This is the second part of a two-part series featuring Leah Downey, a political economist at King’s College London and author of the new book “Our Money: Monetary Policy as if Democracy Matters.”

Mark Blyth and Leah discuss what has happened at the Federal Reserve since they first talked about Leah’s book in May, what Leah’s book has to say about it, and what it all means for the future of central banks in the US and beyond.

Learn more about and purchase “Our Money: Monetary Policy as if Democracy Matters.”

MARK BLYTH: From the Rhodes Center for International Economics and Finance at the Watson School, this is the Rhodes Center Podcast. I'm the director of the center and your host, Mark Blyth. This is part 2 in our two part series featuring Leah Downey, a political economist at King's College London and author of the book, Our Money, Monetary Policy As If Democracy Matters.

In the first part, which we recorded in May, we talked about our book and the historical relationship between central banks and democratic politics. In the second part, we bring that conversation up to date. We talked about everything that has gone on between the Federal Reserve and the Trump administration since May, what Leah's book has to say about it, and what it all means for the future of central banks in the US and beyond. If you haven't listened to part one yet, I recommend you go back and do that. Here's part two of our conversation.

Hi, Leah.

LEAH DOWNEY: Hi, Mark. Good to be back.

MARK BLYTH: So the reason we dragged you back into this is because the last conversation we had was all about your lovely book. Your lovely book that imagines money and democracy going together and saying it would be good if we had a bit more of that in monetary policy. And since then, a few things have happened. There has been some regard as the politicization. Could we even push it and say the democratization, the incipient democratization of the central bank.

So I'm going to set this up a little bit, and then I want you to just jump in and then tell us all what's actually been going on since then. Now, my version of what's going on is a bit different from most because I have a memory. And I do remember that in Twenty Seventeen and Twenty Eighteen, there was this thing going on Twitter, remember that, between Trump and the Fed.

And the basic thing was you should run the economy hot. Every time it looks like the economy is doing well, you guys are so terrified of inflation, which is nonexistent, we haven't seen it in 20 years, that you slam on the brakes and push up interest rates. And that's what keeps wages low, and that's what pisses off my base. Don't you dare raise rates.

And it wasn't just because of that. It might even have been despite that because of things like the Fed Listens campaign and all the rest of it and what their own internal research was telling them, that maybe they could run it a bit higher. And they did. And the result was that wages in the bottom two quintiles actually went up for the first time in forever under the Trump administration, which is why this guy has got a hold on some people. They've got a memory too, right?

Now, fast forward past the inflation, all the rest of it. Trump comes back. And basically, he's saying the same things, but he's also doing a lot more than Twitter. He's actually trying to get his hands on it. Tell us what's going on.

LEAH DOWNEY: Yeah. A hell of a lot more than Twitter I would say this time. OK. Well, let's just start with a few of the basic indisputable facts. So even before he was inaugurated, Trump effectively pushed out the vice chair for supervision, Michael Barr, who, under Biden, was pushing to extend bank regulations significantly.

So Trump essentially bullied him into leaving his seat as the vice chair for supervision. He stayed on the board, but leaving his seat as vice chair for supervision, so he would no longer be in charge of regulation. And at the time, that was huge news because that felt already like it was undermining the central bank independence norms that we had previously.

Powell said he would stand up for Barr if Barr wanted to fight it, and Barr chose not to fight it, interestingly, for reasons of central bank independence, because he didn't want the Fed to be in the court. He didn't want this to even be a discussion. So he essentially just capitulated.

Then of course, this last August, we had the very quick resignation of Governor Coogler, which opened up a seat on the Federal Reserve Board of Governors, which Trump then fulfilled. And then the ongoing saga that started all the way back when, when you're talking about tweets, of essentially Trump harassing the chair, Powell, and telling him he's doing a terrible job.

And then these escalated to the point where he was threatening to fire Jay Powell and even started kind of laying the groundwork for doing that on the basis of this massive renovation that the Fed is going through right now. And the reason he did that is because in the legislation, the President cannot fire a member of the Board of Governors of the Federal Reserve, except for cause.

