 This is Mises Weekends with your host, Jeff Dice. Welcome back once again to Mises Weekends. We're very pleased to be joined this week by our guest, Danielle DiMartino Booth. She's the author of a new book titled Fed Up, an insider's take on why the Federal Reserve is bad for America. And she writes as an insider having spent about nine years at the Dallas Fed under the tutelage of her colleague, Richard Fisher there. And I think with bombs falling in Syria and the U.S. economy seemingly spiraling out of control, it's more important than ever that Austrians and libertarians are talking to fellow travelers. Danielle might not agree 100% that central banking ought to be abolished, but her new book is praised by no less than people like James Grant. And I think the more we can cross over and talk to people who are not 100% like-minded but who are at least asking some of the same questions, the questions Danielle asks in her book, I think that that is a good thing. So that said, Danielle, thanks again for joining us and welcome to the show. Talk a little bit from the get-go about Trump talking to the Wall Street Journal. Give us your thoughts. Well, it's what I've been fearing. Our new president is not very good at silence. So the fact that he's been so quiet about the Fed every day that went by without him having a fat finger tweet in the middle of the night about yelling was very upsetting. And I was actually ironically heartened when the most recent meeting minutes were released because she was speaking about stock market valuation and Trump is obviously or has been very vocal and proud in taking credit for the stock market rally we've seen. And the minutes went so far as to reference legislation as well. So Mission Creep at the Fed was as bad as it's ever been in the most recent minutes and he decided to sit back and take it. So very disturbing. Well, speaking of Trump, speaking of yelling, I think your book fits in with a growing populist movement around the world. We've got Trump being elected. We've got Brexit. And we've got a lot of people pushing back against what we perceive anyway as this sort of technocratic financial elite running our lives. Did you have any clue that when you were writing your book that Brexit or Trump would happen and that your book would fit in so well with that? Oh, no. I mean, I call it blind squirrel syndrome. So I just got really lucky. You know, I had Hillary Clinton won the election, had the polls been correct. I used to joke with my publisher that she would have a book burning party on the White House lawn. And that Ken Rogoff would write in and impose negative interest rates and abolish cash. So but that didn't happen. Well, you know, you talk a lot about yelling in this book and I think one thing that's so interesting is that she is a professional lifelong professor. And we've had the labor economists, not just professors. She's got a really tight focus in her studies. But you know, the Fed has undergone this transformation where it used to be run and staffed by bankers. And today it's almost exclusively staffed by academics, by PhDs. And that wasn't always the case. What do you think? Could you summarize the impact of this academicization of the Fed for us? You know, I think that the end result of all of this, which by the way stands in direct contrast to the mandates of the original 1913 Act, that the president ensure that there's intellectual diversity and industrial diversity on the board and among the Fed leadership. But it's created what I've called group stink. And it is the inability to dissent the inability to say no. Most people inside the Fed think the same. They don't take the complications of a global and very modern financial system into account. I was kind of surprised to hear Yellen talking about the shadow banking system because it has been of so little interest to academics inside the Fed because they don't technically regulate the shadow banking system. And yet it's become so important in a post-global financial world. So it is a lack of appreciation for anything that you and I would consider to be on planet Earth. And it is what has made the Fed so very out of touch and angered so many people. They might not know it's the Fed, but they know something has gone very, very wrong with their financial well-being and who's in control of their financial well-being. Well, when we talk about all these PhD economists, some huge percentage of them are Ivy League graduates. So despite all their book learning, I guess, do you think people in the Fed have read Austrian stuff? Do you think people have read Mises and Hayek? Or is this just completely outside their orbit? You know, I think it might have been in the index of one of their economics textbooks. But I would bring up the word malinvestment and their eyeballs would roll into the back of their head. And this was during a time of the quote-unquote shale revolution. So it was very much heresy on my part to be at the Dallas Fed in particular and be saying there is something wrong with a hedge fund from Greenwich, Connecticut trying to build a 60-story skyscraper in downtown Midland. Clearly, we've got some malinvestment going on and it would just be black stairs. Well, when you talk about group think in your book, I just wonder to what degree you think that people within the Fed, people within the central banking community in general really believe what they say. In other words, do they really in their hearts, apart from the public face, do they really in their hearts believe that what they do, that monetary policy can create economic growth in and of itself? Do you think that they really believe that? If they don't believe it, then they do a really good job of faking it. Let's put it that way because