 So I was at a Misa Circle event earlier this year and I'm at one now and we have Patrick Newman also giving a talk. So there's two Newmans on the roster. If we do a little bit of extrapolation, it means by the end of next year all the speakers are going to be Newmans. So I'm taking over. I want to thank Murray and Florence Sabrin for sponsoring this event. My topic is, has a strange title, the radical uncertainty of a polymorphic Fed. And what I mean by polymorphism is the sort of the unending change in form of the Fed. And this has been something that's been a part of its 110-year lifespan, but it's also the changes have been speeding up. It's a totally new institution every decade, it seems like. And so by polymorphism I'm referring to, I'm thinking about wizards who are casting spells and changing things into new shapes. Like we have Gandalf here who's threatening Samwise Gamgee. Sam is saying, please don't turn me into anything unnatural. So that's the idea that I'm getting at. So the Fed is this creature, it's this monster that's always changing in form. And the idea that I want to drive home is that this is causing a lot of uncertainty in the economy. And people say that sort of thing all the time, that there's always a bunch of uncertainty. But this is a special kind of uncertainty because the Fed is such a large actor, because it's such a large institution with such a huge role in the economy. So let me start with a simple question, or at least a simple sounding question. What is the Federal Reserve? If you ask the Fed, they will say that the Fed is the central bank of the United States, and then they would list its official functions like conducting monetary policy and promoting the stability of the banking system. They would say that their monetary policy is guided by the dual mandate to maintain stable prices and maximize employment. They would say that they are both public and private. Public in that it was created by Congress and its leaders are appointed by the U.S. President. But private in that its operations are not subject to congressional approval or scrutiny, and district banks have private forms of organization. But if you look at the Fed's history, the answer to that question, what is the Fed, becomes more complex. The Fed has taken on new powers in every crisis. And it has cooperated with the federal government in its own expansion of power and crises. It's a government agency with no boundaries, no limits. And since it enables the growth of government in general, it means that the government therefore has no boundaries. So today's Federal Reserve would be unrecognizable to the Federal Reserve of the past. And I just want to walk through some of the changes that have happened just since the 2008, and we'll also talk about the changes in the 2020 crisis. In September of 2008, its balance sheet exploded by about a trillion dollars over the course of three months from September to November. This was beyond anybody's preconceived notions about what the Fed would or could do. And the reason it expanded so fast is because the Fed hit the zero lower bound on the federal funds rate, another unprecedented thing. It could no longer conduct monetary policy the way it had been accustomed to, namely announcing and targeting a new federal funds rate. So the only way for it to stimulate aggregate demand using its own language and motivations was for it to dump a bunch of new money on the market by dramatically increasing its purchases. But now the scale of these purchases is a part of everybody's expectations about what the Fed can and will do. You'll notice that that initial jump, which is on the left-hand side over there, pales in comparison to what it has done since then. And there was less surprise, but still some, when it increased by three trillion over the course of about three months in 2020. So it's important to note that these purchases were unprecedented in two ways. Not only were they massive in scale, but also the types of assets that the Fed started to buy were brand new. While the Fed had for the longest time bought short-run, short-term government debt almost exclusively, it now purchases a rainbow of assets. This is a graph that's in Bob Murphy's book, Understanding Money Mechanics. So they're purchasing all sorts of things, especially mortgage-backed securities. It also started making loans to so-called Maiden Lane corporations that are invested in private businesses, which allows the Fed to sort of indirectly participate in bailing out failing financial institutions. And in congressional testimony, Ben Bernanke said in 2011 that these measures would be temporary, and here's what he said. What we are doing here is a temporary measure, which will be reversed, so that at the end of the process, the money supply will be normalized. The amount of the Fed's balance sheet will be normalized, and there will be no permanent increase, either in the money outstanding or the Fed's balance sheet. Cue the laugh track. The importance of this shift is difficult to overstate. The Fed, which advertises itself as working in the public's interest, is using the power of the money printer to pick winners in the market, and the losers are all the chumps like us holding on to U.S. dollars. While the primary beneficiary of the money printing had been the government, now major financial institutions can position themselves directly under the money spigot. Before this change, they still had undue benefits in the form of indirect cantean effects and an unhealthy dose of cronyism, but now much of their operations are directed toward and influenced by the Fed's actions, instead of being directed toward a healthy balancing of risks