Alexandra Scaggs joins Money on the Left to discuss her experience covering the ongoing paradigm crisis in mainstream economics, central banking and finance—and why leftists should be paying close attention. Alexandra is presently a senior writer at Barron’s, where she covers markets and fixed income. Giving credit to Modern Monetary Theory (MMT) for turning her toward left politics, Alexandra has proven an important contributor to the MMT project through her critical financial journalism and online commentary. During our conversation, we discuss Alexandra’s recent reporting on the complex topic of “repo markets.” We also talk about the inordinately powerful role played by so-called “primary dealers” in concealing money’s political constitution and possibilities. Ultimately, we stress the need for leftists to seize the moment in order to reverse the unjust neoclassical and monetarist consensus that has organized neoliberal political economy since the late 1970’s.
Find Alexandra’s reportage at Barron’s (https://www.barrons.com/authors/8576) and follow her on Twitter (@alexandrascaggs).
Transcript
The following was transcribed by Richard Farrell and has been lightly edited for clarity.
William Saas: Alexandra Scaggs, welcome the Money on the Left.
Alexandra Scaggs: Thanks for having me.
William Saas: Could you start off by telling us a bit about your personal background and professional experience?
Alexandra Scaggs: Sure. I do want to say, first of all, that I’m appearing in a professional capacity. I’m not representing my publication or anything like that. I wanted to mention this just so no one thinks I’m being super political as a Barron’s employee or something.
Scott Ferguson: Understood.
Alexandra Scaggs: Cool, so I joined Barron’s about a year ago and I’ve basically done a quick lap of most of the business publications in New York City. I started off at the Wall Street Journal covering the stock market. Then, I went to Bloomberg to cover the Treasury market. Most recently, I was at the Financial Times covering credit. And then again, about a year ago, I ended up moving over to Barron’s. Here, I cover pretty much all fixed income markets that cover treasuries, emerging market debt, credit and mortgages, and other types of stuff like that.
Scott Ferguson: I’m curious, how does somebody like you start covering finance and making the rounds through all of these New York publications?
Alexandra Scaggs: It’s kind of a funny story. It’s something I mostly fell into. I went to a school that was actually pretty conservative for undergrad. It was Washington and Lee University—a little problematic now here in 2019. But I went there mostly because I wanted to play volleyball. It’s had a good team and I could play there. Once I was there, I thought I wanted to do something that was basically going to keep me employed. As it turns out, I later learned that was kind of the typical millennial person’s priority. It wasn’t just me that was only thinking about that. So I went into accounting and economics. I took a bunch of classes in those departments because I wanted to know how things worked, and I also thought, “Well, maybe this means I’ll actually get a job outside of college.” Obviously, it turned out I didn’t love doing it, but I did like paying attention. I realized those were the areas where most power is wielded. There were a lot of kids going to banks and into corporate finance, and so I realized it’s much more interesting to be on the outside looking in.
I then went into the journalism program and it turns out my advisor actually ran a business journalism program within the journalism school. I figured, well, I have the prerequisites and I can hang out in the journalism lab with everyone and chat, which was mostly what I wanted to do at that point. Another cool thing was, I got to go out into the community a decent amount. Coming from the suburbs of Pennsylvania, going out into Rockbridge County, Virginia was really interesting and eye opening because Lexington, Virginia is one of the wealthiest per capita areas in Virginia, but Rockbridge County is one of the poorest areas per capita in Virginia. So going out and realizing these people are living so differently from these students in this little bubble was really reorienting.
It’s funny, my family’s originally from around there. Thus, I was able to talk to people from the community when a lot of the other students weren’t. It was an interesting experience. You know, I decided to focus on money and finance because that was how people really showed what they cared about. Because if you don’t spend money on something, then it could just be like paying lip service, right? I also did it because I was like, “Well, reasonably, I don’t think a lot of people will want to do this. So this way I can specialize and actually get a job.” And then 2009 happened, which was disastrous and also reoriented the entire country around what’s actually happening in finance, markets, and economics. That was right before I graduated, which was really crazy. Going out into Rockbridge County and then the financial crisis hitting right as I was about to graduate completely reshaped the way I saw the world.
Scott Ferguson: In your economics and finance classes, is it fair to presume that you were learning primarily orthodox economics, and what was the transition like when you moved into the journalism school?
Alexandra Scaggs: It was really interesting to get the economics perspective from Washington and Lee, because I had a couple of really interesting micro professors. They were really bright guys and everything they said made sense. There was a developmental economics guy, which was not my favorite class. But then I took a class with this guy who had gotten a PhD at the Yale School of Forestry, which was a very niche section of micro. He was great on micro theory, and that ended up being a lot of fun. But the macro classes were just totally over my head at the time. It seemed like I was doing calculus in micro, and then when I went to macro, everything was arithmetic. I think at that point macro actually was just arithmetic.
