Dennis Kelleher of Better Markets
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With everything else going on, the ongoing demolition of financial regulation and supervision, which is raising the risks of financial crisis, isn’t getting much attention. So I spoke with Dennis Kelliher, president of Better Markets [https://bettermarkets.org/], an independent think tank that is trying to sound the alarm.
Full disclosure: my nephew works at Better Markets. But I would have wanted to talk to Kelleher regardless.
. . .
TRANSCRIPT: Paul Krugman in Conversation with Dennis Kelleher
(recorded 7/10/26)
Paul Krugman: Hi everyone. It seems hard to believe now, but the great financial crisis of 2008 and its aftermath are now in the distant past. I think, in fact, in November there will be some voters who weren’t born yet. But for some of us, it was a huge, defining event, and financial markets as a source of economic problems and instability hasn’t gone away. And I thought I would talk with Dennis Kelleher [https://bettermarkets.org/team/dennis-m-kelleher/], who is the head of Better Markets [https://bettermarkets.org/who-we-are/], an independent think tank devoted to trying to make financial markets work better for the rest of us. And in the note, I’ll mention I do have a personal connection to Better Markets, but that’s not why I’m interviewing Mr. Kelleher. Dennis is a former Senate aide, and as you know, congressional staffers are one of the great sources of expertise in America. And we want to talk about financial markets, so hi.
Dennis Kelleher: Hi. Thanks for having me, Paul. Good to see you.
Krugman: Good to see you, too. I have a bunch of questions, but we can go wherever this goes. The first thing is, whenever I try to talk about financial market functioning, what comes up is that most financial assets are owned by a relatively small part of the population, even if you take 401(k)s into account. So why isn’t this just a fight among the investor class? Why should everyone care about this?
Kelleher: Well, it’s a great question because there’s such a lack of information about financial markets, the financial system, and frankly, as you well know, the economy. You know, one of the great services that you and many of your colleagues have provided is basically translating what’s happening in the economy and financial markets to the average Main Street American, reader of the New York Times, and consumers of news. And the truth is that the financial markets and obviously the economy impact everybody, and you’re right.
This November during the election, some of the people voting will not have actually had any awareness of the 2008 financial crash, which was the biggest crash in the United States since 1929, which caused the Great Depression. And even though they may not have been born at that time, the people who are voting in November are still living through the repercussions of the 2008 crash. We basically lost an entire generation of Americans, economically speaking, from that crash.
It took ten years for the U-6, the broad unemployment rate, to return to pre-crash levels. It was 2017 before that happened. And indeed, the Fed did an interesting study, which people can quibble with the baseline, but they did a study in 2018 that showed at the end of 2016, 90% of Americans were poorer than they were in 2007 by 17 to 35 percent. So if you think about that, at the end of 2016, the best-off American in that ninety percent bucket was 17% poorer. Now you could say the baseline of 2007 was inflated, but by and large, 90% of Americans have been doing pretty poorly since the crash for a lot of reasons.
And so in November, when those people go to vote, they might not know it but they are actually living through the continuing economic consequences, financial consequences, and actually political consequences. Because the rise of Trump and the dissatisfaction of voters, Americans, and actually voters in the UK and elsewhere—Martin Wolf from the Financial Times wrote a terrific book called The Crisis of Democratic Capitalism [https://www.economist.com/culture/2023/02/02/martin-wolfs-new-book-analyses-the-wests-malaise]. It shows how if countries don’t deliver for the broad population, then democracy erodes and people look for easy answers, authoritarians, and strongmen. And we end up with Brexit, we end up with Trump.
And so you’re right. People don’t remember the crash, but the crash is incredibly important to everybody in America. And the circumstances that we find ourselves in today are unfortunately echoing many of the drivers of that crash.
Now, I didn’t answer your question about the investor class, but when you look at investors, something like 87% of the value of the stock market is owned by the top 10%. On the other hand, there are today $27 trillion worth of assets in 401(k)s and IRAs, retirement accounts. It’s overwhelmingly skewed to the top, but not only. And importantly, one of the great projects that America really needs to undertake is to democratize finance so that financial assets and the ability to grow wealth is more broadly spread out. One of the big crippling problems we have today is that the bottom 50% of Americans, about 165 million Americans, only have 2.5% of the wealth of the country. It’s astonishing, right?
