PEDRO DA COSTA: He was the head of the board of the New York Fed, at the same time, he was the head of the board of Goldman Sachs. Not only that, he was given a waiver to buy Goldman Sachs stock when he knew that they were bailing out the banking system. There was egregious, I would say criminality going on for any worker, any normal human being who's not an economist, the notion that the unemployment rate could be too low is just fallacious. Face it. If it doesn't make any sense, it's probably for a reason.
ED HARRISON: Hi, I'm Ed Harrison for Real Vision. I'm talking to Pedro da Costa, who is a MarketWatch and Forbes columnist. Glad to have you on Real Vision, Pedro.
PEDRO DA COSTA: Thanks so much for having me.
ED HARRISON: Pedro, actually before you were a MarketWatch and Forbes columnist, you were almost exclusively a Fed watcher, I would say, a reporter whose beat was the Federal Reserve. Tell me a little bit about your interactions with the Fed during that time.
PEDRO DA COSTA: That's right. I covered the Fed for far more years than anybody should consider doing. As we were talking about before the show, nobody grows up wanting to be a Fed reporter. You might have the dream of becoming a journalist one day, but the Federal Reserve is not the thing that you want to cover. The way I got into it was basically, as a cub reporter at Reuters News back in 2001, I started off covering actually the emerging markets crisis that was taking place at the time, the Argentine debt default. Later, Lula's election, led to huge fears about the Brazilian economy. That's what I was covering, and my background as a Brazilian American helped me in that direction.
Then as the crisis focus shifted northward, starting in as early as 2006 really with housing prices, and then in 2007 with credit and then in 2008 with the full blowup, my focus had already shifted toward the Fed. I really spent a ton of time traveling around the country, talking to regional Fed officials, talking to members of the board, talking to various Fed chairs. I got to meet everybody from Greenspan, Bernanke, Yellen and down the line so I get to attend a few Jackson Hole conferences especially during the height of the financial crisis. It became a fascinating beat, used to be back page news, but it became front page news during the crisis.
ED HARRISON: We're going to go into the whole history, the whole kit and caboodle, but when you say it became a fascinating beat, to me, that tells you something the site guys have right now, the fact that Fed, that monetary policy, everyone cares about, and they didn't care about it before. What's up with that? How did that happen?
PEDRO DA COSTA: I think it happened in part because the-- I think the growth of the financial sector and its importance in the economy and its influence in the economy meant that interest rate policy also became more powerful and more important more relevant for the day to day trading. I think that because financial media focuses a lot of attention on Wall Street and what Wall Street cares about, the more Wall Street started paying attention to day to day movements in rate expectations, the more various news outlets started to cover that aggressively.
Literally, when I see it became fascinating, I already really enjoyed my job as a markets reporter at Reuters. I was in my 20s. I was having a lot of fun living in New York City. It was a job I loved it, but when the crisis hit and I started to understand and see the historic proportions of what we were living through, and we're going to discuss that in context today, I really started to see economics and the study of monetary and economic policy generally as a lifelong pursuit rather than just a job. It really changed my perspective on things.
ED HARRISON: Well, yeah, we'll get to some of that at the end, because I know that you're in a different situation now than when you were a markets and Fed reporter. You know a lot more, you've talked to Fed officials, give me some meat there.
PEDRO DA COSTA: I'll tell you about some of the reporting that I did. It's actually some of the reporting that I'm most proud of in my life, because I would say that I've heard from Fed officials that it contributed to greater transparency in the Fed and that actually forced the Fed's hand on holding a press conference. One of the things that I used to observe and part of this coziness, I think that the ultimate report was called Cozy Ties at Club Fed. That was a report that I did with some colleagues at Reuters and I think for 2010 and it was about how-- and the way it came-- the inception of it is we'd attend these conferences like in Jackson Hole and Fed officials are friendly and you get to know them, and sometimes, you're like talking to hedge fund managers or bankers. Suddenly, you'd get close to them and they'd clam up.
You'd be like, well, what are you saying to a banker that you can't say to a reporter, because if you're giving them anything of value, that's insider trading. My colleague, Christina Cooke says, hey, Pedro, have you ever noticed this? Like, yeah, this happens all the time. We're like, let's figure this out. We were able to prove that this happened, because, of course, some of these investor types share this "intelligence" information like theft, basically. They would put it in consulting research notes that were not sent to the press, it was only sent to clients saying, oh, yeah, I talked to Fed officials and I'm in the know, and I know this and that, we were able to prove that they were leaking stuff.
The ability to prove that these leaks were happening led them to curtail by holding a press conference right after the meeting. It shortened the period of time that basically, you'd have a Fed statement and then three weeks of speculation about what actually happened in which that information was very valuable and the details are very valuable. Once the Fed chair comes out and explains the meeting, that value is neutralized. That's one experience that comes to mind.
ED HARRISON: Tell me about the Fed leak. Yeah, that was a big thing that like, what was the exact circumstance behind that?