It's not clear in the act exactly what that cause is. Traditionally, that's thought of with other independent agencies as something like malfeasance. You're doing your job very poorly. And so Trump started talking about, spending on this renovation as maybe a reason to fire Powell.

Since then, he has attempted to fire Governor Lisa Cook, again, with claims of cause, claiming that she engaged in mortgage fraud. And there's a lot of legal debate about-- well, there's quite a lot of claims that isn't the case at all, that she never did engage in mortgage fraud. And then on top of that, even if she had, that wouldn't be sufficient to fire her in this case because it wouldn't count as sort of for cause because it had nothing to do with the way she was doing her job. Two appeals courts have upheld her appeal. So she's still in her chair at the Fed, but that's going to the Supreme Court. So they'll be the final deciders on that one.

So that's all the hubbub, right? These are the actions that he's taken. And then, I mean, I don't know. Where should we go next? Because we could talk about why he's doing this. We could talk about if it is democratic because I have a lot to say about that.

MARK BLYTH: There's lots of places we can go. So let's do it very methodically. What's the end game? Why?

LEAH DOWNEY: All right. So there's a mechanical answer to that, and then there's the values-based answer to that. So let's start with the mechanics. So he wants power over the Federal Reserve, right? So he wants the power to determine monetary policy and bank regulation and all of the other things that the Fed does.

And the way he's going to do that is not by going to Congress and saying, let's change the structures, the governance structures of the Federal Reserve. The way he's doing that is saying, I'm going to put people on the Board of Governors that are my people, and they'll do what I tell them to do, and therefore, I will have facto control.

Now, a little background on the way the Fed is structured, like we hear a lot in the news about the FOMC, the Federal Open Market Committee. That's the group that votes on things like interest rates. So that's why we hear about them. It has 12 voting members. Seven of those people are what are called governors. They make up the Board of Governors of the Federal Reserve.

Another permanent voting member on the FOMC is the Federal Reserve Bank of New York's president. And then you have four rotating regional presidents that come through the FOMC. But the Board of Governors, because it's seven people, holds the majority on the FOMC. And also, it technically has a lot of power that the FOMC doesn't have. And so Trump's really going for a majority of the Board of Governors.

Now, why? I think there are four main powers that Trump would be interested in. The first is that while the FOMC votes on interest rates, the Board of Governors actually technically determines the rate of interest that the Fed pays on reserves to banks. And that's how they conduct monetary policy. That's how they actually make the interest rate go up and down. So that's a power that usually the Board of Governors uses, just does what the FOMC decides. But of course, they could do things differently.

The Board of Governors also hires the Fed's general counsel. And the top lawyer at the Fed has immense power because they get to tell the Fed what they think is legal and not legal for the Fed to do. So by all accounts, for example, the general counsel was the person who said, go ahead with bailouts and QE post Two Thousand and Eight, and then we'll make the argument later kind of situation. So that's a huge power.

And then this is a huge one. They also review the appointments of the Federal Reserve Bank presidents. So traditionally, this has been a really, more or less a rubber stamp, where the Board of Governors has said whoever the board at each regional fed votes for, we just say, OK, but they could not do that. So they could force the appointment of Trump loyalists, for example.

And then last but not least, and this is something we talked about last time, is swap lines. So when the Fed decides to send dollars to other countries, which countries, how much they send, on what basis is all determined by the board. Well, the FOMC and including the board. So these are huge powers right. So this is massive power.

And in some, it's the massive power to print money and regulate money creation, and Trump wants it. I mean, somebody asked me the other day, why is he undermining central bank independence when central bank independence has been such a benefit to global asset holders for so long? Like isn't of against his own class interest?

And my argument there is Trump has never been a champion of his class. He's a champion of his own interests. And this is the biggest money printing press in the world, the most powerful one. And he wants it to do what he wants, what he tells it. And I think it's not that much more complicated than that.

MARK BLYTH: Well, let's make it more complicated than that because I mean, it does have a defined constituency, and it's America first. It's not the globalists, right?

LEAH DOWNEY: Well, that's true.