Obviously, the journalism school was very different. It was things on the ground that matter to people. I wrote about healthcare in Rockbridge County and that was absolutely wild. I mean, the lack of institutional structure there to provide health care to the community was astonishing. I interviewed one guy who had not gotten good dental care in decades. He had gotten dentures, but then it was difficult to understand him because his dentures were lost in some flood and he didn’t have anywhere else to find them, which unless you actually go into those communities and talk to people, you don’t realize, especially with my suburban upbringing, there are people out there who can’t get sufficient dental care. It just wasn’t a factor that I ever thought about when I was like 16.
William Saas: So 2009 happens and your niche becomes what everybody wants to talk about. How did your training prepare you to engage with the financial crisis?
Alexandra Scaggs: Well, the fact that I could cover it at all was helpful just because I got to see it in real time. It’s interesting though, because even at the time, I’m not sure I fully grasped the macro underpinnings that caused it. I knew that there was a lot of mortgage debt. I knew that a lot of people were underwater with debt, and so I had to piece things together from there. It’s very interesting, because none of it really made sense to me until I met Rohan Grey, who I know is very active in the MMT community. Then, the entire thing actually made sense, which is kind of crazy.
Scott Ferguson: Can you say a little bit more about that?
Alexandra Scaggs: Sure. I think another interesting thing about journalism in the US, and even about working after college in the US, is I had to scramble a lot just to stay employed. I think that a lot of people have this experience where they don’t necessarily feel like they have time to think about the financial crisis or to figure out why it happened. I was like, “It would be great to know why this happened, but I need to pay rent and eat and stuff.” So at that moment, I was just like, “Okay, I’ll cover the fact that the stock market rallied after this thing called QE3 that I don’t really understand.” Then, when I moved on to Bloomberg, I was covering the Treasury market, and I think that the underpinnings of the Treasury market are very confusing unless you have some sort of macro-like structure or foundation to think about it. Around that time, a friend of mine from The Wall Street Journal ended up introducing me to Rohan, who sent me a bunch of literature—he was really a great advocate for MMT. He sent me a bunch of literature and got coffee with me to talk about what the MMT viewpoint of macro is. Then, all of a sudden, things started coming together in a way that they hadn’t before, partially because the MMT community were such great advocates. They made me want to think about it more.
Scott Ferguson: Did you have any resistance coming to it, either in understanding it or biases or whatever that you brought to the table previously?
Alexandra Scaggs: Oh, totally. I mean, I’m a relatively recent newcomer to all of this stuff, because I felt like I didn’t have time or expertise to think about it on my own. I feel like the message that you get from most places is this stuff is really complicated. And these people like Larry Summers or whoever, they’re very smart so they know exactly what the situation is and you should just listen to them. So I was scared to think about things on my own and do my own reading on macro stuff. It’s crazy, I was talking to Rohan about this, and I remember I got into a back and forth with him and we were talking about the division between the Treasury and the Fed and I was like, “Well, the Fed independence is like a huge deal, it’s very important.” I said that because that was what I had been told in undergrad and after undergrad. Then, Rohan was like, “Why?” I tried to answer the question, but I couldn’t. The only answer I could really come up with was, “Well, if people figure out that the division that they think is there isn’t really there, then…” And he’s like, “Oh, then they can actually take control and use money on themselves. And I was like, “Yeah…”
It’s so funny. I remember that moment so clearly because even then, there was this sort of antipopulist or groupthink in the media and professional circles that if normal people figure out how to take power and advocate for themselves, then everything is lost. I was thinking about that, and I was like, if you don’t say it out loud, then it doesn’t sound as awful as it is. But the more I thought about it, the more I was like, there’s no actual defense for this ideological position. And once you see the fact that the ideological position underlies so much of what’s out there, you can’t really unsee it. From there, it was a radical reorientation of my view again, because all of the injustice happening to people from those claiming this is just the way things are and have to be, after talking with Rohan, it’s clearly not the way things have to be. He gave the impression that the more you pay attention, the more you realize there are people who understand this as well. They just want to keep things the way they are, because they’re scared of change or they really do think that we can’t trust people who haven’t gone to Harvard—which is absolutely absurd.
William Saas: It’s one thing to realize that that mystification has been cultivated over so long and that these norms are norms, not rules or laws that are firm, and it’s another to get comfortable with taking that position publicly. Was it difficult for you or was it a snap, where it’s like, this is the way it is and this is the way I’m going to think about it and write about it moving forward?