it is clear that they do not understand the damage that's been done to the social fabric of this country to the culture to have driven down multiple generations' throats, the idea that the only way to get growth is through the creation of debt. That is not the American way. It is not what capitalism is based on and it has crippled our middle class, completely gutted it out. But while at the same time corrupting all manner of institutions, corporations, banks, pensions, you name it. Right. Do you think they understand this though? Do you think that your average Fed economist would view what the Fed does in terms of interest rate setting or interest rate targeting, I should say, as something that's not capitalism, as something that's illiberal, that sounds like something out of a Soviet Politburo? I think that part of the problem and the disconnect where the disconnect is born is the fact that Fed leaders have pensions, they have health care for life. So what if we're going to impose zero interest rate policy? It won't affect us. We're fine in our retirement years. So officials have to be on the receiving end of the policies they make. It's kind of like Congress not having to deal with the worst vestiges of Obamacare. They have platinum Cadillac health plans. Same general idea. So I think that a lot of the leaders at the Fed can delude themselves into thinking that they're doing good by the people over whose financial system they shepherd when in fact they are not. At the other point, they all study the same basic schools of thought and that is what is broken inside of our higher learning institutions. So describe that school of thought for us. Is it some sort of composite what we might call neocainsianism or neoliberalism, where the goal is to create demand stimulus using monetary policy? It absolutely is. And I think one of the great ironies, I'm sure that a lot of the people who follow the Mises Institute have read the Lords of Finance and appreciate its basic message. But I think that one of the ironies is that Keynes himself came up with a theory of the paradox of thrift, whereby if you keep interest rates too low for too long in the aggregate, you're going to end up with too many people saving because they know that they have to save more today because they're making less on their savings. So it becomes the most massive backfire of all time that would have made Keynes himself very uncomfortable. So sometimes I think his name has been taken too far in vain because I picture him spinning in his grave. That's true. And of course, we have this, we have little old ladies having to go out with a financial advisor and try to chase yields when at that stage in their life, they ought to be in safe, low-risk investments getting 12% or whatever it might be. Right. You know what I'm talking about? Yeah, and I joke about taking Graham out of Vegas. Well, but when we talk about some of the technical aspects of the Fed, and you do mention Rand Paul's audit the Fed bill in your book, from my perspective, we get sort of an after-the-fact balance sheet audit of what the Fed has done in a previous year or previous quarter. Do we really understand though what the FOMC does in secret? Do we really understand what happened during the crash of 2008? Do you think there's more auditing that could be done, more transparency that could be delivered? I get really uncomfortable with the idea of Congress having anything to do with the Fed. It's supposed to be an apolitical institution and barring what happened with Trump recently, I should say. I don't think the Fed would necessarily need to be audited if you had rational practitioners inside the leadership. I think that they would put a screeching halt to making monetary policy by models and or throwing the spaghetti up against the wall methodology, whichever works. Right. There wasn't that much mystery going on during the financial crisis, as many people believe, as much as it was constant reactionary function to the unexpected because their models had not taken into account and or anticipated what real-time data were screaming at them. Do you agree with someone like a David Stockman who argues that if certain firms and banks had been allowed to just go under during the 2008 crisis that it would have been a Wall Street panic and it would not have spread to Main Street necessarily? My only concern there is the connectivity, if you will, between the mortgage market and all of these people. We know that there have been over 10 million foreclosures, but my concern would have been the connectivity between Main Street and Wall Street. And I understand the idea of moral hazard and letting these banks go, but at the end of the day, it could have just as easily been Lehman Brothers that was saved and Bear that went under. It really was not that well thought out after. A lot of the conspiracy theories just don't hold water from my perspective after having been on the inside. Does that mean, though, that those decisions, Lehman Brothers versus Bear Stearns, Countrywide, B of A, AIG, et cetera, but you're not arguing that those weren't political decisions in a sense? Oh, heavens, no. I think that it's fairly common knowledge that Hank Paulson and Dick Foole didn't get along very well or play nicely in the sandbox when they were both CEOs on Wall Street. I mean, that's just something that you know from having been there. Well, so in the ensuing years, obviously the Fed has racked up almost $4.5 trillion on its balance sheet. The QE has at least come to an end for the time being. Bernaki said something after this latest Jackson Hole meeting about, well, we always said that we would unwind this balance sheet and get back to a normal level. In other words, a pre-crisis level. Do you think