Peter Conti-Brown and David Beckworth on All Things Financial Regulation

Recorded live in front of the Wharton Financial Regulation Conference, former guest Peter Conti-Brown joins David Beckworth as a Macro Musings co-host on this week’s episode. Peter and David discuss the inflection point of 2008 in FinReg scholarship, how Macro Musings has become just as much a show about financial regulation as about macro, what to make of the Trump administrations changes to bank supervision, whether we should be enthusiastic about the GENIUS Act and digital assets, the true identity of Satoshi Nakamoto, the crisis that could become Claude Mythos, why networks and Substacks are becoming more important, and much more.

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Read the full episode transcript:

This episode was recorded on April 10th, 2026

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us.

Welcome to this special live recording of Macro Musings coming to you from the Wharton Financial Regulation Conference. There’ll be listeners as well as watchers of the video in our audience. Today, Peter and I will co-host this. I’m going to turn over control to Peter a little bit, and then Peter’s going to ask me questions, I’m going to ask him questions, and at some point, we’ll engage with you as well, and we’ll provide this as a kickoff to the conference.

Peter has been a part of this podcast for a long time, actually. This podcast started in 2016, and he came on in December 2016, so he’s been on this journey. As you can see, we actually brought some of our merch with us for those who follow the show. We got our nominal GDP targeting mug. We will not talk about nominal GDP targeting today. This is a FinReg conference, but we may hand these out to a few lucky souls who can engage with us afterwards. Peter, thank you for inviting me and the podcast to your conference.

Peter Conti-Brown: Oh, it’s such an honor, David. You are an icon and a legend, both in macroeconomics, but increasingly, as we’ll discuss, in financial regulation, too.

History of Financial Regulation

Beckworth: Okay. Well, let’s begin, maybe by painting a big picture of financial regulation, the history of it. We have a lot of scholars, bright minds here, people who are engaged in this space. You’ve mentioned to me before that there’s been some pivotal turning points in financial regulation history. 2008, there was a pre-2008 period and a post-2008 period. What’s the difference?

Conti-Brown: It’s been really extraordinary. There are scholars in this room who were active before that period, but it was a very small group, largely law professors who were a kind of subclass of business law professors, which is mostly focused on Delaware corporate law. If you remember that book, Barbarians at the Gate, and all of the swashbuckling of the junk bond kings, Michael Milken and others, that dominated scholarly attention in the legal academy about what it meant to do business.

Financial regulation was sort of a subgenre of that ecosystem. It was a rare scholar that only focused on FinReg. 2008 changed everything. All of a sudden, we saw the reverse. A lot of people who had a lot to say about Delaware corporate law suddenly found themselves wanting to become more expert in banking and the like. 2008 was a lot of things to a lot of people, but the biggest thing for the scholarly attention is it just raised all kinds of questions that we thought were settled about bank fragility, about the psychology of bank runs, about dialing correctly regulatory tools around capital and liquidity.

In fact, 2008 invented the category of liquidity regulation, really, and then resurfaced again an entirely new area of scholarly attention, which is bank supervision. It was extremely generative. After 2008, we just saw so many other scholars who were wanting to think about not just FinReg for the narrow questions of how a bank is structured and how a bank is regulated, which goes back deep into the 19th century, but broader questions about FinReg and so much else. Financial regulation turns into one of these one big ideas. It’s a lens through which you can see the entire world and explains things you wouldn’t otherwise understand.

Beckworth: Yes. I’ve done the podcast long enough that I’ve talked to a lot of people who cut their teeth in 2008. That was the formative experience for them. They came out of it. Now, it’s been so long, there’s people who are young enough, they don’t appreciate 2008 as a turning point. It makes me feel old. 

Conti-Brown: What’s fun about this conference here is we have people right now who are just at the very beginning of their careers who are coming into this field with an electricity and enthusiasm and a vision for what it might mean. They didn’t go through those battles. That’s history. That’s a history that they’re learning, but it’s not current. I think that’s important. Let me put this now because I’ve got to be co-host of Macro Musings.

Beckworth: Sure.

Monetary Policy vs. Financial Regulation

Conti-Brown: A, I’m putting this at the very top of my CV. It’s going to be Peter Conti-Brown co-host Macro Musings one episode in April 2026. Here’s my question for you. David, when you and I first met in 2016, your podcast was appropriately named. We only talked about monetary policy and macroeconomics. You pulled me in to talk about Fed governance, but it was really as an instrument to understand the broader view.

I was looking recently at the podcast, and I think, depending on how you define it, you’re almost at half and half monetary policy and regulation. More conservatively defined here, at least a third of your guests are talking about regulation. Including many people in this room. What was that pivot for you? You’re a macro guy, international macro. Why so much increased attention on financial regulation?

Beckworth: As Darth Vader said, “It was my destiny.”

Conti-Brown: Yes. Right. Yes.

Beckworth: He pulled us into the dark side of FinReg. No. I found that as time went on, I just saw the importance of FinReg and how it interacts with monetary policy. It’s impossible to really separate the two. I’ve had a guest on the show a number of times namedBillNelson. He used to be at the Board of Governors. He’s now at BPI. He wrote a paper—I forget when, but a few years back; I believe when he was at the Board—on how this is going to be increasingly an important issue that liquidity regulations, as well as capital regulations, but particularly liquidity regulations and monetary policy will be at crossroads. Sometimes they’ll lead to policy implications that are going in different directions.

For example, the liquidity coverage ratio. It’s supposed to be a buffer. It’s supposed to protect banks, a 30-day window of enough liquidity on hand, but it also creates the incentive for banks to have a larger structural demand for reserves. When the Fed wants to do QT, it runs up against this new constraint that banks face. It gets in the way of monetary policy from doing what it might want to do when you have these regulations.