And so a big part of what Better Markets does in economic and financial policy making is to try and rebalance what we see as a rigged economy that’s driven by a rigged and broken financial system. So our economy is producing very well for the top ten percent, and our financial system is structured to deliver those results. Now, part of that is wealth extraction, but a lot of it is just structural drivers put in place by policy makers in Washington that cater to the top ten percent. And that, unfortunately, Paul, as you know, is on a bipartisan basis.
Krugman: We’re gonna get into that in a bit, but let me just ask a question. I’m gonna actually kind of veer off course, although this is something I wanted to get to. Top ten percent. So basically, ownership of stock is, roughly speaking, a top ten percent activity. When you talk about skewed, I mean, I have a sense that it is actually increasingly skewed towards a fraction of a fraction. Do you have anything I should take away about how the system is rigged or skewed within the stock-owning population?
Kelleher: Well, I think the problem is that the higher up you go on the wealth scale, the greater your ability to accumulate even more wealth in a tax-free fashion, right? And then to pass it along to both use it today as if it was cash and income, not be taxed on it, use it, and then hand it off through inheritance without being taxed to heirs for multi-generational wealth concentration at the top. It’s bad for the economy and bad for democracy.
I mean, you’ve talked to Ro Khanna and there’s all sorts of people with different ideas about what to do. We’ve got a wealth tax on the ballot in California. But in terms of the structural drivers, one of the problems we see at Better Markets is that Democrats don’t pay enough attention to the financial structural drivers of the economy. So here’s just a simple example that people are often surprised by.
Community banks in the United States—there’s about a little over four thousand of them. You see them on every corner across America, particularly in “real America,” as opposed to where you and I live, Paul, which is by no means real America. But those banks lend out seventy-five cents on average of every dollar of deposit. The big Wall Street banks, they lend out somewhere less than fifty cents of every dollar of deposit. And that’s because it’s so much more profitable for them catering to the rich, mostly engaging in financial activities, trading, and capital markets activities.
And so ask yourself, why is that? Well, that’s because the rules enacted by the banking regulators and Congress and other regulators allow the profit margins on the financialized trading side to be so much greater than on the lending side. I mean, truthfully, the rules that are created in Washington actually discriminate against lending to the real economy.
And so you have community banks which don’t have capital markets activities. They’re bread-and-butter banks for the most part. It depends on how you define community banks; some people define them all the way up to Wall Street, but those are people in the propaganda industry. But these are banks that are actually driving the real economy. So for example, the community banks have somewhere in the neighborhood of 10% of the total assets of the banking system, but they actually provide somewhere in the neighborhood of 40% of all loans to small businesses.
Krugman: Right.
Kelleher: Well, why are we not having rules that skew towards benefiting the real productive economy and away from the trading financialized activities which serve the very top one or two percent and not the rest? And actually, it not only doesn’t serve the rest of the country, it’s at the expense of the rest of the country. Better Markets put out a report [https://bettermarkets.org/newsroom/banking-agencies-capital-proposals-will-boost-big-bank-profits-hurt-main-street-lending-community-banks-and-financial-stability/] showing that last year the growth in major Wall Street bank lending to what are called “non-banks” grew by 50%. Do you know what their lending to the real economy grew by? Zero. Zero. And so a lot of these activities are being pushed out into what are called non-banks because it’s more profitable. It’s more profitable because the rules make it more profitable. The rules are created in Washington by policymakers, regulators, and legislators who, unfortunately, too often are beholden to the wrong people. And so you end up with this cycle where the rules keep reinforcing the current structure that’s channeling activity and money to the top and away from Main Street.
Krugman: So as I understood it, reading some of Better Markets’ reports, if you’re a big financial institution, lending to non-banks probably ends up being a roundabout route by which the money reaches lenders, but not through the original bank. They actually have kind of a regulatory advantage because it’s lower capital requirements. If I got that right?
Kelleher: Well, it’s lower capital requirements, it’s lower requirements across the board. Capital is one of the core drivers, but it’s not the only one.