MARK BLYTH: So let's say that you want to basically bring back manufacturing. You want to restructure labor markets want to basically get rid of immigrants, all the rest of it. How would having the control of money enable that? How would it make it easier for him to achieve these other goals?

LEAH DOWNEY: Well, I mean, there's a lot of ways that one could do that. I mean, I think the most obvious is that, and I think one that Trump is definitely thinking about a lot given the economic troubles that his recent bills have sent the government in fiscally, is historically-- economists don't like to talk about this because they think this is a taboo. But historically, it is the case that central banks all over the world, including the US, have acted periodically to support government debt.

So the central bank could make borrowing cheaper, easier, more possible for the US government, which would therefore allow more spending on domestic policy. So that's definitely possible. If you wanted to, he could engage more directly in regulating banks, not just in how much they lend but in to whom they lend.

So for instance, at the end of his first term, his president of the OCC, so the Office of the Comptroller of the Currency, which is another bank regulator, got very involved in debates about if banks should be able to lend on bases other than quantitative profit calculations. So banks were starting to do things like not lending to machine gun manufacturers or not lending to certain dirty industries in terms of client interests and things. And the Trump administration came in and said, that's illegal discrimination. You can't do that. If they're creditworthy, you have to give them money.

And so he could start pushing policies like that through the Fed, for instance. There's all kinds of things he could do to push his own agenda, not to mention actually change the policies for buying and the Fed actually buying and selling assets, so he could get the Fed into buying private assets if he wanted, buying his own crypto.

MARK BLYTH: Right. But I mean, in fairness, the Fed did that already in the pandemic when they were buying listed ETFs and all that of stuff. So the hands are already dirty. One of the interesting ones, I want to talk a minor thing and then get into the bigger one. And the minor thing is you create a bit of a fiscal hole with the tax cuts, and you try and fill that, in a sense, by basically creating a stablecoin market, which creates captive demand for treasuries.

So you get basically price insensitive buyers who are going to buy a ton of treasuries. And if you get control of the central bank at the same time, you can force lower rates. Now, in theory, that has a mechanical relationship to the cost of debt, that is to say the interest payments would go down. And that's a good thing, at least from a certain point of view.

But essentially that's also going to signal, let's say, fiscal laxity, if not future inflation. And so the bond holders who buy the next crop of bonds will want a higher yield. So there's a way in which the markets could still tame this even if he tried it, right?

LEAH DOWNEY: In my view, it's tricky to answer these questions. So I get these questions from my students a lot. So how much could we actually could we actually buy in terms of government debt before things went bad, right? In terms of inflation or in terms of the bond market. How could the current government, say, in the UK actually do things differently vis a vis the bond market, push the bond market to allow for more borrowing?

And the truth is that it depends on how you do it and what you do it with. It's all about a narrative. I mean, this is oversimplifying, but just to set the scene, it's like I tell my students, it's like, well, it depends on when you borrow money the first time from a bank. Do you use it to pay for law school, or do you use it to go to Vegas for the weekend? And after that, that's going to affect the price in which you can borrow money again.

And so I think it would depend a lot on what happens with what he does and the story he's able to tell to the bond markets. And it's also the US. And at the moment, despite what he's doing, we're still sitting at the top of the financial global hierarchy. And that hasn't changed. And I think it would take a lot to dislodge that. So I don't know. I don't know is the answer to your question.

MARK BLYTH: So let's go for the bigger one, which might be easier to answer. Isn't this exactly the type of government central bank coordination that people on the left have been calling for the past decade? That ultimately they should play a supportive role, that interest rates should be lower, that ultimately having a 2% inflation target is inherently deflationary, cuts against wages?

The quantitative easing. Miran's piece from the other week straight out of the playbook, that basically QE is ultimately just juicing asset prices for the top 1%. This has been a disaster. I mean, there's a lot of stuff in here that I would expect people on the center and center left who have been critics of central banks to go, yeah, hang on a minute. Isn't this the democratization of central banking we've been looking for?

LEAH DOWNEY: OK. So now we get to the real meat of the matter.

