Younger and Menand Explain How We Got the Modern Banking System

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:15)

So Joe, this is a very special episode of Odd Lots. It is a live recording.

Joe Weisenthal (0:22)

That's right, we did a live recording. There was a big, I don't know what, 200-something people came out, really packed house, to talk about Finrag.

Tracy Alloway (0:30)

That's right, everyone got really into Finrag.

No, so this is basically a follow-up from the episode we did with Josh Younger, one of our favorite guests, in which he was talking about the origins of the repo market. And we decided that we needed to talk more about it, and we wanted to bring in Josh's research partner, Lev Menand.

Joe Weisenthal (0:51)

Yeah, that's right. And so we have this sort of sprawling financial system. You know, as you mentioned, there's repo, there's euro dollars, there's crypto, stable coins, PayPal, Venmo, all of these things that have sort of like some banking-like qualities, but aren't really banks.

And so the frame after that great episode with Josh, I guess that was in October, is basically like, how did we get here? How did we get in this position where we have all these sort of various bank entities that aren't traditional banks that in some way or another, the Fed is responsible for regulating or backstopping?

Tracy Alloway (1:27)

Right. And I think there's a lot about the financial system that we tend to take for granted. But there's a reason that all of these different things exist, for better or worse, and they do come with advantages and drawbacks. So that's really the theme of this particular episode, talking about how we got here and why and what it means now. So please enjoy.

Thank you, everyone, for coming to a very special live recording of the Odd Lots podcast. I'm Tracy Alloway.

Joe Weisenthal (1:56)

And I'm Joe Weisenthal.

Tracy Alloway (1:57)

So I am very pleased to say that today we have Josh Younger, one of our favorite Odd Lots guests. We also have his research partner, Lev Menand. He is an associate professor of law at Columbia, also the author of The Fed Unbound.

And one of the reasons we wanted to hold this live event is because we recorded an episode with Josh Younger earlier this month, I believe, where we talked about the origins of the shadow banking system, specifically the repo market. And one of the themes that emerged from that discussion is that even if you think the shadow banking market has a lot of issues and problems today, the reason those issues and problems exist sort of stems from these decisions that were made many, many decades ago. Conscious decisions by regulators, notably the Fed, that combine to create the shadow banking market as we know it today.

Joe Weisenthal (2:49)

Even if you're not interested in shadow banking market, shadow banking market is interested in you, basically. So, yeah, I'm really excited about this.

Plenty to learn, plenty to sort of look through history, to sort of understand where we are now. Plenty of fin rag and financial stability issues always popping up, so let's go for it.

Tracy Alloway (3:10)

It's a good time to talk about financial stability.

Joe Weisenthal (3:13)

Good time.

Tracy Alloway (3:13)

Just one note before we begin. I think our producer already walked you through some of the housekeeping, but we are taking questions from the audience. Please write them down on your index cards, and they will be put into the magic box that we have on stage.

All right. So without further ado, Lev, why don't we start with you? I mean, researching the evolution of modern banking, how did you get into that and why?

Lev Menand (3:41)

So it's really a product of my biography in some sense. I graduated from college in the midst of the global financial crisis and its aftermath, the Great Recession.

And I, in a weird turn of events, got a job at the Federal Reserve Bank of New York. So I was thrown into an economy that was in turmoil, financially induced turmoil. And so I was naturally very curious about that. And then suddenly I had a job that gave me an opportunity to learn about that problem and to confront it.

And so I got to work on the first CCAR, the first stress test, and develop that. And I also got to, I was seconded to the Financial Stability Oversight Council. I got to work on preparing the first financial stability report for the United States.

And then, you know, once you find a problem that is interesting to you, you know, I guess my personality, I've just continued sort of chewing at that ever since. And in part, because I don't think that we've solved the problems from 2008 And I think that the consequences of 2008 are extremely momentous across a number of dimensions of our society. Many problems that we're experiencing today, political, economic, social, 2008 was a major shift in how we address those problems. The nature of those problems made a lot of them worse. And I think that monetary and financial stability, what we lost for that one moment, is a key social good that we need to do a better job of preserving and protecting over time.