Krugman: So if you put your money with Citigroup or another one of the big financial institutions, it’s not going to be lent out, or much of it will not be lent out to small business or households. It’ll be lent to others; it’ll kind of divert around and it’ll in effect be channeled into what you consider a worse way through which the money reaches the rest of the economy. Is that a fair summary?
Kelleher: That’s a fair summary of part of it. Keep in mind a lot of this money is funding hedge funds doing big basis trades, basically swinging for the fences. I’m not saying there’s no value at any hedge fund to the real economy, but when you look at their activities, that’s not exactly what I would call beneficial lending to the real, productive economy. Private equity is basically a strip-and-rip business model. It gets their money from the banks. Almost everything goes back to the banks, and that’s because deposit money is the safest, soundest, and cheapest source of funding for economic activities.
And so the banks have got the money, and what they decide is: where are they going to send it? Are they going to send it over here to lend to Main Street businesses where their profit margin is modest, or go over here to hedge funds, private equity, or other financialized activities—business development corporations, crypto, all sorts of things where the profit margin is large? They’re making rational economic decisions in their self-interest to profit maximize.
The question is: why are the people in Washington structuring it that way so that their profit margins are like that? The current capital rules that we’re fighting about, Paul, are supposed to change that. And in fact, what they’re supposed to do is have, for example, the trading activities accurately reflect the risk associated with them. And if they accurately did that, the capital requirements for those activities would be much higher. Not only are the banking agencies with the Federal Reserve in the lead not doing that, but when they’re done with the proposed capital rules, capital at the biggest, most dangerous banks in the United States is going to be back to the levels roughly before what they were before the 2008 crash.
I mean, think about that. It’s crazy, right? Here’s something that’s even crazier: a bunch of those big banks are going to have capital rules and capital levels that are roughly similar to community banks.
Krugman: Which are low, because they’re in a very safe business, right?
Kelleher: Yes. Well, right. The systemic risk to the economy of community banks, first of all as an absolute matter, is pretty low. But relative to the giants on Wall Street, they’re infinitesimal; they’re not even comparable. And we’ve got a Federal Reserve, particularly the Vice Chairman of Supervision and Regulation over there, that acts as if she’s the primary lobbyist for Goldman Sachs or JP Morgan Chase.
She even hired three of Wall Street’s top lobbyist lawyers to be her senior advisors. I’m not making this up. One was a vice president at Goldman Sachs. One was one of Wall Street’s top lawyers at one of the top Wall Street law firms for 35 years. And the other one was a top executive at Wall Street’s biggest trade group in Washington. Those are her three top advisors.
Krugman: Are you talking about Fed employees or outside consultants?
Kelleher: No, they’re Fed employees. They’re on staff. We put out a press release [https://bettermarkets.org/newsroom/federal-reserve-putting-lifelong-wall-street-lawyer-lobbyist-in-charge-of-regulating-his-former-bank-clients-endangers-all-americans/] about her hiring the three of them. I mean, this is not just the fox guarding the hen house; this is the fox in charge of all operations of the hen house. So the lawyer who was on Wall Street for 35 years, serving his clients for 35 years—all of the banks—is now the Director of Regulation and Supervision at the Federal Reserve of his former clients, and the right-hand top staffer for the Vice Chairman of Supervision and Regulation on the Board of Governors of the Federal Reserve. And so anybody who is surprised that the Fed is now enacting or proposing rules incredibly favorable to the biggest banks on Wall Street...
And it’s not just capital, Paul. I mean, one of the tradeoffs here is that banks get to have a somewhat unique role in the United States, right? They get to accumulate all these activities and take people’s deposits. Main Street American deposits are how these banks fund themselves, largely. And then we insure that money through the FDIC so people have confidence that they’ll get their money back. But the exchange is: we regulate them so that they don’t actually threaten the economy and financial system of the United States because they’re so big. So that means they’re supervised.
People don’t know this, but every day, people who work for the Federal Reserve and are paid by the American people, go to work at the biggest banks, supervising them. They literally have an office there. They go in, look at the books and records, and talk to people all day long at Goldman Sachs, JP Morgan Chase, and Citigroup. That’s called supervision. It’s basically invisible but incredibly important. But the Fed is not only cutting back on capital and regulation like stress tests and other important safety features; they’re also gutting supervision. And so they’re basically unleashing the biggest banks in the United States from modest, sensible regulation and supervision that’s supposed to protect Main Street jobs, homes, and savings from high-risk, reckless, and inappropriate conduct by these gigantic banks. We saw in 2008 what happens when you don’t regulate them or supervise them. And we actually just saw it again in 2023.