MARK BLYTH: To refresh everyone's memory, Leah's book is called Our Money, Monetary Policy As If Democracy Matters. So now he got elected. He's got all branches. He seems to be doing stuff that upsets the central banks, but he's doing this coordination. You could argue it's a form of democratization. Discuss.

LEAH DOWNEY: Great. Let me start with one thing. I think it's really important to say this. So for example, there is somebody making that argument explicitly, and that's Vice President Vance. So he went on in an interview in late August. And I just pulled this quote up because I think I just have to read it.

So he says, "I thought the people controlled this country. The people made the determinations in this country through their elected representatives, including the President of the United States". He goes on and on. He says you can't say that the democratic decision making process has no influence over monetary policy. That's really, really, I think, an anti-democratic principle. And he says he thinks that that's what this whole thing is about.

I mean, I think the first superficial but very important thing to say is, OK, in which case, none of this is actually about Lisa Cook. It's not about mortgage fraud. It's not about the Fed renovation. That's all bullshit, right? That's all pretense. If it's actually about democracy, then the proper thing to do would be to go to Congress and say, let's pass a Revised Federal Reserve Act. This shouldn't be how it works. It should work like this. Let's have a debate and let's pass it. So the first thing is to say the mechanism through which they're getting at this is pretty shady in my view and not at all democratic in its own right.

The second thing to say is even taking that for granted, it's the view that Vance promotes here and the view that some people are saying, is well, Trump's elected. It's a pretty bonkers view of democracy from a political theory perspective. So giving more power to any given elected official, so centralizing power in one particular individual, is kind of at odds with centuries of democratic theory, right?

That's the whole point is to democracy as opposed to oligarchy or monarchy is, right? A legislative process. The people are in charge and the legislature, not the single president. And in particular, that's too much power over printing money in particular has caused huge problems over the history of political theory.

I mean, that was the English Civil War. That was too much power for a king, let alone a democratic president. And we've known this for a long time. So the US Constitution was written specifically to put the powers of the purse and the power over coining and regulating money in the legislature, not the presidency, for exactly this reason. And I think there's good arguments for that. I think that's a pretty indisputable argument about democracy.

Now, that all being said, I will say that I have been pretty unimpressed and irritated by a lot of the responses to what's going on. Because what you see is everybody and their mother who disagrees with what Trump is doing jumping behind the status quo of the Federal Reserve.

And in a way that I find almost infantilizing. So Jason Furman wrote in the New York Times, independence of central banks are vital, right? He says people and governments and banks have to have confidence that the Fed is making its own decisions. Otherwise, bad outcomes can follow. It's sort of like, OK, that's so simple. Make your argument. What do you mean? Do what I think is right or bad stuff will happen.

MARK BLYTH: Many people out there who voted for Trump might think bad things have been happening for a very long time.

LEAH DOWNEY: Exactly, exactly. And some of the stuff, just as you laid out in your question, a lot of the things that the critiques are being made, and to his credit, Miran has been making these arguments since before he was in Trump's administration. He's been critical of the Fed as it's construed. Now, he's always had a different solution to mine in the sense of he's always wanted to centralize power in the President as opposed to make it more democratic.

But he has had these critiques for a long time. And in my view, the critique still stands. And if you're committed to a healthy democracy, it requires rejecting what Trump is doing, absolutely, but it also requires rejecting central bank independence as currently constituted in my view. And so all those people that are jumping behind the Fed as currently constituted are making a mistake, I think.

MARK BLYTH: Let's go into that Miran thing for a minute because I had an interesting exchange with a couple of people over email because we all got the text and had a read and went, well, that's pretty interesting. Some of the numbers are wildly off, and some of it's obviously self-serving, but it's something that also has a lot of traction, this notion that basically QE in particular has led to a huge misallocation of capital, et cetera.

And the conclusion that we came up with at the end of is this is one of these really important like attempts to grab the narrative as you were talking about. Because there's a bit whereby if this is true, Miran and everybody like him over the past 15 years really made all their money because of 0 interest rates and a ton of QE.

And you can live that cognitive distortion for a while. But ultimately, you kind of know that you're not really skilled. You're just faked it. You got lucky. We had sparks. We had crypto. Everything was free. And then it all went to hell in a hand basket. And now, we have positive real rates again, and we're surveying the damage.