PEDRO DA COSTA: There were a couple of different ones, but the most prominent one was the Federal Reserve, Medley Global Advisors--
ED HARRISON: Yeah, that's the one I'm thinking about.
PEDRO DA COSTA: --choose and information, I think they're a spy firm, but I don't really know what they do. I think they're corporate spies, that's what I would call them but they send people to these conferences to gather information and pretend they're reporters, but they just write private reports for their investor clients. Medley Global Advisors wrote this report like basically predicting what the Fed was going to do with QE 2 to the tee. The report was written October and it was called December bound and in December, QE 2 was launched.
At first, the Fed explained it away by saying that, oh, this was similar to what had already been reported at the Wall Street Journal, where I was working at the time, and there's nothing to it. Later, Jake Bernstein to his credit from Pro Publica actually managed to get a hold of the note. We saw that actually, like there was a lot more juicy detail in the notes than there really was, and so it became this unresolved mystery. Eventually, Jeff Lacquer had to resign because he was said to be one of the people that confirmed the leak. We never quite ascertained who it originally was.
What I would say about that is that like, if this was happening at a level that we were able to like capture in reporting, imagine what's going on behind the scenes in these conferences where people are drinking and hanging out. It's really a group of friends and there's this incestuous relationship that still exists for like, after you're done at the Fed, you might go work at Vanguard, or go work at PIMCO like Bernanke did. It's a very chummy world where information peddling can be a thing.
ED HARRISON: You asked Janet Yellen about that, didn't you?
PEDRO DA COSTA: I did.
ED HARRISON: Her response wasn't that forthcoming.
PEDRO DA COSTA: No, her response was not forthcoming. I actually quoted Jeb Hensarling. I think it's the only time I've ever quoted Congressman Hensarling, but he just had a report on what had happened. His report claimed that the Fed had tried to shut down an internal investigation into the matter. I was just asking her a follow up question and I think I actually blame our communications team. I don't think they've prepared it very well, but it was a very obvious question and she was flustered, and that was that but that was one example of seeing how the sausage is made.
ED HARRISON: Interesting. Tell me a little bit-- I want to go back and do like a broad sweep of what's happening with the Fed. Because my understanding is the Fed came into existence in 1913. That was relatively late compared to our European brethren and their central banks and so forth. Why is it, first of all, that the United States had no central bank? Second, what was the central bank supposed to do? Why was the Fed even founded to begin with?
PEDRO DA COSTA: It's a very interesting history and one which I had to learn over time as I started to cover the institution. The Fed was founded in response to repeated financial panics which used to take place every 10 to 15 years and which used to wreck the financial system and lead to massive bankruptcies of banks, huge runs on banks that led to depressions and prolonged-- deflation was actually the norm rather than the exception as you know from those really backward looking charts that are truly historic.
The US as a fairly new country and economy was a junior player in world affairs and the financial system reflected that. A lot of the money was issued by private banks, there was a very incoherent financial system that was divided and that was split into states, different states had their currencies and there was all kinds of different coinage in the United States.
There was also an aversion to centralization, which coined the creation of the Federal Reserve represented and there was like a founding father conflict between Alexander Hamilton and Thomas Jefferson about the nature of centralization that affected all parts of government that the Fed was a key player and Alexander Hamilton wanted to create a central bank and they tried twice. There was the First Bank of the United States and the Second Bank of the United States and because of its lack of traction and lack of institutional support, eventually those charters expired.
ED HARRISON: You could almost call it libertarianism in America that wanted to avoid having a central bank. Then eventually, we got the central bank and as soon as we had a crisis, it basically failed. In a sense, you could say that its first test that it had, it didn't pass the test. What do you make up with that as someone who's not just a Fed reporter, but also like a Fed watcher, historian who knows the full sweep?
PEDRO DA COSTA: Sure, I think that's the correct historical analysis. Basically, the Fed was created in response to most immediately the panic of 1907. That led to really a lot of hand wringing. Basically, JP Morgan had to come in and philanthropically bailout the financial system so that he could then own it. We see that story repeating itself over time. By the way, JP Morgan was involved in the creation of the Fed. One of the interesting parts of the inception of the Fed is the Fed really was created with a huge influence of the banking system for the banking system to prevent banking panics.
It's much less of a civic minded institution back then. It was really about preventing bank panics and just lending at a time of crisis. To your point, the Great Depression hit, but the Fed almost didn't understand its tools, didn't understand how to calibrate monetary policy. It was fairly new at it. It was his first real encounter. What it did was basically it failed to understand the nature of the shock of the Great Depression and how deflationary it was and how much the money supply was being depleted and it did nothing. By doing nothing, it generated a deflation that created a downward spiral that made the event much worse.