Krugman: Right. This is 2023 with the Silicon Valley Bank and all of that, right?
Kelleher: 2023 there were four big bank failures. Three of the four biggest bank failures in the history of the United States happened in 2023. People don’t realize it.
Krugman: Even I didn’t realize that, and I’m supposed to be on top of these things. And this is happening incredibly fast, right? Normally we think you forget the lessons of the last financial crisis basically once people age out of the business and nobody is around who really remembers it. But we were dealing with the aftermath of 2008 just fifteen or sixteen years ago. And you’re saying that basically we’re fully back to that kind of Wild West, no-supervision world, or maybe worse.
Kelleher: Well, we’re getting there, and the direction is there. We’re not quite there yet, but the thrust of what’s happening now is broader, deeper, and more reckless than it was in the years leading up to the 2008 crash. I mean, if you think about it, it’s quite amazing. The so-called shadow banking system—non-bank financial institutions—today is bigger than it was in ‘08 and less regulated.
Krugman: That’s what I was going to say. Yeah.
Kelleher: And it was identified as one of the primary drivers of the ‘08 crash.
Krugman: That’s right. I mean, I remember very vividly in the fall of 2008, the conventional wisdom, even in textbooks—including my own—said, “Well, we can”t have a 1931-style banking crisis because the banks are insured and regulated,” and then the week of Lehman’s failure was, “Sixty percent of the banking system is shadow banks.” And you’re saying that we’re back to that and more now.
Kelleher: Yeah, I don’t remember the exact percentage, but yes. And what’s worse is they’re less regulated today than they were then in many material respects. And now a lot of people think, “Well, it’s hard to worry about big catastrophic events when there’s a lot going on every day.” But this is happening fast, and because there’s so much happening in the Trump chaos machine—where there’s not a scandal a day, it’s like almost an hour.
You know, J.D. Vance, who I almost never agree with on anything, said in a speech recently at the Nixon Library that if the Nixon crimes happened today, it wouldn’t even last a full news cycle. And he’s probably right. And so a lot of this is not only happening fast, it’s happening invisibly because just a very small slice of what’s happening is getting into the media. Meanwhile, the industry termites are working day and night in the policy-making process in Washington, eating away at the foundations of the financial stability of the United States.
Krugman: You’ve been talking a lot about the Federal Reserve, which is critical because it traditionally has been the more competent, less politicized piece. And you’re basically saying that now that piece of the Fed has effectively been captured. Is that a fair description?
Kelleher: The Fed has unfortunately been largely captured. It’s being run by people who have an agenda that is not consistent with the best interest of the American people, frankly. I’m not talking about the monetary policy side—that’s a whole different discussion—but on the supervision and regulation side, they are not acting consistently with the best interest of Main Street Americans. Wall Street is winning day in and day out in the policy fights.
Krugman: Right.
Kelleher: There’s going to be news coming out, I think, over the next several weeks, maybe months, that will illustrate that pretty starkly. It’s really quite astonishing what has happened at the Fed. And don’t get me wrong—there are a lot of good, hardworking, dedicated public servants at the Fed who nobody will ever see or acknowledge, who have been fighting the good fight for many years. But the leadership at the Federal Reserve at this point—the Trump leadership—is doing to the Federal Reserve what’s being done everywhere.
Now, we know we had two big Supreme Court cases recently which supposedly cabined off the Federal Reserve from direct political control by the President, unlike the other agencies, and that’s true, but it’s all relative, right? I mean, he now has direct political control of the SEC, CFTC, and everything from the NLRB to the FTC to the FCC—all the critically important regulatory agencies that have been in place since the New Deal, basically creating and enabling an economy to be profit-maximizing but still have adequate protections for the public. I mean, that’s the balance that we need to get.