So rather than blaming themselves for it because they were the ones who profited from it. It becomes this system did this. And the epicenter of the system is the Fed. So there's a way in which finance is trying-- it's kind of a bit like people who go on long Catholic walks and start beating themselves. This is kind of like we didn't really do it. It was really the system. Look over there. It's the Fed, and this is what we need to do.

So I think your power grab story is totally right, but I also think there might be something like that going on as well. And there's a way in which you've got the temple-- the people from the inside of the temple of high finance are actually talking about the inequality caused by finance. That's an incredible pirouette of a move, if you think about it.

LEAH DOWNEY: Yeah. I mean absolutely. I mean, it's also interesting because if someone like Miran because he's going from finance, and now, all of a sudden, he's transitioning into political power rather than economic power. Fundamentally, the Fed is the nexus of the struggle between those two things. So what's on top? Is it financial, or is it political?

I mean, the history of the Fed, I think, can be written in a fascinating way of actually, here's this public institution that's set up fundamentally to secure the private financial industry, maybe for public reasons, but that's its job. And then that immediately sets up a tension of what's the real, like who's its real master here? Is it domestic democratic politics, or is it the interest of the private financial industry?

And over time, the private financial industry becomes increasingly international and globalized. And so that tension grows. And so I think that that is something that we're seeing right now. And I think you even see it right in these people, these individual people that are jumping kind from one side to another.

I mean, I also think that your point about the left is being a bit two-faced about it, they're changing their minds about what they're actually committed to, is a really important point. And they need to think about that going forward. Like in the UK, for instance, a big portion of the book talks about how many major countries now conduct monetary policy by paying interest on reserves to private banks. So the government is paying a huge amount of money to private banks in order to conduct monetary policy.

And in particular, as interest rates go up, and that makes everybody else's life harder, we're paying more money to the private banks. And this is something that the right wing party in the UK has finally started to scream about. And I'm like, where's the left here? Why aren't we having this conversation as well?

MARK BLYTH: Just a sidebar on this. I was actually talking to students about this very thing just yesterday. Actually, it was the before because we did endogenous money, and we're doing crowding out. And I thought to myself, isn't paying interest on reserves reverse crowding out? Because well, the standard crowding out argument is like there's only one pool of capital. The government comes in and gets it. There's less for everybody else. They have to pay higher rates. It goes, right?

But if you're actually setting monetary policy by saying, hey, lads, over here, and I'll give you more than you'd get in the private market. Aren't you just sucking money out of the market that should be invested in the private markets?

LEAH DOWNEY: Well, yeah. Kind of, yeah. I mean,

MARK BLYTH: Bizarrely, it's a reverse crowding out.

LEAH DOWNEY: Crowding it into the Fed.

MARK BLYTH: You never hear anyone-- No, exactly. And again, so let's go back to your point on this though, right? I mean, to what extent could that ever be justified on democratic grounds? Whatever. This is crazy.

LEAH DOWNEY: This is how they tried to do it, which is crazy. It started in the US at least. It was introduced in a bill, I want to say, Two Thousand and Six. And it wasn't at all about the conduct of monetary policy. It was about regulating. So at that point, it was the banks. They had a certain number of reserves they were required by law to hold at the Federal Reserve.

And the argument was you're requiring us to hold these reserves and you're not paying interest on them. So it's essentially, they claimed, the banks claimed it was double taxation. So through opportunity costs, it's double taxation. I think that's an insane argument. We require car manufacturers to put seatbelts in the car. We don't pay them to add the seat belts. That's just a part of the game.

MARK BLYTH: When you rent an apartment, somebody pays a security deposit. You're meant to put it in an escrow and give them interest, but nobody actually does.

LEAH DOWNEY: Exactly. But this was the argument. And so on the back of this double taxation, it was part of a reduction in regulation push in the US. So they allowed the Federal Reserve to pay interest on these reserves, on required reserves. Then when Two Thousand and Eight came, Bernanke thought, oh great, what that does is it divorces the amount of reserves in the system from the interest rate.