Alexandra Scaggs: It was really interesting, because it also helped me to challenge some of the power structures in the Treasury market, because on the one hand, you’ve got the Bloomberg opinion guys writing explicitly ideological stuff. It helped me first identify what they were writing. But then I was doing a lot of coverage on primary dealers, and those are the groups of banks that basically backstop Treasury options. The primary dealers have a very political view of their job. In their view, they are the ones who underwrite the government’s ability to borrow. They believe they are the reason the government can do the stuff that it needs to do. And you don’t necessarily realize that is a political view until you learn MMT. You find out that the government is the one who sets all of these rules. And so, when you’re saying that you’re doing all of this stuff for the government, you’re actually doing it on the government’s playing field. So then who are you actually working for? It ends up turning that perception upside down.
That also helps me interrogate the role that they played a little bit more, which ended up making me look into the rules that exist for primary dealers—which again, are set by the government. It allowed me to interrogate that in a way that actually made me better at my job, which was cool, because as soon as you stop accepting everything that these guys tell you at face value, you’re allowed to interrogate what they’re doing a little bit more.
William Saas: Right, we all learn in civics class about primary dealers.
Alexandra Scaggs: Haha, maybe not learned in my civics class.
Scott Ferguson: Do you have contentious direct interactions like on the phone with representatives from these primary dealer banks where you suggest alternative viewpoints? And maybe I’m presuming too much, but do you persuade any of them?
Alexandra Scaggs: That’s a good question. Not anymore, because I’ve moved on from that job. But it was funny, at the time, I did kind of piss a bunch of them off, because I ended up writing about this pre-auction trading thing and it seemed like there was some room to mess around with the auction based on this pre-auction market. And so, that led to an already contentious relationship with the primary dealers. A lot of them would get on the phone and just complain about Basel III regulations and be like, “They don’t know what we do for them.” So I tried to say, “Are you sure?” But again, it’s the guys on the desk that are not particularly interested in having their viewpoint expanded. A lot of the time, you have that conversation and you’re like, “Well, if you say so.” I hope that my coverage helps people reorient the way they think about that. It did help me get in touch with some of the guys who used to be a primary dealer, and then moved on to more sophisticated roles at high frequency trading firms and other Treasury market adjacent positions—those people also looking at it from the outside. I wish I could say I went in there and won hearts and minds, but I’m not sure that it was the most successful attempt.
William Saas: So we invited you on Money on the Left primarily to help us shed light on what’s being regarded as a paradigm crisis in mainstream economics and central banking. Can you help us figure out precisely what is happening and explain why leftists, democratic Socialists, and others should care about this? Maybe we can start by tracing the origins of the crisis?
Alexandra Scaggs: Yeah, I see the origins of the current crisis to the financial crisis. I think that what happened during the financial crisis, all of the pain that was felt by people, and the news that came out in fits and starts afterwards about robo-signing and some of the misconduct that happened, really broke the trust that people had in the financial system and in the representatives of the financial system. It’s interesting because, within the financial system, it’s all of these guys performing what they think is their job. They think their job is to maximize their P&L. There’s an argument to be made that that is actually just what bankers do. But a lot of public policy people had taken the banker’s job and just decided that it makes everything work out for the greater good, so just let it go from there. Thus, the idea that everyone is working in their best interest all together in unrestrained trade—that this idea was the best possible organization of the economy—was fundamentally broken because of the financial crisis.
Scott Ferguson: From my point of view, it’s been kind of a slow bleed. Clearly, at first there was a sense that spreading tons of risk throughout lots of different markets is not actually stabilizing, but totally destabilizing—that is, the shock and wake up call of the initial crisis. But since then, our relatively weak and unequal recovery has been accompanied by certain epistemological challenges to some of the fundamental truths of the neoclassical mainstream. And so, maybe you can help our listeners make sense of how these debates are happening? For example, maybe we can start with the kind of mythos of the independent central bank and with what a central bank is supposed to do vis-a-vis fiscal policy? How are these things thought about pre-financial crisis, and now, in terms of meta-debates, how are mainstream big players talking about these things anew?
Alexandra Scaggs: That’s a good question. I do think that the post crisis in the government response to the crisis is like the second domino to fall, because people really did think that the Federal Reserve was this government entity out there by itself, floating in some apolitical cloud—one that was meant to stabilize this almost mechanical system. I think people do think about the financial system like it is just mechanical and apolitical, which we’ve since learned is not true. Seeing what happened post crisis and the way that the first priority was to help and fix the banks, I think that made people realize the relationship between the Fed and the banks is that they’re not really as separate as you would think, which means the relationship between the government and the banks is not an oppositional relationship. When you have the Fed buying trillions of dollars of treasuries from banks and paying banks interest on excess reserves and all of this stuff, there are fewer ways to pretend these two entities are separate. And I think people understand that, and not just people in the halls of power. Real, everyday people have a better understanding of this than a lot of the leading minds in punditry.