that still holds? Do you think there's any way the Fed can ever really unwind all this Treasury debt and worse on its balance sheet? Unfortunately, I think that the markets have become addicted to the notion, if you will, that every single bond that central banks worldwide have purchased, every single bond has been expunged from the supply forever. Otherwise, I don't think that we would have interest rates where they are. I think that the Fed can talk tough about reducing the balance sheet if it wants to play politics and push the economy into a recession, but they consider that $4.5 trillion to be their fortress, their power base. They really do. The balance sheet has gone to their head. But isn't Janet Yellen an awfully tough spot? In other words, if she wants to raise interest rates, the debt service for Congress and its annual budget expenditure can double without much of a rate hike, but without raising interest rates, how does she continue to create a market for U.S. Treasuries? It seems like she's in a whipsaw. It is an absolute dilemma, but it is a dilemma. It is a corner into which the Fed has painted itself. That's what people need to understand. There were people on the inside who were saying, it's a slippery slope if you go to zero. This will not end well. The market is not screaming for lower interest rates. The market is telling you that there's a liquidity freeze going on and that it needs other things. If you go to zero, you're going to introduce distortions and make it extremely difficult one day to ever exit. And guess what's happened? It has become the Achilles' heel, not just of Janet Yellen and the Federal Reserve, but I would argue the Bank of Japan, China, the ECB, Mario Draghi. This is a shared global phenomena. Well, assuming they've all become zombie banks, they're supposed to be the banker's bank. Who becomes the central bank's banker? Is it some sort of IMF scenario if they can't work their way out of this? Yes, but who funds the IMF? Again, there's nothing elegant I can suggest to you as a way out of this situation. The gallows humor is that God can get out his checkbook because you have to ask yourself who the entity possibly is. Now, if you speak to the academics that we were talking about before, the ones who are one and the same with the same school of thought, they will tell you that we'll just simply have to monetize the debt away, that there'll be a gentleman's agreement between the developed countries that have lots of debt and that we will walk off into the sunset and everything will be fine. I consider that to be the last stop on the currency war train and the next stop to be an actual war war. And I'm not trying to push for hyperbole here, but I don't think that a lot of countries that don't have high debt levels would stand still for it. Right. In other words, there's definite winners or losers in a walk away scenario. Always. Well, one thing you say about Janet Yellen in your book that's interesting to me is you say she's the most liberal Fed Reserve Chair, meaning left wing Fed Reserve Chair we've ever had. Tell us a little bit about how you think maybe her worldview shapes her decision making and how she sees her role. You know, it's interesting. In the book, I talk about an interview that her husband, Akerlof, did with a German newspaper, wherein he basically said that George Bush had been the worst president in the history of the United States. Now, these are two people who studied at UC Berkeley. She is a labor economist. That means that she is going to do everything in her power to bring that next marginal worker off the sidelines and back into the workforce. It is the most extreme form, if you will, of Keynesianism on steroids. And that is what bothers me most is that her philosophical leanings will push her to do more than an economist who was not grounded in that second mandate of the feds to maximize employment, which introduces malinvestment by definition. Right. Well, Danielle, we're almost out of time. Let me just leave you with one last question. You worked for many years with Richard Fisher. You both left the Dallas Fed at about the same time. You know, he's considered, at least in mainstream financial journalism, to be some sort of Uber hawk. And I suppose that's all relative. Do you think people at the Fed today really have an institutional memory? In other words, would a young Fed economist really know anything about Paul Volcker or anything about how monetary policy used to be conducted? Or are we just living in a new normal where people are ahistorical in their approach to central banks? I don't think that we have enough of a memory, if you will. I worry about what's going to happen one day when China doesn't have those foreign reserves for us to fall back on. And I said that correctly. I worry that somebody's going to flip a switch in the sky and we're going to go from having a deflationary to an inflationary impetus over which we have absolutely no control. For the moment, it is still deflation. But these things absolutely do worry me. And when you talk about a young generation of economists who've never known the miracle of compound interest, why would they have an interest in making sure that we never revisit it the zero bound to say nothing of negative interest rates? Well, it makes us wish Paul Volcker was back. He's still alive and kicking folks. He's in his early 90s. We actually invited him to our New York event later this fall. Not sure if he's going to be able to attend. But that said, Danielle, thank you so much for your time today. Congratulations on your new book and you're really making the rounds of the financial shows. I wish people would listen to you and read you. And that said, ladies and gentlemen, have a great weekend.