So I can completely engage in massive balance sheet policy QE and push all that money out into the economy. And it won't change the interest rate because the amount of reserves in the system won't affect the interest rate. So it sterilizes QE is the language that they use. So then it became a tool of monetary policy. But it wasn't at the start. It was all about avoiding regulation and paying more money to the state.

MARK BLYTH: But this brings us back to this thing of there may be ridiculous things going on in the Trump administration, but there's actually ridiculous things going on anyway.

LEAH DOWNEY: Yeah.

MARK BLYTH: Right? To go back to the democratic argument, that tension that you talked about is exacerbated by not just global linkages, responsibility for swaps, but the fact that the dollar is the global reserve asset. Because of the eurodollar markets, more dollars are made outside the United States than inside the United States. It means the Fed is outside money for the world.

Now, if you are a serious democrat, either you have to scale up your argument to be a global democrat without responsibility, or you have to abjure that responsibility in the name of democracy. So my point being, when you push it should be about democracy, this can go in very unexpected directions.

LEAH DOWNEY: Yep. So the whole last third of the book is about this. And it's essentially a claim that democracy and what the literature had called hyperglobalization or the global financial world just are fundamentally incompatible. And yet, if you take a picture of global democracy out of the picture, if you take that option out, which I think we have to because for both practical reasons, maybe also for desirability reasons, but definitely for practical reasons, at least for now.

And therefore, the argument is that if you want proper democracy, it's going to come at the scale of domestic politics in the nation state. And I think that that's just the case. I think I choose that with serious capital controls, with serious euro dollar regulation, over the current system that we have, which I find completely unsatisfying, both as a citizen of the United States, but also from the perspective of places all over the world that really get the short end of the stick when it comes to the global financial system screwing their countries over in terms of dollarization and dependence on the Fed's interest rates and stuff that are set not from their perspective.

But the thing that freaks people out about it is that it's like, OK, well if you're going to change that, what comes next? What replaces it? And that's a scary question because we don't know. I mean, there have been proposals, right? Kane's and Bancorp. And having domestic democratic politics doesn't mean you can't have any of international arrangements and agreements. You have to do them in a way such that the domestic democratic political system has the ability to revise and change its mind and do things differently over time. So you can't have precommitment.

But you could have a system where states decide right to regularly revisit and to support an international system of, I don't know, an international currency, right? The Bancorp or something like that. But the point is that that's a hard choice. And going into that sort of abyss of what's going to come next would obviously be difficult. But the point of the book, and I stand by this, is that that's what's required if you want to have actual democracy.

MARK BLYTH: As if democracy matters.

LEAH DOWNEY: Exactly. And the alternative-- and to be fair, the current system, to the point of Miran and others, isn't great for a whole lot of people in the world. And so maybe we shouldn't be so afraid of trying something new.

MARK BLYTH: I wonder if this is also part of a wider strategy because it's very tempting to say, oh, it's just chaos. They don't what they're doing. They jump from one thing to the other. But a lot of the politics of distraction, certainly. But there is a certain thread. And what seems to be the case with Miran and others, the Mar-a-Lago paper, et cetera, it's all drawn on a kind of Klein and Pettis model of imbalancing, hollowing out manufacturing capacity, et cetera. And if you believe that, if you think that's fundamentally what's going on, you kind of have to stop everybody using the dollar, right? At the end of the day, you just can't have this, right?

LEAH DOWNEY: If you want to produce stuff, you can't just produce dollars.

MARK BLYTH: Yeah. You got to stop producing the credit asset. Right, exactly. So to the extent that like if you believe that is fundamentally what has to happen, then it's kind of hard to do it, and you don't want to do it with capital controls and other of blunt force instruments that will really completely piss off Wall Street and turn them against you.

But you probably do want to consider things like a foreign transactions, tax for people buying dollar assets. You want to basically make them a bit more nervous about the course of monetary policy. You might want to think about maybe you want alternative assets out there rather than just dollar. All of which seems to be what this is doing, right?

