During times like these it's nice to go back to first principles and better understand how things work so we can understand why/how we navigate financial problems.

The 2008/9 crisis was the greatest learning experience of my life.

It was the reason I wrote this paper, which helped me formulate a better understanding of the monetary system and how things work at an operational level. More facts, less ideology!

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625

Today I want to talk briefly about the Fed at a first principles level so we can better appreciate what they're doing and why.

Let's start with some history. The 1800s were a mess of economic booms/busts with an average -22% GDP contraction every FOUR years.

via @UfukInceCFA

A big part of this was our fragmented banking system. Before the Fed banks would settle payments at local private clearinghouses.

Bank A would conduct biz with someone who banked at Bank B and the two banks would settle up at the end of the day. All good.

The problem was, when the shit hit the fan, Bank B would look at Bank A like, "wait, can I trust your balance sheet to settle this payment?"

So, what would happen is a garden variety economic downturn would turn into a banking crisis which would exacerbate the economic downturn.

Joe Schmo, who did nothing wrong during the boom, would go out of business because his bank couldn't settle payments for him. Not cool.

After a huge panic in 1907 it was clear that private capitalist based clearing systems didn't work.

So we formed the Fed, which is just a big clearinghouse that NEVER shuts down, even during a panic.

This helps smooth the business cycle by keeping recessions within the real economy rather than being exacerbated by silly bankers.

2008 was a case in point. What would have been a very deep depression without the Fed turned out to just be a severe recession.

As I've noted before, today's actions are a bit different. This isn't a real economic downturn. It's an exogenous virus that's hurting a lot of innocent people and the Fed is just trying to make sure the banking system doesn't collapse and hurt even more innocent people.

So, as my man @TimDuy said, "Stop looking for someone to blame because there is no one to blame."

We're all trying to get through this alive. Let's stop pointing fingers and start helping and understanding each other.

Be well.