And actually, a former colleague of yours, David Leonhardt, wrote a great book—and I always have it on my desk because I recommend it to people. It’s called Ours Was the Shining Future [https://bookshop.org/p/books/ours-was-the-shining-future-the-story-of-the-american-dream-david-leonhardt/dccf8bf82ea6ac72?utm_source=google&utm_medium=cpc&utm_campaign=dsa_nonbrand&utm_content=%7Badgroupname%7D&utm_term=aud-1885352274144:dsa-19959388920&gad_source=1&gad_campaignid=12440232635&gbraid=0AAAAACfld40ZTHRb4F6KxCmUX1uWQ2kbh&gclid=Cj0KCQjwsMLSBhD9ARIsAIpUTDpwgbHYJTQZ4-grbNk1pXOlbTsRsj3sOszYXxelXiiCO-vXHvePKREaAroDEALw_wcB]. It’s a great history of how the United States, post-Great Depression, built the largest middle class in the history of the world, really compressed gross income inequality, and created wealth in places people didn’t think it would happen. And he talks about how things changed when Reagan came in and kind of where we are now. But that was because we had a regulatory state.
Now, people can argue about what’s reasonable—how much is too much, how much is too little—but we struck a balance that enabled the SEC, the CFTC, the Federal Reserve, and other regulatory agencies, from labor to health to product safety. That balance took some of the craziness off the blind profit maximization built within the engine of the economy.
Now, the Supreme Court basically said last week that doesn’t exist anymore. What exists going forward is that the President gets to control all those agencies, and all those agencies are now subject to both the political agenda and the whim of whoever the President is.
Krugman: So, for listeners who may not know: SEC is the Securities and Exchange Commission, which is supposed to regulate stocks and corporate accounting and all of that. CFTC is the Commodities...
Kelleher: Futures Trading Commission, regulating derivatives and commodities. It’s the least known but a very important agency. For example, commodities: the bread in your lunch pail, the cereal in your breakfast bowl, the gas in your car, the heat in your home—all those markets are regulated by the Commodity Futures Trading Commission.
Krugman: Yeah. And so Humphrey’s Executor, the case where the Supreme Court essentially said that Congress cannot establish a mandate and then expect an agency to fulfill it if the President doesn’t want to. That really affects all of these agencies, right?
Kelleher: Right. Actually, the case last week was Slaughter v. FTC, and that case overruled Humphrey’s Executor, which was a Supreme Court case from ninety years ago. I don’t remember exactly; it could be eighty. Contrary to what my kids often think, I haven’t been around that long.
Krugman: It’s ninety years ago because it was actually a ruling against FDR. FDR was trying to change something, and the Supreme Court said, “Well, that’s not what Congress said and you, Franklin Delano Roosevelt, cannot change it.” But now it’s been waived for Donald Trump.
Kelleher: Yeah, well, look. We have a right-wing Supreme Court—a supermajority—that is essentially creating, for the first time in American history, an all-powerful executive branch. As you know, it’s been referred to by legal scholars as the “unitary executive theory,” where essentially the President, whoever they are, gets to control the entire executive branch. And of course, over the last ninety years or so since the New Deal, we’ve had an administrative state that has, in key respects, put some brakes on the worst excesses of unrestrained profit-seeking. They’re just basic public protections.
I think of it as being like cars, right? Cars today are very safe; they have airbags, bumpers that are shock absorbers, glass that shatters and doesn’t kill you, and reinforced doors. What the Supreme Court is doing with Slaughter v. FTC and these other cases that are empowering the President is literally taking the airbags and bumpers off your car. Except the car, in this case, is the country. It’s our democracy, our economy, and our financial system. The safety aspects of that system that protect our democracy, economy, and financial system protect people’s jobs and savings.
And frankly, their safety—even things like the Consumer Product Safety Commission or the FDA. These acronyms can get confusing, but what they really are are safety mechanisms and protections for Main Street Americans from things that happen in a gigantic economy like the United States that would otherwise have really bad impacts on Main Street Americans, whether it’s their job, their health, their safety, or their savings—frankly, their families and their dreams. And that’s what these agencies do; some do it better than others, and I’m not saying they always get it right. They don’t; they get it wrong. We criticize them all the time. We criticize them when Democrats are in charge and we criticize them when Republicans are in charge. We also praise them when they do well. But we need them; we need these shock absorbers on an otherwise unrestrained economy that’s just profit-driven, and that’s what we’re seeing now.