and channeling consumer savings into loans to businesses. This is why the Fed is no longer some boring government agency working in the background. It's center stage as I described in a recent Mises wire article. All lies are on the Fed chair as he simply reads the transcript of an announcement that has already been posted online. Financial news media posts moment by moment commentary on minutiae like small textual changes from one announcement to the next in the tone of Powell's voice or maybe the color of his tie. There are real stakes and broad repercussions for correctly guessing whether Jay Powell will see his shadow when he emerges from the FOMC den on announcement days. But there have been more recent abrupt and dramatic changes in the way the Fed operates as Bob Murphy documents in his book Since the 2020 crisis the Fed has yet has had yet another massive explosion in its balance sheet. It also created many new lending facilities and these have the effect of giving the Fed the capability is a quote from his book The Fed has the capability of influencing the credit markets not just for commercial banks but for commercial and residential real estate, corporate bonds, commercial paper, cars, student loans and even personal credit cards. So the Fed is getting involved in everything. They also got rid of bank reserve requirements but this was offset in effect by the Fed paying interest on reserves. The combination of these changes has put the Fed in a strange situation this year As the cloud interest rates to rise due to the unpopularity of price inflation, the Fed has become technically insolvent. The amount that it pays for its liabilities like commercial bank reserves exceeds what it is earning on its long-term assets like government debt and mortgage-backed securities. Mises Institute senior fellow Alex Pollock has written about this extensively. Back in March of 2022 before this nosedive and the Fed's remittances to the Treasury he was warning that the Fed was putting itself into the same position as the saving and loan institutions of the 1970s with low return long-dated assets and short or immediate run liabilities meaning that they are subject to interest rate risk. And since interest rates have increased, the Fed is now suffering losses to the tune of over $100 billion a year. Interestingly, the Fed quietly changed its accounting practices back in 2010 to categorize these losses as a deferred asset so it's pausing the amount of time that it will send the remittances to the Treasury and then resume them once the net income has covered their losses. Another unexpected move from the Fed happened this year when there were three bank failures, four now as of yesterday. The Fed teamed up with the Treasury and the FDIC to bail out the depositors even though the accounts were over the FDIC maximum of $250,000. There was only a little stir in financial news media regarding this unprecedented move, but not much. It seems people have come to expect that Uncle Sam will come to the rescue in all crises, big and small, even if the actions taken by Uncle Sam are non-traditional or even unconstitutional. Alex Pollock discussed this emerging expectation in a talk he gave at the Institute in 2022. He said, over the last few decades, U.S. financial actors have believed in and experienced the Greenspan put, the Bernanke put, the Yellen put, and the Powell put. This is the belief that the Fed will always manipulate money to save the day for financial markets and leverage speculators. These puts of risk to the Fed have themselves over time induced higher debt and inflated asset prices, including house prices, making the whole system riskier and in need of more of the puts. And he continues, the emergency central bank interventions, however sincere the original attempt that they would be temporary, I highly doubt that intent, can build up economic and political constituencies who profit from them and want them to be continued. This is where central bank monetization of government debt to finance deficits, the biggest of such constituents, is the government itself. So now we see that the Fed is not just white noise, it's changing a bunch, but it's not changing in such a way that is unbiased. It's unpredictable, but it's going in a certain direction. Its interventions and shape-shifting are biased towards rescuing large financial institutions and financing the government. It's a chimera, but it's a pet chimera, one that's owned by those in power to benefit those in power at the expense of everyone else. But the costs are much more than just the dollar's declining purchasing power, even that is a huge cost. The Fed's interventions create future crises, which become launch pads for more intervention. Interestingly, the Fed was created to mitigate and prevent financial crises. People were tired of the cycle of banking panics in the 19th century and they thought that a central bank with the power to expand and contract the money supply, regulate the banking system and act as a lender of last resort would help with these banking crises. But of course it didn't, and with just a little bit of thought you can see why. The government owns nothing that it didn't extract from the private economy. No matter how much they try to hide it, everything they do comes at a cost. Any action taken by the government or central bank can only benefit some at the expense of others. Rescuing a failing bank with newly printed money merely spreads the losses to everyone holding dollars. Financing government deficits with debt monetization does not magically create new resources for the government to use. It merely disguises and spreads the cost of the expropriation