk about this? How central banking and foreign policy interact? Well, yes. I mean, again, domestically in the U.S. and then internationally, the First World War that happened right after the Fed was created and I'm going to go back in history because, again, history really just informs us but 1914, when the First World War broke out, J.P. Morgan was basically Jack Morgan, his son. J.P. Morgan died right before the act was passed but his son was up in Washington talking to Woodrow Wilson, who was president at the time and basically saying, we just passed this Fed thing and there was a little bit of a concern that there could be and there was some pushback as to some of the language in the Federal Reserve Act and the idea would be there just for banks. There was a little pushback at the time after it was passed but then the war broke out and Jack Morgan was like, look, you know, we have a lot of money here at the Morgan Bank and they basically were going to help the Treasury Department and the United States Government if they needed to be in a war finance the war and if the U.S. wasn't going to be in the war then they would finance the allies of the U.S. in the war and then there was issues in terms of which banks supported which side of the war and so forth but these were actual conversations that took place. I mean, I go through some of them in the book between Morgan and Wilson about how the banks were there to help the Fed and the Fed was there to help the banks so that was how the Federal Reserve was established. In any scenario if you have the private banking system as that exemplifies in the U.S. supporting a war effort, right? Supporting whether that's lending to allies whether that's lending to poor weaponry whether that's subsidizing, you know, certain arsenals that need to be built up from the standpoint of the military whatever it is, things need to be financed and the partnership between financing of what's happening with a big bank what's happening through the government and what's happening with the Federal Reserve or any central bank is very connected because banks have a problem of providing private financing into that arena into the military arena well then the Federal Reserve or the Bundesbank or the Bank of England or whoever is involved has to come up with some way of fortifying those banks and at the same time the government can also rely on them we don't do this anymore but through our world wars to issue war bonds or sort of allow things to be financed through different channels we don't do this anymore now it's just more connected between central banks and private banks and also we have a large defense budget now which we didn't necessarily have back in the day and so that allows financing as well but where the private banks are involved in any of that connection into private companies that also finance wars and because they are also associated with Federal Reserve that provides them now cheaper money and because that's all connected to the government any kind of military operation has some connection to that triangle Well, summarize for us from your perspective how central banks exacerbate inequality there's a lot of talk about income and wealth inequality there's a lot of talk about cronyism if you were just to grab an average lay person on the street of average intelligence how would you explain to him or her how central banks increase or worsen inequality Well, it's this simple I talked to someone on the street who has to pay if they have a credit card on average say 15, 16% they could be paying 12 they could be paying 29 I mean it really just depends on the person their credit rating but just pick a number where banks are getting that money 0% that's a level of inequality right there if they're going to use that card 16% for which bank is getting money at 0 if they have money at the bank they are basically paying banks today to keep their money so if you have just a thousand dollars someone who doesn't have a lot of money in a bank and you're paying $20 a month as a fee because that's all you have in your bank account to any of these big private banks that's $240 a year so you're basically paying a bank 24% interest on your money in order just to have it be with them so how does that create inequality? well all of your money gets penalized whereas all the banks get this money cheaply and free and they can do whatever they want with it including commit crimes and be subsidized so that's just how inequality ultimately spurs at the bottom level that's you and your bank account and your bank but if you take that in an even larger context so you're getting dinged along the way the bank isn't the bank is now subsidizing companies and using its own resources to get involved in the markets to speculate to work in the derivatives markets and so forth to enhance their profit to enhance the profit of their CEOs of the executives in their company all of that money is basically coming from all of those dings along the way to the average person so basically you're paying to subsidize these banks if you're paying to subsidize anything you're at a disadvantage there at an advantage inequality is about the gap between financially your disadvantage and someone else's advantage and so the larger the ability of a financial institution to get money for free and the harder it is to make money as an individual plus be penalized for financial normal activities as an individual the greater inequality is going to be and in fact the Federal Reserve did a study a couple years ago where they acknowledged in their own reports that the actions that they had undertaken since the financial crisis had coincided with a widening of inequality in individuals throughout the country it's also coincided with wider inequality in the world so within each country the central banks have created inequality in their own countries and then between countries that means that the countries that were weaker to begin with have become more so and the countries that were stronger to begin with have become more so but within them there's more inequality as well well let me leave you with one last political question isn't the Fed an unbelievably ripe area for populist agreement where a Ralph Nader and a Pepe Cannon can come together and say this isn't working for the American people we can change this politically on a single issue basis I think it is I mean also and I was a part of this when Bernie Sanders was before he ran he was one of the big proponents at the very least and looking at how they went about subsidizing the largest financial institutions here globally and that was a very good fertile area for coming together and saying what are these people even doing and why? Net of whether they should exist or not so I definitely think it is that the issue is seeing the Fed on both sides is seeing the Fed as detrimental to economic stability as opposed to believing that because it's subsidizing the financial system that that's better than actually fixing the problems in the financial system and that's a separate issue that's a perception issue and that needs to be worked out but yeah this is definitely an area where the left and the right can come together you know Nader has talked about and as I said Bernie Sanders and Ron Paul have done things together I mean this is definitely an area where some progressives and some libertarians and conservatives all agree as well this is an outside body where it is not political it's unelected it's merely appointed so I guess that's the one place it's not political that has tremendous power over everybody's money Well ladies and gentlemen we're going to leave it at that thank you so much for your time ladies and gentlemen check out our website it's prinsprins she's an absolutely prolific writer a very interesting and smart person and we appreciate her time so much this weekend ladies and gentlemen have a great weekend subscribe to Mises weekends via iTunes U, Stitcher and SoundCloud or listen on mises.org and YouTube