Also, the SLR and the ESLR. Bill told me this. He was there, I believe, in 2014 when the thing was being written. In fact, if you go back and look at the FOMC transcripts and the staff reports, they were estimating a balance sheet of about $25 billion, a Fed balance sheet, because they thought after QE3, it would shrink, it would get smaller. They did not expect reserves to become a binding constraint on banks.

The SLR was a backstop. It wasn’t supposed to be a binding constraint. It was a leverage ratio that would kick in if we got past the risk-weighted approach. He just kept sharing these insights. I’m like, “Yes, it is. It matters.” We can talk about this later but I do think the Fed’s balance sheet is increasingly an issue that’s coming to the forefront because it creates other distortions and challenges in implementing monetary policy.

If we look around the world, most other advanced central banks, they have switched directions. They’re going toward a demand-driven operating system which has implications for the size of the balance sheet. I think the Fed is slowly going in that direction as well. One of the constraints it faces is the unique set of regulations that we have in the US.

Conti-Brown: It’s really for you, it’s about understanding the points of fragmentation. When we’ve got a monetary policy goal, where is regulation facilitating those goals? Where is it preventing it?

Beckworth: I guess also some of this ties into—we’ll talk about this later—but digital assets because that’s right up FinReg alley. I had Dan Awrey and others on. We’ve talked about this a lot. 

Bank Supervision

Let me go back to you, though, Peter. You’re talking about this pivotal moment in 2008. There’s been another pivotal moment. I think with the Trump administration, there’s been a big change in how they approach the financial regulation. A lot of executive orders were signed. Also, a change in approach at the Fed in terms of governance of banks. How do we think about the moment we’re in now?

Conti-Brown: Yes. We are having, I think, a discussion in 2025, 2026, likely to continue around bank risk management and bank supervision, the likes of which we’ve had maybe twice in the last 100 years. This is a major discussion. We didn’t have it at this level in 2008. We didn’t have it at this level in the first Trump administration. We certainly didn’t have it in the Biden administration, which mostly was a blank on these kinds of issues.

The debate is there’s a lot of partisan politics inflected in it. You’ll have different characterizations of what’s happening depending on one’s perspective. I think to offer the most charitable interpretation of what’s happening, charitable to the Trump administration and the Bowman Fed, Miki Bowman, the vice chair for supervision, is a reprioritization of bank supervision toward optimization of supervisory priorities.

They’ve issued this operating statement on supervisory priorities where they want to focus examiners’ attention, supervisors’ attention on material financial harms and away from what many of the banks regard as a picayune compliance function where you’re monitoring through thousand-item checklists around questions about conflicts of interest and how reimbursements are done and technology policies and the like.

The less charitable version is that we’re engaged in a process of de-supervision. De-supervision simply means giving up on supervision, just saying that we’re going to have bank risk management be regulated like it is in other fields, but the supervisory process, this idea that we’re going to share risk across the public-private divide where supervisors have a say in the kinds of risk that banks take, we’re not going to do that anymore.

I think, as I sit on the outside, not as a partisan, but just observing, I don’t know which of those accounts is right. I want to see some examples coming out of the Bowman Fed to understand it better, examples of where a bank with political power is slapped with some kind of supervisory pull of the leash to say, “This question that we’re encountering is material to your safety and soundness, and you need to do something other than what your own risk management models have suggested.”

If we don’t see that, then I would say we’re in a de-supervisory area. Now, unfortunately, we’re not likely to get that chapter and verse because traditions of confidential supervisory information are likely to mean that we don’t see that, but there are going to be ways that we will know, and that’s the thing I’ll be watching for. If we do start to see that, then I think this is an appropriate swing of the pendulum that should follow elections. Elections should have consequences.

There’s partisan content in the priority between stability and growth, and the Trump administration has turned every stimulative dial in encouraging on monetary policy, certainly on tax policy, a little bit mixed on trade policy, but certainly on credit policy, and a Democratic administration might turn that dial differently, and I think that they should be allowed to do so.

If it’s that kind of thing, that’s called democracy, I’m happy for it. Dismantling the supervisory state, though, if that’s what’s happening, I think that we would lose something that is very precious and very hard to regain.

Beckworth: You just wrote a book on bank supervision.

Conti-Brown: Thank you for bringing that up. They’re available for order.

Beckworth: Yes. Get your copy if you haven’t already. This will be your second part of that book, maybe a second book with your co-author. Interestingly, I had them on the podcast, and they both powerlift. 

Conti-Brown: One of us is stronger than the other. We’re not going to name names.

Digital Assets

Beckworth: Okay. Let’s talk about digital assets because that’s a hot topic, and today we’re going to talk about it as well. I know you have some thoughts on it, but I know I initially was enthusiastic about the GENIUS Act and dollar-based stablecoins.

Conti-Brown: Well, let me grab the mic from you because I’m the co-host here, buddy.

Beckworth: Okay. Go for it.

Conti-Brown: Your thoughts on this have evolved. I’ve seen it in your conversations on the podcast. You’ve had several about this. I wonder if you could give your listeners a sense of where you started and where you are today on what you see as the major issues in the regulation of digital assets and especially stablecoins. Those are the issues that I’ve heard you opine most on, but take that wherever you want to go if you want to talk more broadly about cryptocurrency.

Beckworth: I came at this first from more of a macro-US perspective. I was excited. “Hey, here’s some extra demand for our debt. We have a huge deficit problem. Let’s extend that runway a little bit more until we have to deal with our debt problem.” Obviously, getting our debt in order is probably far more important, but that was one thing. The other thing was it would extend the reach of the dollar. Dollar dominance would be strengthened.

I was enthusiastic about that. I thought that initially the Genius Act was going to turn dollar-based stablecoins into the equivalent of a government money market fund, so it’d be safe. As I talked to more and more guests, I had more and more doubts to raise. Dan here, he really chiseled away at my confidence, but I’m still hopeful. I think it can make a difference, but my enthusiasm is tempered by some of the technical details with digital assets as well as the ability for stablecoins to get access to the Fed’s balance sheet. We have the prospect of these Skinny Fed Master Accounts. I know you’ve got some people in this room who are working on that.