Scott Ferguson: Can you maybe give us a few examples of some of the, justifiably or not, leading minds in punditry and how they’ve handled this? Do you see fractures in this worldview moving forward?
Alexandra Scaggs: The way that it has played out is actually kind of a bummer, in my view, because it’s turned into this thing where everyone says, “Well, the Fed isn’t political. The Fed doesn’t play this game.” But then, their recommendations for policy are basically based on their own politics. You can probably think pretty easily of a major paper’s pundit who is very concerned about the deficit now that Trump is in office. But then, if the Democrats were to get into office next, maybe the deficit wouldn’t be a problem for them—maybe the national debt wouldn’t be something they worried about. I’m not even sure that they necessarily realize that, but maybe that’s where the cracks have shown up. If you have these people only sometimes saying the national debt shouldn’t be $20 trillion, then you start seeing the contradictions in their own messages. And these contradictions are definitely getting out there to normal people.
Scott Ferguson: So you’re saying it’s less of a clear paradigm shift and more of the cracks in the edifice themselves becoming more and more apparent to more and more people?
Alexandra Scaggs: Yes, definitely. I really think that people are actually starting to get more interested in this stuff too, mostly because Americans love a tale of elite deception. The establishment deceiving itself is a pretty clear example. Like, the jig is almost up, but a few people are still holding on here and there. It’s funny, because this is one of the things where I actually think if you just talk to people and say, “This is how money is made. This is why the messages that they tell you are about how the treasury market is gonna blow up and China’s gonna foreclose on us, and none of that actually makes any sense,” then people actually start getting it. Some of it depends on prior political ideas. But I think the distinction between the group of pundits here in New York or down in DC and regular people is growing.
Scott Ferguson: Yeah, for sure. I also think that there’s a kind of lag or translation failure between punditry and everyday people’s interests and our political rhetoric. On the one hand, we see politicians—and certainly in this presidential race—talking about large government programs that are gonna cost a lot of money, but for some reason, none of that rhetoric or framing seems to be tapping into the fact that a lot of the mainstream economics and finance discourse has been calling for more fiscal policy, especially in the case of another major crisis. And that’s not to say we aren’t already in one, but we pretend like we’re not. So yeah, I don’t know if you have any thoughts about how the economic and finance discourse interacts with that popular political rhetorical?
Alexandra Scaggs: Yeah, that is interesting, because I feel like I get to chat with a pretty wide range of folks, and depending on where you’re at, it’s very funny to see the class breakdown, because the professional class, or people who went to fancy law schools, they’re the few people who are left sitting there like, “Well, God knows how we’re gonna pay for all of this.” And I think that’s just because you get cultural brownie points for agreeing with Larry Summers. But among other people who don’t have quite the investment in the establishment, they don’t trust the messages that they’re getting told at all. So if you start talking about it as, “Well, so and so says we can’t afford it, but look at the cost of the military programs and technologies that we have, look at what happened with QE in the post financial crisis,” then they are absolutely willing and ready to hear it. It resonates a lot more.
But when you start getting into the separation between the Fed and the Treasury and the role of taxation, that’s been a little bit tougher. It’s pretty funny, but it is a good message. I was talking to someone the other week about taxing billionaires. It was someone who is sort of middle class. They were talking about how, if they take Jeff Bezos’ money, why wouldn’t they take mine too? And I was like, “I’m not sure they really care about your money.” But that’s actually the perfect opening for MMT, because then you can say, “Well, the thing is, taxes aren’t actually the government getting money for programs. The reason you tax people like Jeff Bezos is so they have less power to direct the political process.” The person then responded with, “What are they just gonna set the money on fire?” And was just like, “That is literally MMT!”
Scott Ferguson: Yes, and there’s a long history of tax day actually being a money burning act.
Alexandra Scaggs: Yes, exactly! And so, those sorts of intuitive conclusions that come from that, that’s part of the reason why MMT resonated with me so much, because it actually makes perfect sense. But then once you accept that, the implications are a radical paradigm shift.
William Saas: There’s a lot to think about here. One of the things that’s coming to mind as we’re talking about chatting with people about MMT and popular reactions to seeing the bailouts of the banks as opposed to bailing out homeowners, we attended the most recent MMT conference, and one of the interesting things about the MMT conference is that it is pretty public facing. There were a lot of activists from different states and backgrounds, and very interested and motivated to bring MMT to their communities and to their local politicians, and to change the discourse from the bottom up. I wonder if you might comment on your own experience at the MMT conference and the perception of the mass movement that appears to be nascent there or at least forming in the MMT community?