Now, I don't want to put too much coherence into it. But nonetheless, if I basically read Klein and Pettis and went, this is what we need to do. We need to reverse this problem. Then basically politicizing monetary policy and making the dollar less attractive and getting people to worry about long bond rates, that might be part of what I was after.

LEAH DOWNEY: Yeah. I mean, so when people ask me, prior to the whole Trump, recent Miran explosion, how would you actually do that if you went to democratize and in the face of this global financial system?

Well, what I said was, well, the first thing you would do is you would let it be known that you are not going to da facto back the euro dollar market in exactly the same way over the long term. You are going to introduce political considerations to that backing more explicitly. And you are going to perhaps even reintroduce what already existed in the '90s, which were specific reserve requirements at the Fed for euro dollars.

And start trying to shrink, pin prick that market a little bit and see, let people know we might not be there next time when you come calling, or we might only be there for political reasons. Because you have to give advance notice of this to prevent massive panic, but just let them know that things are changing.

MARK BLYTH: Yeah.

LEAH DOWNEY: And as I said, I don't think what they're doing is democratic. I don't share almost any of their political goals. But I can see what you're saying. A story for their kind of trying to shake things up on the international sort of financial markets world about maybe things aren't going to go the way that they've always gone, and that could change things. Yeah.

MARK BLYTH: I mean, if that happens, then is there anything left of the British financial sector if you basically cut out the eurodollar market?

LEAH DOWNEY: Yeah.

MARK BLYTH: It could have very, very large scale consequences. And if the euro is not set up to be an alternative because you're still in mercantilist mode, yes, this could prove to be extraordinarily disruptive. All right. Let's bring it back to democracy to finish it off. In the book, you argue that basically the legislature should be the focus of this, rather than a kind of like what would we call them a centralized presidency as the focal point of democracy, which is the one we're seeing, which you don't agree with. But Congress is beyond crap.

LEAH DOWNEY: Oh, yeah.

MARK BLYTH: And it still is beyond crap. I mean, it's more beyonder crapper than ever before. And we could think the same thing about the House of Commons, whatever. I mean, legislatures just don't seem to be up to the task to do the stuff that you'd want them to do. Are there any signs of hope? Do you see anybody in any legislators trying to grapple with these things, or is that just not really the case?

LEAH DOWNEY: I don't know. I mean, I was just writing an op-ed recently, and the title was like, start shouting at Congress. Like why aren't people shouting at Congress? They're so crap, we don't even blame them for the problem anymore. We just kind of ignore them.

Is there hope? I mean, I know the UK system a little bit better now because I'm here. And I do talk to some MPs that are interested in asking interesting questions, of Andrew Bailey. For instance, somebody, an MP in the last meeting of the Financial Services Committee equivalent, asked Andrew Bailey, who's the head of the Bank of England, about tiered reserves. Could we do reserve payments differently?

And I have to say, which is a great question, I have to say there was a letter written in response from Bailey back to the House of Commons that I found really quite dismissive and didn't take any of the arguments seriously. And I found it a bit depressing because it's like it ups the stakes. Essentially, what that means is now, if Parliament wants to do something differently, they have to have enough confidence to say, forget you, Bailey, we're going past you. We're just going to pass a law to do things differently. Because the central bank won't even engage in a discussion about what it might look like to do things differently in this kind of iterative sense.

Do I think that-- I mean, we talked a little bit about this last time, about how I think part of the problem with Congress is all of this delegation. And I still believe that, that we've gotten a crap Congress partly because of the way that we've conducted policy making through independent agencies for years and years now.

But it doesn't point to an obvious solution until you have a politician that comes in and says, I'm just not going to listen to this, and I'm going to break the rules, and I'm going to do it differently, and we're starting to get those. And I'm not surprised by that, because people are pissed off because they feel like their vote isn't translating into policies that are actually different, that they want to see because the politicians don't really have the power or are choosing not to exercise it and letting the administrators take care of it. I just wish there was a different kind of politician that was walking in the door and breaking things.