Krugman: We’ve ended up talking a lot about the Fed, which has a critical supervisory role, but Better Markets has been writing a lot about the SEC lately [https://bettermarkets.org/newsroom/secs-2026-agenda-shows-the-agency-no-longer-cares-about-investors/], and there’s stuff happening there that’s barely being noticed. I’m barely seeing anything about it in the newspapers, and yet that’s just as important, right? There’s a lot going on at the Securities and Exchange Commission.
Kelleher: So, the Securities and Exchange Commission was created in 1933. There were two laws: 1933 and 1934. And by the way, I should say if anybody’s really interested in this—I hate to sound like a book reviewer—but there’s some great stuff. Diana Henriques wrote a terrific book last year called Taming the Street [https://www.penguinrandomhouse.com/books/611070/taming-the-street-by-diana-b-henriques/], which is a history of the SEC, how it came about, why it’s so important, and what happened during the Great Depression. It’s also a history of the American economy, a bit like David Leonhardt’s book. And it’s an easy read.
But the SEC regulates investor protection in our markets. And you asked this earlier, Paul: why should anybody really care given that so many of these assets are owned by the top ten percent? Well, as you know, we basically have an economy funding pipeline—a capital pipeline, if you will—in our economy. People all over the country come up with ideas, some of which fail and some of which succeed. Those that succeed need capital to grow so that they can take it from their garage to a local store, to a factory, and to global markets.
Krugman: Right.
Kelleher: When they start, they end up using angel capital or friends and family. Ultimately they get a good idea and a venture capitalist. And then the big success used to be your company would go public on the stock exchange. That’s how companies generated enormous amounts of capital—which is just a fancy word for money. They got enough money to grow their business, build things, and hire a lot more people. It’s how we built the middle class.
And that’s what the SEC regulates: the public part of that capital pipeline—the big public markets like the New York Stock Exchange and the NASDAQ. They regulate both the disclosure obligations and they police those markets. They do that because what happened in the 1920s contributed mightily to the 1929 crash and the Great Depression. It was basically people who were lying, cheating, and stealing with almost no regulation at all. The big banks were often multi-headed financial conglomerates doing self-dealing and conflicts of interest. Not only didn’t they disclose things, but when they did, they often lied and defrauded people. A lot of that ended up being basically what we would think of today as Ponzi schemes—nothing really there except the people running the firms enriching themselves.
The SEC was created to make sure we had well-regulated and well-policed markets so investors wouldn’t get fleeced, providing capital for businesses to grow. And until very recently, the SEC was the global gold standard for investor protection. Well, that’s gone. The SEC under Trump has now moved from investor protection to management protection. It is as captured as, unfortunately, the Fed in many respects. It is cutting back on disclosures and investor rights.
For example, they’re even interfering with proxy advisors. It’s very difficult if you’re an investor to keep track of the proxies at all the public companies. The big investors have to vote on director appointments or major policy questions, so they hire proxy advisors, just like you would hire an advisor for anything else. Well, the SEC is now interfering with people hiring advisors to give them advice on proxies. How can you say I can’t contract with somebody to give me independent advice? They’re interfering with that because it makes investors more dependent upon management.
Krugman: Just explain to me how that works. How is the SEC blocking that? I’m just curious because that sounds important.
Kelleher: It is important, and the details are on our website. But at a very high level, there are two big proxy advisor firms that have a large amount of the market. And what you would do is hire them to provide tailored advice. For example, if you were interested in companies that were socially active and cared about the climate, you could tell your proxy advisor you want advice related to that. If you were on the other side and you loved fossil fuels, you could tell them that and the proxy advisor will tailor it to you. You then pay them, right? What the SEC said in one of its proposed rules—I’m not kidding—is that the proxy advisor had to submit any comment about a company to the company’s management, and management had the right to comment on it. Well, it’s the exact opposite of independent advice. How that’s even constitutional is beyond me.