Conti-Brown: Including the person who invented the name, the Skinny Master Account, David Zaring.

Beckworth: It was David. Yes. Soon coming to the podcast as well. Dan also, he had some thoughts on that. Again, he really shot me down from my high horse. Also, just perspective. Some of the high ends of how big could stablecoins get? They’re around $300 billion now. There’s estimates it could get up to $4 trillion within a decade. Let’s look at how much debt we’re going to accrue over that period.

If we grow the GDP about 4%, 5%, and if CBO projects debt to be 120% debt to GDP, we’re looking at about, I believe, $60 trillion in debt. Roughly $60 trillion. You look at $4 trillion out of $60 trillion, that’s 7%. That’s something, but it’s not a lot. Then also, if you look at that $4 trillion, some of that might be simply substitutions. Some of that might be what banks were holding, and then we substitute it from banks holding Treasuries to stablecoins. I guess I’m less sure how big of an impact. Even the best-case scenario for dollar-based stablecoins, how far of a reach will it have in the world, and how much of a dent will it make on our Treasury market?

Conti-Brown: Let me push back on another aspect of the opus of David Beckworth on this, because something confused me about a recent episode that you had. You had the MIT crowd on, and they are as fervent a group of cheerleaders as there is in the world on stablecoin. They make the argument that I find to be totally implausible.

I want to see if you can defend it and what you think because I understand the idea, like, all right, we’ve got to have some sort of mechanism to sop up the debt. I’ve heard you talk a lot about how the number one US export are dollar-denominated assets, and we have to generate enough safe assets to satisfy global demand for a safe asset. We are the beneficiaries of dollar dominance, something we’ll talk about more, I think, in the hour.

The MIT claim was that stablecoin, it will never cause a disintermediation of the banking sector. Anyone who thinks so is basically an imbecile. You’re never going to have any sort of deposit substitution effect. There are no deposits that will exit the banking sector. I heard that. Of course, the immediate reaction is until stablecoins start functioning as money, in which case you don’t ever have the exit into banking, they’re just going to function in that way. 

I have to quote another Dan Awrey-ism. If stablecoins succeed in 20 years, they will maybe grow. No one will call them stablecoins. We’ll just call it money. That’s, again, credit to Dan on that. I think that’s really interesting. If that occurs, unless the stablecoin are issued by banks, I don’t understand how this isn’t a massive disintermediation, especially if the stablecoin industry gets what they want and gets yield on their wallets or interest on their accounts, whatever the terminology may be.

How do we defend that? How do we defend this idea that we’re going to create this new thing regulated with much less burden than we have on the banks? It’ll be all fine and good. The banks will still have all of their business. By the way, we’re going to grow this up to $4 trillion, and everyone’s going to use it to buy their coffee.

Beckworth: Great question. I’ll do my best to defend that position. I think two things. One, when we talk about disintermediation of banks, I think we’re talking maybe about individuals or certain sectors. I think the point they were making is, writ large, banks will still be custodians. They will still hold Treasury. If I take money out of my bank, they lose my deposit, but then I go to Circle. Circle then gets my money. Circle has to go to a bank and deposit the funds and have it buy the Treasury for it.

It’s a shift in deposits, not necessarily the complete exodus of deposits. They would argue, yes, there might be change. Some banks may suffer, some may grow, but the aggregate effect would be pretty level. That’s the story they’re saying.

Conti-Brown: A brokerage rather than a bank? To broker custody, like a BNY Mellon?

Beckworth: Yes. They would probably push that as well. 

Conti-Brown: Which seems to me fundamentally different, right?

Beckworth: Yes. I’m just telling you what they’re arguing.

Conti-Brown: Okay. All right. I’ve got to be a good host.

Beckworth: Their argument.

Conti-Brown: I got to quit picking at you.

Beckworth: Okay. The other thing, though, is I don’t think stablecoins are going to be huge in the US for retail use. I think, if anything, tokenized deposits will be what takes off in the US. Tokenized deposits will offer all the benefits of stablecoins, but you’ll still be a part of the bank. There is talk of technology that will bridge the gap between on-off ramp usage. Maybe that could be something.

I think stablecoins, to the extent they are used as a transaction asset, will be overseas. Something that was interesting, we’ve had this crypto winter, they call it, since October of last year, a lot of risk assets, crypto came down. Stablecoins, they didn’t go down, but they quit growing. Market cap, it hit around $300 billion, and it plateaued. What was interesting is Circle actually came down a little bit. That’s because a lot of Circle’s activity is tied to crypto. People are using Circle to transact in crypto assets. Tether actually grew a little bit during this period and I think that’s because Tether is more tied to emerging markets, actual transaction use. 

I think what will happen over time, if I had to predict and just try to support these folks’ argument, is that stablecoins will serve as a transaction asset for maybe some emerging markets, some other places. With that said, if you listen to ECB officials, they are terrified about dollar-based stablecoins spreading into Europe. I’m not sure how this all plays out, but I guess to go back to the first point, they would argue that aggregate deposits would stay the same. There might be some shake-up in the industry as to who’s holding those deposits.

Conti-Brown: That only speaks to the liability side of bank balance sheets; the asset side is what I find more troubling. A custody bank’s balance sheet looks fundamentally different than a bank, even like JPMorgan Chase, never mind the community banks, whose assets constitute the engine of economic growth, right? Lending.

Beckworth: Yes. I was invited to give a presentation to a bunch of federal bank regulators on stablecoins back during my days of high enthusiasm. It was like I was at O.K. Corral. They were shooting me outside the front there. Boom, boom, boom, boom. I actually had to step back because some of these questions did come up. They’re also worried about concentration.