Alexandra Scaggs: Oh, for sure. It was so inspiring to see and meet the activists and look at the great work that they’ve been doing. It was also interesting and encouraging to see the non-activists that were there, because I do think that most of the people in attendance were activists doing really important work, and also people who have been there since the very beginning. But since we’re talking about the discourse, or talking about the spread of MMT, I met a few people at the conference who weren’t activists and we’re just like professional guys who drove over for a couple of days because they were curious about it. That is fascinating to me, because again, that is the same group that gets brownie points for listening to Larry Summers. Like, if you’re reaching them, then that’s really wild. The way that the movement has grown has been so cool and encouraging.
Scott Ferguson: Yeah, absolutely. To shift to another major topic that is a place where the cracks in the system are becoming quite visible, in all of the assumptions about inflation—how inflation works and what its relationship to unemployment supposedly is—what’s your sense of the way that has been framed in the past and the way that’s being challenged? Again, I’m interested in a correct analysis, but specifically in this case, I’m interested in what the big players are saying about these things?
Alexandra Scaggs: I mean, inflation used to be like a boogeyman. Even the big voices, like Bill Gross, were convinced that QE was gonna cause hyperinflation after the financial crisis. He talked about it publicly a lot and got run over 100%. The people who have been right have been the people who pay attention to MMT, to the people who are basically carrying out their jobs within finance and the MMT perspective. This is very interesting, because those are not the traditional people that you’d expect to see at a conference of progressive economists. But they are the people who are putting their money where their mouth is and it’s been working out for them. Olivier Blanchard, for example, came out and started talking about how, as long as growth is higher than interest rates, then you’re okay. Scott, you’re probably in a better place to talk about the specific economics of it, but the way that they’re dialing back their inflation warnings have been like a CYA effort. On the other hand, I guess it’s encouraging that people are changing their views after ten years without any inflation at all. The idea that there is a level of unemployment below which inflation gets out of control has pretty much been debunked now.
Scott Ferguson: And within the mainstream, they’re not becoming MMTers, but they see they don’t really have two legs to stand on anymore.
Alexandra Scaggs: Exactly. Even some of my really bright colleagues have come out very strongly against the idea that there is an ideal unemployment level. Because the whole idea is reactionary and problematic, especially in a country where healthcare is tied to employment.
Scott Ferguson: Yep, and it’s racist and sexist, of course. It’s people of color and women who suffer the most.
Alexandra Scaggs: Yeah, exactly. And I actually think that the Fed has realized this. The Fed has realized that people are not willing to accept the idea that there is or should be a reserve army of unemployed people anymore. That idea resonates a lot with people, because they’ve been hearing from mainstream media publications like, “Oh, unemployment is this low, maybe inflation is going to start now.” At this point, first, unemployment has fallen a lot and inflation hasn’t picked up. And second, people are more willing to challenge the Fed’s point of view since the financial crisis.
Scott Ferguson: Yeah, and sometimes directly and to their face.
Alexandra Scaggs: Exactly. And the Fed is not traditionally the most responsive of institutions to the public. But I do think that they’ve been paying attention, and they’re a little freaked out.
Scott Ferguson: Yeah, and they’re doing damage control. They’re holding conferences and they’re acknowledging that they have to be somewhat answerable to the public, even if what they’re doing is totally unsatisfactory. It’s at least another piece in this paradigm crisis puzzle that we’re trying to unpack.
Alexandra Scaggs: Exactly. And I think you can link a lot of that to the great work that Fed Up has been doing. And as people start to pay more attention, and as people listen to that message, normal people are gonna be like, “Why is it that they want unemployment to be 3% or 4%?” They’ve been doing really great work and are really effective.
William Saas: So…what’s the deal with repo markets?
Alexandra Scaggs: Haha, oh god. Yeah, repo has been taking over my life. It’s so funny to see people online freaking out that the Fed is intervening in repo markets, which like, that’s how it implemented policy before the financial crisis. The only reason any person would worry about this is if they had the assumption that the Fed should not be in money markets, which again, is an extremely neoliberal assumption.
Scott Ferguson: Yeah, can you just explain repo market basics? What is it? How does it function? What’s been the nature of the crisis?