to everyone holding dollars. This is why taxes are unpopular, but inflation is a great tool for the government because it's subtle and it's hard to see the effects of it. This is why it's important to keep a clear head when evaluating all these brand new things that the Fed does. We need to remember the one lesson of economics according to Henry Haslott. He said, the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy. It consists in tracing the consequences of that policy not merely for one group but for all groups. So I want to make the hopefully safe and uncontroversial claim that one of the effects of the Fed's polymorphism, especially over the last few decades but certainly over its whole life, is not stability but uncertainty. Despite its era of sophistication with its army of PhDs and high-powered models and its era of authority with its seal and its backdrop of the American flags from the Fed shares giving an announcement and it has an era of determination with its constant appeals to its congressional mandate. Despite all this, it wreaks havoc on the economy. It attempts to provide forward guidance with its summary of economic projections but these are laughably off even for its own policy rate, the targeted federal funds rate. So here's a graph of all the dashed lines represent the FOMC members' projections of what the federal funds rate will be in the next few quarters and the black line shows the actual course of the targeted federal funds rate. So you see that they're caught off guard just as much as the rest of us are. So the uncertainty that I'm talking about, one side note that I'll make about these projections is that the projections themselves become an element of surprise. So they try to give these projections ahead of time so that nobody will be surprised about what the new targeted federal funds rate will be but now we've got to the point where people are surprised by the projections themselves so that when they revise the projections, now people are surprised. Now they're forecasting a 25 basis point decrease in the federal funds rate by this quarter as opposed to what they were before. So now the forecast themselves are surprising people. So the uncertainty that I'm talking about is more than just the unknown path of interest rates, inflation or economic growth. So that kind of uncertainty is considerable. We've got the uncertainty regarding what kinds of things the Fed will do and what kind of institution the Fed will become in the future. And this is not something that you can easily quantify because it transcends quantitative guessing. This is a qualitative sort of thing. It's a categorical sort of thing. I think this uncertainty is behind the increase in the term premium which has many financial commentators perplexed. If you're not familiar with the term premium, I looked it up from an Axios article. They said it's a nebulous thing. It's basically the premium investor's demand if they're going to accept all of the uncertainties such as swings in inflation, government spending and economic growth that could occur as their money is locked up in a bond for a decade. They said you can think about the term premium as a measure of how confident or uncertain investors are about predicting the key factors that affect bond yields, inflation, economic growth and monetary policy. So the reason the term premium is in the news is because it has increased sharply lately even though it was suppressed during the years of accommodative monetary policy after 2008. But there's a lot of confusion about what is causing the increase. There's no consensus about this. One Financial Times writer said that it's caused by climate change. I didn't stick around through the full article to see how he explained that. But here's another explanation from Axios. Adrian Crump and Munch, that's one of the sets of authors that have come up with the model to estimate what the term premium is. They said the term premiums tend to rise during specific economic conditions including periods when the economy is entering a downturn, when professional forecasters disagree on future bond yields and when investors become increasingly uncertain about future treasury yields. Currently these conditions seem to be in place, but what's in the next paragraph is interesting for us. Additionally, one can conjecture that the increase in uncertainty about the future trajectory of inflation, the Federal Reserve's tolerance for deviations of inflation from the 2% target, speculation about the Fed potentially resetting the inflation target, questions about the long-term level of the Fed's neutral rate, are you seeing a theme here? Uncertainty surrounding the demand for an upcoming large treasury issuance arising the risk of liquidity events in the treasury market and concerns about a rising fiscal dominance contribute to the term premium. And even the Dallas Fed president, Laurie Logan, commented on this saying that the fact that they are rising could mean that the Fed will not need to hike interest rates anymore. And in a Reuters article that was reporting on her comments from a speech that she gave, it says higher term premiums play a clear role in the rising long-term yields citing the results of surveys, models, and her own assessment of investor expectations that the Fed will continue to allow its balance sheet to shrink even after it begins reducing interest rates to account for falling inflation. And the Dallas Fed president said this, the expectation of lower Federal Reserve asset holdings over time implies that other investors will need to hold more long-duration securities which appears to be one factor among the many contributing to the higher