What happens if there is a massive run at Tether? What if the stablecoins do buy up a large portion of Treasury bill markets? Then you have these issues of concentration. There’s a lot of devil in the details. There’s no doubt about that. Let me bring up one other issue that I’ve become more cognizant of as well about stablecoins that concerns the Fed.

As you know, the Fed’s balance sheet, it funds itself short term and invests long term. Traditionally, the best funding source for the Fed has been currency. It’s currency franchise. Currency, 0% interest. The Fed has to pay interest on reserves. In the limit, if dollar-based stablecoins do take off, I suspect they would displace physical cash overseas.

Conti-Brown: Interesting.

Beckworth: This is an extreme argument, but in the limit, if stablecoins displace physical cash, the Fed loses its currency franchise, and it loses cheap financing. I bring this up because the Fed right now has operating losses because how much it’s paying on its reserves relative to its investments.

Conti-Brown: Not anymore. It’s got net interest income today, right?

Beckworth: I haven’t checked today, but it got profitable, then it lost. It’s going like this. I think it’s plateaued. I’m not positive where it is right now. The point is, it’s going to be more volatile going forward. If you get rid of the currency franchise, it’s really going to be volatile. The Fed’s going to lose—

Conti-Brown: I mean, that’s 15%, I think, of its balance sheet.

Beckworth: Yes. I’ll bring this up, and then I’ll throw it back over to you, Peter. Sweden, in 2015, early 2010, Sweden pushed really hard to get rid of physical cash. They were one of the early leaders in this. They were fairly successful. Now they’re having regrets for a number of reasons. There’s some people who aren’t in digital payments. There’s also emergencies when you want physical cash.

Something else they found out the hard way is their operating revenue has fallen. The Riksbank’s operating revenue has hit the floor. They’ve had a lot of losses, too. Now the Riksbank actually has a deposit facility, and they require all member banks to put a portion of their deposits there, and they earn 0%. It’s a way to get back that seigniorage—

Conti-Brown: They reinvented cash. Yes.

Beckworth: —that they lost from their currency franchise. I’ll end on this particular point. I think the Skinny Fed Master Accounts should pay 0% interest because to the extent that stablecoins do displace physical currency, the Fed’s losing its seigniorage profit, and the Skinny Fed Master Account would be a way to generate that seigniorage back.

Conti-Brown: My question or yours?

Claude Mythos and Banking

Beckworth: I guess you asked me, didn’t you? I guess it is mine. Okay. Let me take a swing at this. Last night—you guys may have saw this in the news, fascinating—Secretary Bessent and Fed Chair Powell invited a bunch of bankers over because of Claude Mythos. Everyone’s worried about Claude Mythos in here? You guys are FinReg, you’re supervisors, former government officials. Should we be worried about Claude Mythos?

Let me tell another story that was fascinating that I read this week or last week. The New York Times had a cover story that they had discovered Satoshi Nakamoto. Did you guys see that story? It’s like finally, we all know. Now, I read the story, and then I went online and looked at all the Bitcoin bros. They’re like, “Ah, this is ridiculous. They don’t know what they’re talking about.”

One of them, a guy that I follow, Nic Carter, he made this really interesting observation that Bitcoin is facing a big problem, and that’s quantum computing. He calls it Q-day. At Q-day, there are some legacy Bitcoins that aren’t being claimed or touched from early miners, including Satoshi. Satoshi has, I think, 1.7 million Bitcoins, and they’re on a ledger from the early days, and quantum computing could easily get them, if we get to this place.

Nic Carter made the point that if Satoshi were alive, if he cared about Bitcoin, he would be trying to get those 1.7 and move them to a safer deposit facility, whatever that means in the Bitcoin land. I’m not positive about that. The fact that he’s not tells you he’s dead. It was interesting, all these concerns. They’re worried about Q-day because Bitcoin folks don’t want to update their operating system. We may not have to wait for Q-day, Quantum Computing Day. We have Claude Mythos, and we have the central bank and the Treasury inviting bankers over. Should we be worried?

Conti-Brown: Yes. Well, here’s my opportunity to unveil myself as Satoshi Nakamoto. I haven’t touched it because I’ve been busy. There’s lots of other stuff been going on, the $66 billion I’ve had there. Thank you for bringing that up. I’m going to cash that out.

Beckworth: I need some funding at the Mercatus Center.

Conti-Brown: No, I’m not Satoshi Nakamoto. I’m not buying the Kariru account either. One of the things that makes it extremely difficult is, first of all, you see the person you named, that bet guy or whatever his name is, transacting in Bitcoin. He hasn’t touched the original. Also, a coder brought up the C++ language differences, and they just code totally differently. There’s almost no overlap in their style. I don’t know.

Last time a journalist did this, they literally found some poor Californian named Satoshi Nakamoto who’d never heard of any of this, and they put him on the front page of Newsweek. Do you guys remember this? That’s so ridiculous. That was in 2015 or something.

Anyway, Claude Mythos is, I think, going to be for banks and bank supervisors, one of the following: Y2K, 9/11, or 2008. I am extraordinarily worried about this. For those who aren’t familiar with what’s happening here, this is the Anthropic’s frontier model. It’s a stepwise development. Those who are thinking, at some point, we’re going to get diminished returns on these updates, that has not happened yet. This is a major change. 

They just put it as an agentic AI devoted toward various cybersecurity issues, and it discovered errors in code that had been sitting there for 27 years on major firms, it was able to get a master status within those systems, and to exploit it, could shut things down. This is the things that we’ve made movies about, going back to Matthew Broderick’s WarGames and the like.

The Y2K story is the one that we hope it is. Y2K was the crisis that didn’t happen. As I’m finishing up my history of the Fed, I have a chapter on Y2K because it is unbelievable the amount of work that the Fed did to prepare banks for Y2K. When Y2K happened and nothing happened, that was a major victory, a major victory, a supervisory victory, a private sector victory, the best tradition of bank supervision.