Alexandra Scaggs: Yeah, it’s probably easiest to start talking about it from the way things worked before the financial crisis and then talk about what happened during and after. I also think that this is one thing that blows up the assumption that the Fed is not actively involved in markets every single day. So before the financial crisis, banks had a certain amount of cash reserves in their accounts at the Fed. And from day to day, one bank would be a little bit short on reserve cash, and then another bank would have a little extra. And so, they would have these short term loans where they would—and this actually isn’t Repo, this is in the Fed funds market—they would make short term loans of cash to one another, bank to bank, no matter which one, usually overnight, but sometimes in the day. Again, I’m not an expert on this.
During the financial crisis, the Fed bought bonds from the banks, which created a ton of extra cash reserves, so then banks had more than they needed. Then, the Fed started shrinking its balance sheet. Banks sort of stopped making short term cash loans to each other in the way that they were doing before. Instead, they’ve been making short term cash loans, but basically started taking a treasury in return. One bank will need cash, because cash is a little bit better than treasuries for various things, and so the bank will pledge a treasury with another bank to get that cash.
Scott Ferguson: Am I mistaken in presuming that this is usually happening so that banks can meet their reserve requirements?
Alexandra Scaggs: More or less, although, one of the interesting things is that, and yes this is for reserve requirements and other regulatory stuff, but after the financial crisis, global banking regulators said, “Okay, on top of all of these reserve cash requirements that you have, we’re gonna say you need a certain amount of high quality liquid assets.” And high quality liquid assets could be cash or treasuries. The thing that confused regulators is, back in September, the rates at which banks were borrowing cash from each other short term spiked really high.
Scott Ferguson: And that’s the crisis.
Alexandra Scaggs: Yeah, this is the new repo crunch or crisis. It was definitely repo madness. The rates ended up spiking really high. And so, the Fed said, “Okay, we want things to get back to normal, so we’re going to intervene in the market and we’ll start lending out cash in exchange for these treasuries short term at a preset rate that’s closer to our policy rate.” And people seem to think that this is the financial crisis 2.0 and that the sky is falling, which is interesting, because this is actually the way that the Fed implemented policy before the crisis. Before the crisis, when banks are lending reserves to each other short term, every once in a while, they’re wouldn’t be enough, so whenever that was the case, the Fed would come in and lend out reserves short term. This was a pretty standard thing.
Now, that was usually happening in a pretty small volume. What people have been paying attention to this time around is that the Fed has been doing it in large volume. So banks, for whatever reason, need a large amount of extra cash and they’re willing to put up treasuries for it. This is interesting because it gets into the distinction between what really is the difference between cash and a treasury. You can do a lot of things with treasuries. You can sell them really easily. You cannot pay taxes with them. I think that’s one of the distinguishing factors. But both of them are obligations of the US Government more or less. I also find it really interesting that the way the Fed is implementing policy is basically by saying, “Okay, well the Treasury’s obligations are pretty good, but definitely not as good as our obligations, and in order to enforce that, we’re gonna go into the market and lend out a lot of cash in exchange for treasury obligations.”
Scott Ferguson: Just to drive home the point without being totally deterministic, it seems fair to say that this repo madness is an effect of policy or multiple regimes, including Basel III and other regulations. And then, I’m not sure if you mentioned it, but the choice to begin a taper process, whereby the government is essentially depriving this already fragile system of liquidity such that it creates a crisis.
Alexandra Scaggs: Yeah, for sure. I should have probably talked about that in a little bit more detail. The tapering of the Fed’s balance sheet was basically them saying, “Okay, we’re going to stop buying so many bonds at Treasury auctions,” because the Fed has been buying a decent amount. This means that those bonds were going to be at the banks instead of on the Fed’s balance sheet. This is all part of the Fed’s desire for things to get back to “normal.” For them, that means they still want a scarce amount of cash at the banks. And again, it’s not clear to me why they want that. I don’t think they ever really made the argument for it in any compelling way. I think that they just want it to seem like they’re not really intervening, even though they intervene regularly just to keep their policy in place.
Scott Ferguson: Right, and they play this ideological game of peekaboo where they’re pretending that they’re not always in charge in conditioning what’s happening.
William Saas: It seems like they intervene to remind you that they’re independent.
Alexandra Scaggs: Yeah, they’re like, “We’re intervening, but then we’re gonna intervene less because we want to keep the appearance of independence.” But again, as you’ve seen, that didn’t work. Because after a full two years of that, the market for those cash loans secured by treasuries ended up blowing up. The rate for borrowing cash went above 5%, even though the Fed’s policy rate was around 2% at the time. And actually some of those transactions went almost up to 10%, but that’s kind of a different story.
William Saas: As we’re talking about all this is, I’m tracking the fancy dancing in my head and it just all seems so terribly inefficient. I wonder what might be accomplished from this. I mean, a large part of the MMT is game asks, why are we doing this? What could we be doing otherwise and how much more effective and efficient would that be? It just seems like all of this is tied up with that independence rhetoric, or the idea that we need to preserve and maintain this notion that the Fed and the Treasury are just completely independent from each other—but at what cost?