term premiums. So it seems like there's not much appetite for all these treasuries that are being dumped on the market. So I think this is just one bit of evidence that the Fed has done too many unprecedented things in too short a time. When you surprise everybody over and over, they become used to being surprised and they start pricing in the fact that they will be surprised even if they don't know exactly what it will look like. But like I said, the Fed's unpredictability is not white noise. People have come to expect that they will be bailed out by the government and the central bank in a crisis. And this leads to a terrible moral hazard problem in which the whole economy takes on more risk than it otherwise would. It led to big investments in housing in the 2000s. It led to big investments in commercial real estate, which we're now starting to see unwind. It led to leveraging an interest rate risk that bankrupted three banks early this year and then an additional one yesterday. It has led to a fiscal nightmare for the U.S. government in which interest payments on the national debt are projected to take up large proportions of the budget. So this is not a projection. This is current interest payments. But you can see from the CBO, here's projections going into the future, so that the blue shaded area represents the proportion of the CBO's projections for the budget that will be made up by interest payments. So just a huge amount of debt, huge, huge amount of treasuries that somebody's going to have to buy. I recently saw one headline that our deficit this year surpasses Australia's GDP and I didn't believe it, so I looked it up. And it's true. So our deficit this year is larger than Australia's GDP. So let's return to our original question. What is the Federal Reserve? Is it a boring central bank that conducts monetary policy and promotes the stability of the financial system? I would say no. I would argue that the Fed, especially when viewed as a consolidated entity with the government through the Treasury, is a dangerous, shape-shifting monster. The political cartoonist Henry Robinson chose to depict the second bank of the United States as a mini-headed hydro monster, even though he was attempting to lampoon Jackson in his battle against it. I thought it was interesting that he chose this depiction for the central bank, even though he was against Jackson. So he was trying to show how futile it would be to try to battle this central bank, I guess. He chose to depict Jackson's enemy, the bank, as this terrible monster. So it seems to me like the American public might look at this and be like, well, maybe we should do battle against this sort of thing. But I think this depiction is brilliant because it gets at the Fed's ability to survive attacks and grow new powers. And it seems to me that the mixed economic data and forecasts that we see today are the result of the market not knowing what kind of monster the Fed will become. We have a little bit of time for Q&A. David has a microphone that he'll pass around. Give David a round of applause. You mentioned earlier that the Fed could go the way of the savings and loan industry. And I recall back then with the Garn St. Germain law that permitted savings and loans to engage in all sorts of banking activities that were previously prohibited to them. And you're showing here that the Fed's pretty much done the same thing, diving into vehicles that it would never previously considered doing. Is that the same scenario shaping up and what's that going to lead to? Well, I think so what's happening to the Fed is not specific to the Fed. So the interest rate risk that they have taken on is the same sort of interest rate risk that all other banks in the United States have taken on. So it's not unique to the Fed. What's unique about the Fed is that they have a money printer for one. And also they have this ability to change their own accounting rules. So yes, I do think that the four bank failures that we've seen this year are a foreshadowing of, or at least an indication of, troubles that are inside of banks broadly in the U.S. He had his hand up first. So in 1973, 1974, the equity capital markets in the U.S. went down, let's say, 46 percent. So we saw the average PE ratio go from 17 to 7 during that time. We're sitting at 24 right now. What is your idea of what's going to be happening going forward say over the next three years in that regards? Well, I'm not a stock market forecaster. Although I'm not optimistic in general. That's really the most that I can say about that. Maybe one more? Is there any good news? The good news is that we're all here and it's a beautiful day outside. Yes, there is some good news. Thank you for asking such a great question. The good news is that I think more and more people are waking up to the fact that the Fed is a monster. I think more and more people distrust the media way more than ever. I think people are doing their own research, even though the government has advised them not to do such a thing. And I think people are realizing that we have these dangerous institutions, one large dangerous institution with a bunch of branches, that is messing with their lives. The fact that all of us are here to discuss this sort of thing is a good indication of that. I think Lou Rockwell earlier this year at Mises University said that the work of the Mises Institute is more important now than ever. I think there's great truth to that. Not only is it more important now, but I think we're seeing the fruits of that. I think more and more people are aware of this and I think that's a necessary step before we can actually get to any action being taken. So, thanks everyone.