In that sense, what we have, and we’ve had cybersecurity supervision going back to the 1950s, I’ve been able to review, and anybody can, on Fraser, the documentation, and then it stops in about 1995. I FOIA-ed the additional documentation on this, and I was denied. They reached out to me to explain the denial. They were like, “You know what? This still remains pretty important to the way that we approach this stuff.” I was like, “Oh, that’s interesting.” I thought about it for a minute. I was like, “Wait. That can’t be right. Are you really using stuff from the 1990s to monitor?”

What we’re going to have to have is banks and bank supervisors with not just an answer for Mythos but an answer for all additional developments because in AI, it’s the dual-sided AI issue that cops and robbers are going to use these different tools, for the same purpose, and the ratchet effect is going to continue. I don’t worry about the JPMorgan Chase’s of the world. Literally, JPMorgan Chase is the only bank that was given access by Anthropic to Mythos to prepare themselves against it.

I worry about the billion-dollar bank or the $500 million bank in my hometown of Moore, Oklahoma, whose CEO is kind of good at email. They don’t employ a single coder. All of their cybersecurity is from technology service providers that are governed by their own separate statute and their own separate supervisory system that is not subject to the supervisory perimeter.

Right now, what I think the Fed supervisors and OCC, FDIC, and throughout the state should be doing is having an all-hands meeting. Maybe they shouldn’t have fired all those people they just fired. Bring them back in so they have a face-to-face conversation with every single bank in America, not only to ask, “What are you doing?” But here is the tool that you don’t have access to because you’re not JPMorgan Chase, to make sure that some hacker out of Belarus isn’t going to just completely wipe everything out because the lead time that we get before these frontier models all start to catch up with each other is generally about six to nine months.

If that’s what we have right now, then in six to nine months, you’re going to see a lot of banks that, if they have not prepared themselves for this, are going down. That will be a failure not only of banks, but a failure of bank supervisors. This is their moment. I hope it’s a Y2K moment. The 9/11 moment is this exogenous shock that they did not prevent. It was pretty devastating. Then they did a pretty good job of responding to it.

2008 was not an exogenous shock. It was an endogenous shock of bank supervision. I would regard this, if we see major failures, and we will see failures, the question in my mind is going to be, “What did supervisors do not only to alert banks to this issue?” They didn’t really need to do that, but to provide the tools to those banks that can’t afford to do this in-house, like a JPMorgan Chase, to prepare them for that eventuality.

We talk a lot about bank supervision having political inflection. This isn’t that. The majority of bank supervision is technical. This is technical. It’s also existential. My hope is that whatever else is happening in Washington today in bank supervision, that they’ve retained this technical capacity to get this question right because this is not a question we can get wrong.

Beckworth: It sounds like if we don’t get it right, there could be more consolidation in banking. The smaller banks get knocked out and bigger banks take over.

Conti-Brown: I think that’s a very, very strong possibility, although a lot of people have gone broke betting against community banks in America. They don’t have a good business model. They don’t have necessarily strong assets. Their liabilities are weird, but they have unbelievable political savvy. Community banks are going to be able to figure that out on the political side. The question is what happens to the rest of us while they do it?

Beckworth: All right. Your turn.

Conti-Brown: Okay. My turn. I’ve got a big one for you.

Beckworth: Uh-oh.

The Market Argument for the Discount Window

Conti-Brown: You already cited as your path into FinReg. Look, David, you’re a markets guy. You’re at Mercatus, classical liberal. I’ve never met anyone who’s more enthusiastic, with the exception of the BPI lobbyist Bill Nelson, for the discount window. Now, I am myself enthusiastic about the discount window, but I’m enthusiastic about the discount window “Hold your nose. This is better than the alternative.” It’s not necessarily good.

The alternative is that every little ripple of crisis, we freak out, pull out our hair, and call a 13-3, and everything just gets flooded. That’s not a good equilibrium. The discount window is better than that. Why get so enthusiastic about liquidity reform and the discount window when you could just say to these banks, “You know what you should do? Solve your own damn problems and figure out the rest of it with other banks and counterparties. Go to the markets and see.”

If markets don’t like the price that you’re asking for, and they ask for a higher price, that might have just told you something about your business model and your fragility, and you should pay that price. Whereas the Fed, for all kinds of reasons, is not going to be surprise-sensitive to that.

That feels like, to me, an invitation, if we dramatically expand the discount window in the way that some of your guests have proposed, to make it so destigmatized that you get to use this as a way, with no questions asked for any kind of purpose, in any sort of way, that seems like we have just dramatically increased moral hazard in the system, and we are subsidizing from seigniorage, from the public, to banks that are taking risks that aren’t theirs to take.

Beckworth: Yes. How can I—?

Conti-Brown: How do you defend it as a markets guy? That’s me putting the most aggressive kind of question to you.

Beckworth: This one I will support. I have a Substack I recently wrote about this. There was a speech given by Michelle Bowman, Travis Hill, Scott Bessent, where they were arguing that we should incorporate the discount window into liquidity regulations. I wholeheartedly support this. How can I, a markets guy, someone who works at the Mercatus Center, go all in on moral hazard?

It’s complicated. Let me start it this way. There’s always tradeoffs we face in policy. If you’re coming from a market’s perspective, you want to minimize the footprint of the government, we have a tradeoff we have to make here. You asked the question, “Why not just tell banks to go solve their own problems?” One of the reasons they can’t solve their own problems is because there is so much stigma at the discount window.

The liquidity coverage ratio, combined with that, and this is something that was brought up in these speeches, is that banks begin to self-insure to the point that they treat it as a buffer, that they have to keep it. If there is a crisis, they’ve got to keep this buffer intact, the LCR intact, and they’re afraid to go to the discount window because it would say something about their internal liquidity management.