Alexandra Scaggs: Well, it’s funny because you could argue—and I’m not saying that I’m arguing this necessarily—but you could argue that the primary dealers are basically a front for the lack of independence between the Fed and the Treasury. They sit in the middle. The Treasury sells bonds, while the primary dealers sort of underwrite them. And then the Fed lends cash against Treasury bonds from the primary dealer. It’s literally like a shell game—or maybe that’s a problematic way to put it. It’s just going from one hand to another.
Scott Ferguson: Money laundering?
Alexandra Scaggs: Well, what the big US banks are doing is they’re basically charging rent in between the Treasury’s auctions of Treasury securities and the Fed’s short term cash loans secured by Treasuries. In that sort of two sided market, the private primary dealers are in the middle, and they exist to make it seem like it’s a private market and they earn money from it. They’re basically charging rent to be in the middle of that big market.
Scott Ferguson: Absolutely. And this is why the MMT proposal to push the overnight rate down to zero is so important, because it’s about bringing a democratic accountability and a more democratic order to the way our financial system is organized in the first place, rather than through this shell game of private markets. One question I have for you, to come back to your own personal experience, is about gender. It seems to me that economics and finance has historically been very much a white man’s world. I’m curious what your experience has been and if you’d like to speak to any of those questions?
Alexandra Scaggs: Oh, that’s a good one. It’s funny, because it’s now impossible for me to see this outside of an economic framework. When I first got into the business, it was tough because people didn’t take me very seriously. I was new. I was young. I didn’t have a lot of negotiating power, and that was super frustrating. But then you sort of advance a little bit and people start treating you a little bit better. But even then, people have their shticks. A lot of women that I know in financial journalism have to sort of fit themselves into a predetermined box. Like if you remind somebody of their daughter or something, then it ends up being that kind of relationship with the source. So internally it’s weird, but I think it is like any other place of work.
But again, in relationships with people in the financial industry, it’s a commercial relationship. It sort of flattens you into a one dimensional person. You have to play a role. I think it’s moderately more dehumanizing for women and other people in minorities and people who don’t necessarily fit within one of those boxes that powerful people usually fit into. Lately, I’ve also been thinking that these extremely commercial relationships are all sort of dehumanizing and depressing. And I do have a lot of good long term source relationships, but those are different. Because you actually get to know them as people, and they get to know you as a person. But the highly inter-mediated and commercial type of relationship is very one-dimensional and challenging.
Scott Ferguson: What about advancement in the field or opportunities for covering certain kinds of stories?
Alexandra Scaggs: Yeah, historically it’s been pretty tough. Some outlets have made a lot of progress and have worked pretty hard to make progress. But even so, it’s still pretty rare that you find powerful women in financial journalism, or even in finance. And without that path forward, it could be difficult to see yourself at a publication or in an institution for the long term, because there is sort of no path and benefits aren’t always necessarily great. I feel like I shouldn’t talk specifically about different places, because it is nice to eat and have rent paid.
William Saas: This seems like a beautiful time to transition to another question: you’re talking about dehumanization in the commercial relationship, and it’s obviously nice to have money for rent and benefits—could you talk a bit about your own politics maybe beyond journalism? And also, how is MMT maybe shaping your political perspective?
Alexandra Scaggs: Yeah, absolutely. I mean, I have taken a pretty hard shift left over the past five years. And the source of that is almost entirely MMT. It’s funny, I probably hadn’t thought about a lot of these political topics as much as I should have because, you can go around day-to-day and think, yeah, there are political problems in the world, and yes, activism is important. But I also felt like I couldn’t afford it, just because rent and food and all that stuff. It’s been interesting since learning about MMT, because it’s a thing that you see and can’t unsee. Because when you see how skewed policy makes power relations between powerful establishments like the primary dealers or the Fed and everyone else, it just feels very wrong. And it’s very difficult to tell yourself, “Well, I just don’t trust people.” I think the fundamental view behind thinking that the Treasury and the Fed should be separate is basically saying like, “I believe that the public will run away with themselves and ruin everything if you actually trust them with their own money.” I can’t morally believe in that. When everything is seen as a mechanical process, which I think a lot of people still think of economics as a mechanical process, you can believe certain things, but once the ideology is unmasked, you have to look at it and basically decide. And I couldn’t in good conscience decide to think, “People suck.” That is not for me.