ED HARRISON: Well, you said something that I thought was interesting in that whole point because I know you've told me this offline before that you were in an event, that was the 100-year anniversary of the founding of the Fed. There was some like little nitty gritty from insider's view of what Fed officials were thinking about that time. The Fed was founded by bankers for bankers, as you said, and to me, that's not a government institution in its normal sense. I think that this is something that a lot of people have a problem with is that the quasi-public private nature of the Fed. Talk to me about how it was founded and this quasi-public private nature.
PEDRO DA COSTA: The Fed is and should be a public institution, because its mandate comes from Congress. It comes from me and you. It comes from voters, their power comes from us, so it should be democratically accountable. However, it was created initially for the purpose of stemming banking panics which helps the bankers most immediately, we you could argue also helps society by preventing long deflations that create high levels of unemployment, etc.
There is this original sin of having deep banker involvement in the creation of the system. Especially in the way that the founders of the Fed solve the problem of this fear of centralization is by creating the Federal Reserve district system we now know of creating these regional Feds, which was great in theory, but it also created a very unaccountable system where the presidents of these regional Feds who get to vote on monetary policy and regulatory policy, until recently they were appointed by bankers. After the crisis, the bankers on their boards, they're still bankers on their boards. They no longer get a vote on the appointment, but they're still highly influential. They get to pick the next class of directors. The level of bank influence is just still excessive.
ED HARRISON: Who picks those guys? You're talking about the regional Fed presidents like San Francisco and Chicago, who nominates the president for those positions?
PEDRO DA COSTA: The board members.
ED HARRISON: The board members. Those board members are not elected.
PEDRO DA COSTA: In any way shape or form. There's three classes the directors. Class A is supposed to be bankers literally mandated by law because the excuses, oh, you need bankers to understand the banking system, it's a dubious claim. The Class B directors are businesspeople but if I understand it correctly, they're appointed by the Class As and so the bankers are already picking. Then there's a Class C directors who are supposed to be community people but that can be anybody from like a small startup FinTech firm to like-- it's not really always actual community people. They're a lot less influential.
There's been a lot of criticism by progressive organizations about the opacity of the search process in those cases, because for instance, the way that John Williams got into the New York Fed was very, very dubious, he seems to have just been slotted in there without broadening the search for it for as diverse and wider range of candidates as could have been selected.
ED HARRISON: You bring up an interesting point because John Williams, the New York Fed, the New York Fed is very critical in terms of the Fed. When you think of the centers of operation of the Fed, you're describing a system that has multiple sources of power. You have the Fed governors, you have the New York Fed, which is doing all these operations with the money center banks, and then you have the regional, other regions. Where's the center of power been traditionally, and where is it now?
PEDRO DA COSTA: The center of power has shifted over time but I think the center of power at the very inception of the Fed was at the New York Fed, at the expense of the board because Benjamin Strong, in accordance with his last name, although his health failed him a lot but his name is Benjamin Strong and he was president of the New York Fed from its inception and he was very powerful. He basically made decisions above and beyond the board.
At the very start, that was the case, but really over time, if you look back starting with Chairman Volcker and Greenspan and down the line, the board is really all powerful. They get permanent votes on the FOMC, which is the Federal Open Market Committee, which is a committee that actually sets monetary policy. The New York Fed is still very powerful probably because of that history. The president of the New York Fed not only gets a permanent vote on the Monetary Policy Committee, which other regional Fed presidents have to rotate in and out on a two or three year basis, but he or she, up until today, always he, is also vice chair of the Federal Open Market Committee, which is a very influential and important role.
ED HARRISON: Basically, as it stands now, it's the Federal Reserve Board in pole position, New York Fed in second, and then the regional presidents having, maybe collectively, do they have the same pool or?
PEDRO DA COSTA: I think collectively, they might and they push back, but they're not always aligned so there's a collective action problem. I feel like they just-- they jostle for power and media attention in different ways. Then the curious thing about it is that the less accountable regional central bank, less accountable in a political sense, are actually more accessible and reachable from a reporting sense just because of how things have played out historically. That's always been a contradiction. When I covered-- Janet Yellen was president of the San Francisco Fed for, I believe, 9, 10 years before she came to Washington in 2000. She'd been in Washington before but she returned to Washington in 2010 to become vice chair of the Fed under Bernanke, and then she took the helm of the Fed in 2014.
When she was the San Francisco Fed president, she would sit with the four of us, wire service reporters. It was Reuters, Bloomberg, Market News and Dow Jones, who like had the coverage and the funds to go to every Podunk town and cover every regional Fed speech in case they said something market moving during the Q&A because that's what financial clients cared about. I got to talk to her and other regional Fed officials for as long as I wanted, but once they get to the board, they clam up. It's really difficult then you get the occasional off the record meeting with them.
ED HARRISON: It was a totally different-- she just changed, she disappeared, basically.
PEDRO DA COSTA: Absolutely. Not because-- not for her own volition, which are now under the communications machine of the board. Her attitude didn't change. She was still a very open chair and very public facing, but she was much less