The stigma itself can create incentives so that banks don’t operate efficiently. They don’t go to each other. This is, in turn, tied to the size of the Fed’s balance sheet. To get to the core of your question, right now, we have a large Fed balance sheet. It’s driven by the structural demand for reserves held by banks. What that does is it completely undermines interbank overnight lending. When banks have this large cushion of reserves, there’s no incentive to go to each other.

Conti-Brown: Federal funds is dead.

Beckworth: Federal funds market is a shell of what it used to be. Let’s compare this. I think it’s useful. Most other central banks around the world, I mentioned they’re going to a demand-driven system. Part of the motivation is to resurrect and to make robust overnight interbank lending because there’s price discovery, it’s the market process. They’re going in this direction. Part of it is having a business-as-usual lending facility.

There was a great Fed’s note that came out where they compared all these central banks. Most other advanced economy central banks have business-as-usual lending facilities, the equivalent of a discount window or a repo. Usually it’s a repo facility in many of these places. What that does is if you feel comfortable going to the discount window, it opens up possibilities. You’re also more comfortable going to another bank.

If I have to go to you and ask your bank for liquidity, you say no, I know I still have the option of going to the central bank. It’s this dynamic that they interact. I guess, to put it bluntly, the Federal Reserve already has a large footprint in the economy via its balance sheet. It’s large in repo. It’s large in Treasury. It’s snuffed out interbank lending.

If you’re familiar with Raghu Rajan’s work on QE, what he’s argued is the massive injection of QE and reserves has affected how banks fund themselves. Instead of funding with term deposits, they’re funding with runnable deposits. In some ways, it makes the system more fragile.

I think there’s a tradeoff. I would be willing to get a little more moral hazard at the gain of more interbank lending, smaller footprint for the Fed and repo and Treasury markets, as well as potentially more robust financial stability. It’s not like I’m just blindly saying, “Hey, bring it on, more moral hazard.” I’m saying I’ll take more moral hazard and gain over here the cost of a large Fed balance sheet.

Academia vs. Real-World Impact

Conti-Brown: That was a good answer. Should we kick it over to Q&A?

Beckworth: Yes. Actually, one more question. It’s 9:40, but we’ll keep this quick. Something that, Peter, you’re doing, I’m doing, and I’ll focus on you, but you have a Substack now. This is a world of AI where some of our skills are replaceable, complement or substitute, we can debate that.

My boss at the Mercatus Center, Tyler Cowen, he has really pushed—you’ve got to develop your networks, whether it’s through social media, Substacks, going to conferences like this. It’s much more important to develop networks, meet people, than it is to spend six months, a year, two years writing a paper that maybe a few people read.

Now, it’s important to do that type of research, but if you’re not getting out and making the networks, he said, then it’s pointless, particularly in our world, the think tank world. Tyler even said, and you guys can correct me over there, my colleagues from Mercatus, “That traditional think tanks are like dinosaurs now.” You’ve got to have immediate impact. You’ve got to respond in real time, what we’re doing here on this podcast.

What is your sense? You’re an academic. You’re writing books. You’re doing articles, and somehow you do a Substack as well, which is meeting that need. What is your sense of the academic going forward? The folks here with FinReg, what should they be thinking about in the future?

Conti-Brown: I love that question. This Substack has been one of two changes in my life in the last couple of years that has just completely changed my orientation to the world. The second is taking up triathlon, which is also related, actually, because I write about this a lot.

I decided to do this Substack for exactly the reason you named. There’s so much happening, and I had curiosity about these things. I wanted to speak in first draft and just get things out. I used to do that on what was then Twitter. Even before Elon Musk bought it and turned it to X, I was losing my way on there a little bit. I wanted to find a place where I could have reactions.

Also, I spent the last 10 years at Wharton teaching business ethics in Aristotelian mode, thinking a lot about human flourishing, what Aristotle called eudaimonia. I wanted to integrate these things. I didn’t want to be so compartmentalized. I just wanted to live out loud. Substack has, I have found, an incredible community there, including some people here who came to the conference just because they’re PCB Central readers, which all of you should be.

I really agree with what you’ve characterized as Tyler’s take. First of all, for me, I never use AI to write first drafts. Never. That’s a moral commitment on my part. Could it do it better? Can I train it to even use my voice? I’ve written a lot. I probably could. It probably would. For me to wrestle with a blank page to express my views, I’m going to still have typos in it. I’m going to still have arguments that don’t quite land or that are a little bit funny. I’m going to have to say things that are wrong.

That’s me living out loud and building a community so that when we can come together, we can be real complicated people, not caricatures. I think that is central to human flourishing. Whatever else AI is, we’ve got to find ways to elevate our humanity and then render legible that humanity to another so that those can connect.

What AI can never be is me because there’s only one me, and AI can never be you. I want to really protect that, not only for my own survival, but because it’s putting me in touch with a different way of living than I had done before. I’m still going to write books. I’m still going to write articles. Trying to surface that sort of a community, that sort of an experience, has become my number one professional priority. How about you?

Beckworth: Just to be clear, you’re saying it’s building a network. You’re not just publishing articles, but you’re connecting to people who now follow you, that come to the conference. You meet in the real world.

Conti-Brown: I write three times a week, and every one of those gets read by a couple thousand people. I get tons of emails from people. I’ve met people who I love the way they think. They teach me things. They’re writing their own Substacks, and I connect there. These are the kinds of connections that give my life meaning that I did not have before. I’m glad to have now.

Beckworth: For me, again, I’m unique. I’m in a think tank. Typically, you’d write a piece, go through the policy editor, then the copy editor, and then gets out. Substack, it’s right away, but there’s also mistakes. In fact, we did a bike ride yesterday. We called it Tour de—

Conti-Brown: Tour de FinReg. Who invented that? Somebody invented that. I love it.

Beckworth: Yes, it was Jeremy.

Conti-Brown: That was Jeremy Kress.