And maybe for better or worse, I also struggled to keep my mouth shut about it. But I also think that there shouldn’t be a huge lack of people who are willing to talk about this stuff, who understand it well enough, and who have the sort of good conscience to actually say out loud, “No, this is actually what it means to believe that there’s a huge separation between the Treasury and the Fed.” Because a lot of people who are nice people, who are lovely humans, don’t feel confident enough to challenge it. And that’s sort of how it perpetuates itself, right? It’s this insidious thing. And so, thank god Rohan actually sat me down and was like, “No, this is actually what it means.” I had to see it, and now I feel like I have to tell other people about it.
Scott Ferguson: Yeah, that’s a familiar feeling. And I think what has become increasingly clear to me and is one of the reasons why we invited you on to help us think about this epistemological crisis, is that it’s not just that MMT has a better description and opens up politics to radical alternatives. It’s that the emperor has no clothes and and knows it. And so, it’s not MMT in a vacuum. It is, no, the mainstream, for the first time since the seventies, is undergoing an epistemological breakdown and MMT has an alternative. It has an answer. And many of the positions that the mainstream is now flirting with are pointing in the direction of MMT, even while they keep MMT at a distance and pretend that it’s just a crazy thing over there.
Alexandra Scaggs: Right? And MMT not only has an answer, but it’s a humane answer. It’s an answer where you don’t just take half of the population and say, “Oh, sorry, you lost the lottery that you get whenever you’re born to whoever your family is.” It’s something that makes you think, “Oh, we can actually build a better society. We can build a better United States with this.” It’s not a zero sum game basically.
William Saas: And it stages a confrontation when you remove the neoclassical, neoliberal framework of the economy. It lays bare the moral assumptions and you force a confrontation. This is what 5% unemployment, as a metric for inflation, means for people. Here’s what it means when you define things this way. I think that’s one of the most exciting things about MMT. Yeah, the emperor has no clothes in this, but those articles of clothing that they are wearing are soaked in blood.
Alexandra Scaggs: Yeah, I was so mad after realizing what the ideological assumptions were behind all of this and seeing people write about this stuff—and it’s people you know understand it—it just made me so mad because I felt like I had been duped. So many people out there are thinking like, “Oh, I’m a decent person, this is just the way decent people think about things.” And underneath it is this horrible zero sum, all against all type of thing and it doesn’t actually have to be that way. I was so mad about it and maybe I still am. I definitely get mad on social media sometimes. It’s just disingenuous distrust of normal people really gets to me. And I do think it gets to most Americans and people. Hopefully, having a system that is set up to screw over normal people, and even more so vulnerable populations, is something that everyone should get mad about. I think more and more people are because it keeps getting worse.
William Saas: And so, people should definitely follow you on social media for that. They should also read your Barron’s work. Is there anything else that you’re working on or getting ready to work on that you would like people to know about?
Alexandra Scaggs: Yeah, I am hopefully getting started with a Substack newsletter relatively soon, mostly on a lot of these smaller aspects of where the government and the private sector are actually separated. Like I’ve been covering Pacific Gas and Electric a lot. That is one of those classic scenarios where PG and E maintains the grid, but its revenue is determined by the government. I’m hoping to dig into the history of how we actually decided that this is the way that things are, and to develop a working model of how you regulate or think about these utilities, whether it’s a financial utility or an electric utility. Hopefully, I’ll have more clear thoughts about it by the time I publish something.
Scott Ferguson: Great, so listeners should just follow you on Twitter and you’ll make announcements and tell us where to go to find these things.
Alexandra Scaggs: Yes, for sure. I’ll post links and hopefully keep you guys updated that way.
William Saas: Maybe just one last question: we’ve talked with a bunch of people who are engaging with and extending MMT in interesting ways—are there any new directions or uncovered areas that you’d like to see MMT applied to or thought through the lens of MMT?
Alexandra Scaggs: You know, I’m really interested—and I know there are some people doing work on this—in the relationship between municipal governments and the federal government. Because the state of Pennsylvania, for example, doesn’t have a printing press; however, it has this like semi-implicit backing from the federal government. But then, it doesn’t actually, because there’s no bankruptcy statute for it. So that’s an area with a lot of really interesting questions.
Scott Ferguson: Agreed. I think municipal and state level finance is an area that we all have to dig into a lot more and get into the written laws, the unwritten laws, and the de facto assumptions that organize those politics.
Alexandra Scaggs: For sure. Puerto Rico is a really interesting case for that too, but that’s probably like three other episodes to cover.
Scott Ferguson: Well, I think we’re gonna wrap it up. Thank you so much for coming and chatting with us on Money on the Left.
Alexandra Scaggs: Thanks so much for having me.
* Thanks to the Money on the Left production team: Alex Williams (audio engineering), Richard Farrell (transcription) & Meghan Saas (graphic art).