MARK BLYTH: But they are still responding, as you just said, to the democratic mood, which is one of the things have got to change. And it may not be through an iterative governance model through the legislature, but it seems to be the case that, for example, reform are kind of saying, why are we giving banks 25 billion? We could set interest rates lower. We have a budget hole of 50 billion. We hand out 25 for the banks. What's going on? Why is it that they are the only ones that seem to be able to make this argument? Are the sort of the mainstream just so utterly cowed?

LEAH DOWNEY: I mean, it's a great question. I don't have the answer to that. I mean, I think part of it is that some of the mainstream, especially the people that have been around for a while, are cowed. They're afraid to change the rules. They're afraid to break things. We've taught ourselves to-- I mean, there's a whole history behind decision making science and how we've come to make decisions about policy today, sort of post Cold War and how that's developed. And we tend to focus on wanting to have a clear answer.

I want a cost benefit analysis. I want to know that this is going to deliver x, y, and z. Even though those predictions are almost never correct, we are too afraid to act without them and to experiment and try something completely different because it's scary. And we've lost-- what was it FDR's quote about this? The thing we should be most scared of is taking no action at all. And we've lost that sort of feeling in a huge portion of our politics. And I think it's starting to bubble up.

But as you say, it's mostly on the right. And that, in my view, is a real issue. And I think the left needs to be careful. So the left in the UK, after Liz Truss exploded the economy, immediately ran into the arms of the Bank of England.

MARK BLYTH: Through the orthodoxy.

LEAH DOWNEY: Right. The old orthodoxy. Because the enemy of my enemy is my friend. And I just want to yell at the Democrats, don't make that mistake. And we're starting to see that.

MARK BLYTH: Oh, they'll do it again. They'll absolutely do it again. Remember, during the Nineteen Eighties, the Democrats banged on about the twin deficits. And I just remember thinking, I was an undergraduate student studying American politics at the time. And I was like, OK, I barely understand what this is. The notion that people who are living in the Rust Belt, who've just lost their towns, all the rest of it, are just worried about imports. I mean, it's just madness. This is not how it works at all.

LEAH DOWNEY: The thing that pisses me off about that too is it's like they then think, the politicians then think, oh, people are just dumb. They don't understand. So I need to dumb it all down. But no. It's not that they're dumb. It's that you're talking about stuff that doesn't matter to them. Like you can have a very complex conversation.

Think about the debates in the late Eighteen Hundreds about the gold standard and the silver standard and all of this stuff. It was really complicated. Monetary debates were happening like in big political scene. But that's because it mattered to people's lives. It's not that you have to dumb it down. It's that you have to talk about what's relevant to them.

MARK BLYTH: Yeah. Or alternatives of the ideological screen that's being pulled back from finance we're talking about with the Miran stuff with QE, et cetera. That ultimately, maybe the people doing this stuff also don't believe in it anymore, but they just don't know what to do instead. So you double down. We need to have a 2% inflation target. Why? Because we do.

LEAH DOWNEY: I mean, this is the thing where it's also fear. It's fear of regulation. Because it's like you go back to the golden years after the war. And businesses were saying-- what is the quote? What is the quote from-- oh, gosh. I'm going to forget his name. I have to look it up. There's an economist from that sort of time who said free market capitalism can be a great thing. He was quite a lefty economist. So this is an interesting quote. Can be a great thing. But you have to have a rudder under your sails.

And that's regulation. You have to tell people what we want to produce, what we don't, what's OK, what's not OK. And finance hasn't really had that for a while. And now, they're kind of coming up and saying, dang, maybe we should have, because this is all bonkers.

MARK BLYTH: This is all bonkers. It's an interesting place to leave it. I don't think we've solved the democratic dilemma. But nonetheless, I think we'll leave it there. Leah, it's been great to have you back on the podcast. We'll need to do an update in a year and figure out how bonkers things are.

LEAH DOWNEY: All right. Sounds good.

MARK BLYTH: This episode of The Rhodes Center Podcast was produced by Dan Richards with video production by Azura Cruz. If you like the show, leave us a rating and review on Apple, Spotify, or wherever you listen to podcasts. And while you're there, be sure to subscribe too. We'll be back soon with another episode of The Rhodes Center Podcast. Thanks for listening.