Beckworth: That was awesome.

Conti-Brown: That was so fun.

Beckworth: Tour de FinReg. It was a lot of fun. At the last part of the ride, Peter was just booking. I was trying to keep up with him. I’m out of breath. Peter’s grilling me on my latest Substack post. “David, I think you’re wrong here. I think you’re premature on this.” That’s the point. I want Peter to read my Substack and—

Conti-Brown: I do.

Beckworth: —to raise questions and to make me think and get real-time feedback before I go to Capitol Hill or go to the Fed and make this proposal to them. All right.

Audience Q&A

Let’s turn it over to you guys. We have a microphone here. Your face will not be on the video, but your voice will be. We’d love to get you engaged as well. If you’ve got a question for Peter or myself, if you want to correct Peter or myself, that’s fair play, too.

Conti-Brown: The collective expertise in this room is pretty staggering. What did we get wrong?

Beckworth: If you want to hit the microphone there and join the conversation, you’ll be a part of Macro Musings.

Conti-Brown: As co-host of Macro Musings, I might cold-call people.

Beckworth: Oh, here we go. Our first person.

Audience Member 1: Hey, guys. Thanks so much. This has been a fantastic conversation. One of the things that comes across in the topics you guys looked at was really how digital assets has taken a lot of the policy oxygen over the last couple of years. I was wondering if you guys might shift gears a little bit. Perhaps speculate about the extent to which that oxygen, leaving other parts of the conversation around monetary policy, financial regulation, might have an enduring impact on those nondigital asset areas and whether you think that’s a good thing or a bad thing. Thank you.

Conti-Brown: That question came from Dan Awry, an author of a book that sucked a lot of oxygen toward technology, although it explicitly did not talk about cryptocurrency directly. I love that question for that reason. Let me build on something I have learned from you, Dan, which is I think one of the greatest blunders we have made in conversations around digital assets and cryptocurrency is that we have rendered those terms synonymous with technological innovation.

If you want to think about back-office developments at a central bank, about how they interface with banks and reserves in increasing capacity in tokenization or digitalization, then we can have really interesting conversations. All of a sudden, in 2026, it’s verboten to say “central bank digital currency.” That is weird. It’s distorting. I’m not a big cryptocurrency enthusiast, despite my early days as Nakamoto, but I resent that our conversations about innovation, which are so vital, so essential, have to have the discussion of where that is situated relative to digital assets.

I’m going to go ahead and declare bankruptcy on that, and so I resist that urge and try to pull oxygen back, let innovation be what it is, which is technology neutral. If we can have that conversation, then we can have some really fascinating kinds of debates about operating systems and monetary policy.

One of the things that we were talking about on the bike ride was how do you make sense of those central bankers who have been so savagely critical of the August 2020 system of flexible average inflation targeting and then are advocating for rate cuts when we have not yet hit target? That is a really fascinating question, but we don’t really talk about that. Maybe it’s because of that issue.

I think more people who are more comfortable saying crypto’s going to crypto, digital assets are important, we see their importance. And I guess maybe this would be my avuncular advice to the young scholars who are here: You keep on doing your thing. If nobody else is listening now, people will start to listen. I wrote a book on Fed independence that wasn’t that successful when it came out in 2016. Sales are doing great right now on that 10-year-old book.

You just find your bliss. I remember one criticism I got, which was like, “Peter, people don’t care about Fed governance. Why are you writing about that?” I was like, “Ah, I don’t know. There’s no explanation for taste, as the Latin saying goes. I just think it’s interesting.” You do that, and then all of a sudden, people will start to convene on those questions, and they become important in their time.

Beckworth: Peter, for the record, I had you on the podcast in December 2016.

Conti-Brown: You, I’ve always liked about that.

Beckworth: On the book, Fed independence. You weren’t wrong; you were just early.

All right. Any other questions on the mic? 

Conti-Brown: Yes, Stefan.

Audience Member 2: Yes. Thanks so much for this great conversation. Initially, you guys talked a little bit about the current efforts to consolidate and reform the supervisory and regulatory landscape in the United States. I guess everyone in the financial regulation community would agree, no one would design the US supervisory regulatory system the way it is. There’s a lot of path dependency, how we got where we are.

If you could dream up what is the optimal arrangement that we would have between private sector and public sector in the banking system and maybe beyond, and if you could even weave in thoughts about how technological changes, stablecoins, we touched upon that as well, change your views potentially on that.

Beckworth: I’ll throw this over to Peter, because I think you can answer the question better. Let me add to that a question that we talked about last night at dinner, but also, it’s come up in the podcast. I asked you this, I think, the last time you were on the podcast. Even the question of the discount window, can the Fed itself lose its supervision duties, if this is part of your optimal design, if it has a discount window? Does it need supervision, the ability to know what banks are doing and their collateral worth, all that, if it has a discount window?

Conti-Brown: No is the answer on that. Supervision exists in its origin, not as the common law visitorial power that the sovereign had for corporations in the banking context, although that’s much older, it goes back to the 16th century, but in counterparty supervision through the lending mechanism of the Bank of the United States and the Bank of England. 

There wasn’t supervision in the UK until 1979, former on-site examinations on a regular cycle. We had extraordinarily robust supervision going back to the Peel Act in 1844 and before, where you were doing counterparty verification about creditworthiness, and that was itself a form of supervision. 

Stefan, the question here about what we would do, Sean Vanatta and I almost called our book The Banker’s Thumb with a reference to The Panda’s Thumb from Stephen Jay Gould. Our editor didn’t like that title, so we called it Private Finance, Public Power. The idea there, just as you say, this system evolved. It wasn’t designed, but it evolved in a way that fit to purpose. I think the reason I would resist the fascinating intellectual invitation of what would you design to be better is I’m not sure what else I’d have to redesign because it’s so fit to purpose. 

If you extract out the supervisory system as we have it today and then want to plug in something better that’s more coherent, more logically structured, has better accountability, has better coordination—we just got another rulemaking from OCC and FDIC. Who is missing? The Fed. This was just from yesterday or the day before. I like that, honestly. I think it’s good when the Fed doesn’t join or when others don’t join because I like that struggle. If you were to redesign it just so it’s smoother and it moves better, you have to redesign the American economy too.

We don’t get to plug and play in that way. That I can’t do. I’m not a central planner. Maybe that’s my inner Mercatus guy. I don’t like that. Would I like to see better financial inclusion? Yes. Would I like to see lesser inequality? Yes. Would I like to see less moral hazard? Would I like to see more private sector risk-taking where the risks are born both on the upside and downside? Yes. I don’t know what I could do that was better than the thing that we have when we think about all the unintended consequences from shifting one thing or another.

Beckworth: Time for one more question.

Audience Member 3: Hi. Thank you. A fantastic conversation. Peter, I think that my question is mainly for you. You described very interestingly the evolution of financial regulation and how 2008 was very generative. It really changed how scholars of financial regulation look at things, how they’re shaped. I have perhaps a slightly provocative question, so I have to raise my flag here. I’m more of a private law guy. If you want, I represent a little bit more that old way, the pre-2008 way of approaching financial regulation.

I wonder about this. There was this reaction to 2008, and there was great scholarship, great thinking, very generative. It worked super well. Could it be that perhaps this way of thinking has grown a little bit insular and that now financial regulation scholars are very focused inward toward financial regulation but have lost a little bit of contact with those other relationships, with the private law side of the fence, and that this has been holding back the success of financial regulation?

For example, with digital assets, with stablecoins, the issues that we’re encountering in looking at the bankruptcy risk of stablecoins, the challenges that we’re encountering in looking at the redemption right associated with stablecoins. That might be the time to talk a little bit more between private law people and FinReg people.

Conti-Brown: I’m guilty as charged. The indictment is served. I hope that doesn’t lead to the execution because I 100% agree. If the intellectual evolution of FinReg moved it from corporate law, the forgotten younger sibling to corporate law, something happened post-2008 is we became a more active sibling of administrative law. I think this is good, very good, because banking is a subset of administrative law. If you don’t understand administrative law, you’re going to be lost in financial regulation, both on the banking side and on the capital markets side.

I have taught at law schools twice, not as a TA. Once at Penn Law, once at Columbia Law. In Columbia, I taught the secured credit course, secured transactions. I became a business professor, but when I was thinking I’d be a law professor, I would tell people I want to teach Article 9 courses. I want to be a private law guy because I found it endlessly fascinating.

I learned more in teaching that class at Columbia than just about any other class about how these things work at a more granular level. Administrative law is the superstructure through which we think about rulemaking. Supervision is a unique creature within banking. In terms of what bankers do, that’s a different body of law altogether.

I think that invitation is something that we should take. Some really terrific scholars in this room, yourself included, have pushed in this direction. I think that the opportunity to do so much more here would be great, especially around bankruptcy and the very curious, long list of inexplicable exceptions to bankruptcy code that banking has demanded over and over again. Basically, that’s my long way of saying “Completely agree with you.”

Beckworth: One more question. 

Audience Member 4: All right. My question is for David. You’ve been talking a lot lately about your concern about the ratchet effect on the Fed’s balance sheet, that it grows and grows, and then there’s no return to some semblance of normalcy.

As a longtime Macro Musings reader from back when it was on Blogspot, back circa 2014, ’15, I remember you writing a lot where you would complain that the Fed was being too impermanent with quantitative easing. December 2008, they’re already talking about their unwind plans, and this sort of undermined some of the effectiveness of QE.

I guess I’m asking you, how do you square that circle? What is the tradeoff? Certainly there are cases. Think of the Bank of England’s gilt intervention. Surely, that’s a financial stability thing. You want to undo that quickly. When it comes to monetary policy QE, what’s the tradeoff between telegraphing permanence and saying, “Hey, this is temporary”?

Beckworth: All right. Great question. There’s a tension in my rhetoric, as Steven is pointing out. On the one hand, I want a smaller Fed balance sheet for financial reasons. On the other hand, monetary policy, to really pack a punch, it needs to signal when it injects money into the economy, it’s going to be permanent. This goes back to liquidity trap discussions, zero lower bound concerns, and that was the context back when you were reading in 2010.

You want to have a permanent increase in the monetary base. Back then, it was a little different, but a permanent increase such that people expect higher inflation in the future lowers real rates, the economy recovers faster. I would submit that you could get that. You could have permanent growth in the Fed’s balance sheet that is still smaller than what we have today. You can still pack that punch. As you know, most money in the economy is created by banks. It’s a signal. You want the Fed to signal that it’s going to permanently, if needed, reflate the economy, increase aggregate demand like in the 2010s. That requires a level target. It requires a commitment to permanence.

Yes. I’m for that. I’m still all for nominal GDP level targeting. In fact, for those who want, I have some nominal GDP level targeting stickers up here you guys can claim afterwards. I still hold onto that. Yes, it would imply all else equal, a larger Fed balance sheet. I just think we’re well beyond that. I think the balance sheet we have today, where we have reserves around $3 trillion—we don’t need $3 trillion in reserves to get there. 

I think you can have a smaller stock of permanent reserves, still pack that punch. I think the tradeoffs that we’re seeing, the Raghu Rajan concerns are very real, and I want to make the Fed more efficient. At the end of the day, this, I think, affects Fed independence. I want the Fed to be able to do what it needs to do. When it’s undermining itself, it’s unfortunate.

Okay. This is it. Thank you so much, Peter. Thank you, audience, and thank you, listeners.

Conti-Brown: Thank you, David, for joining us here for the conference and for this remarkable conversation.

Beckworth: All right. Thank you.

Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth, and follow the show @Macro_Musings.