The proxy advisory firms have been engaged in litigation I believe in Trump I and in Trump two, about the restrictions that they’re trying to put on independent proxy advice. It’s just one example. I actually put out a report called The SEC is Demolishing Investor Protection, Threatening Capital Formation and the US Economy [https://bettermarkets.org/analysis/the-sec-is-demolishing-investor-protection-threatening-capital-formation-the-u-s-economy/], which detailed many of the actions they’re taking.
But the problem we have is that this isn’t just an issue for rich investors; it impacts the entire economy. One of the reasons people all over the world send their money to the United States capital markets is because they are well-regulated and well-policed. They’re not going to do that if those protections are gone. There’s already been reporting about people thinking about putting their money elsewhere. Now, because the US stock market is doing so well, you could argue it’s still a safe bet. By and large, there’s no other place that can compete robustly with the United States at the moment. Leave aside whether it’s a bubble or not. As an investment vehicle, it’s one of the top global places to put your money.
Well, that’s because—and this is what they don’t get, Paul—they are well-regulated and well-policed. You take that away, and you’re going to end up with crooked, rigged markets where you don’t know what happens to your money. And if that happens, that doesn’t just hurt the rich people who own most of the financial assets. That’s going to have impacts all the way down the capital formation pipeline to the real economy and people’s jobs.
Krugman: Okay. I was completely unaware that the SEC was doing all of that. But I just want to move on a bit. Better Markets has been writing quite a lot about crypto. Crypto has suddenly faded from public attention because there’s so much else going on, like AI. But crypto is still a two trillion dollar asset class. Talk to me about crypto and where it fits into all of this.
Kelleher: Well, to start with, we have been the tip of the spear fighting crypto since 2020. We were the leading opponents of FTX and Sam Bankman-Fried back in ‘21 and ‘22 when he was trying to buy all of Washington and get his predatory model approved by the CFTC. In fact, we were so much of a thorn in their side that Sam called and came into the office for ninety minutes to try to convince me to support him. Unfortunately, there are so few people active at the CFTC, which is where he was trying to get his predatory model adopted.
Krugman: This is Sam Bankman-Fried who came in to talk to you. Okay.
Kelleher: Yeah, him and his bipartisan phalanx of advisors, because he bought everybody. For ninety minutes he tried to convince us. We didn’t know about his crimes obviously—but he clearly had an entire business model that was financially predatory. It was basically: “If we get rid of all these customer and investor protections, I can make a lot of money.” And I was like, “Well, anybody can make a lot of money.” You could make a lot of money building buildings if you don’t put in fire escapes or fire doors. It doesn’t mean it’s a good idea. That was essentially what Sam Bankman-Fried was trying to do in the derivatives markets, and we opposed him.
He also thought he could bribe us; he offered us a million dollars or more. Frankly, I could have asked for twenty-five million bucks and I’m sure he would have delivered it in a paper bag. We said no. To my knowledge—and I don’t say this arrogantly, but in sadness—I think we were the only ones in Washington who didn’t take his money. He ended up in the right place.
But Better Markets has been out front on this because there is no legitimate use case for crypto. They’ve had 18 years to come up with one. They keep throwing things up like “an inflation hedge” or “source of stability.” Every one of them has turned out to be baseless. The only real use for crypto is tax evasion, money laundering, and crime. It’s the preferred mechanism of choice for global terrorists, sex traffickers, and rogue nations like North Korea and Iran.
You have to ask yourself why crypto has basically hijacked the political agenda of Washington. It’s because they followed the Sam Bankman-Fried model of buying bipartisan support by spending hundreds of millions of dollars in campaigns. And this is the astonishing thing, Paul, that people don’t know.
Krugman: Okay.
Kelleher: It’s the biggest bait-and-switch in history. In the hundreds of millions of dollars they spend on campaigns, they don’t mention crypto. That’s because they know crypto is toxic. Poll after poll shows crypto is toxic with the American people. Politico and the Wall Street Journal independently looked at the massive amounts of ads bought by the crypto industry supporting candidates in the United States, and not one mentioned crypto. Then they get their friends elected who come to Washington and say, “Crypto voters sent us here,” except not one voter voted based on crypto. They were mostly negative attack ads on extraneous issues.
So crypto has now basically hijacked the agenda. The amount of attention politicians give it is crazy. The Senator from Maryland was recently quoted as saying, “I’m spending virtually all my time on crypto.” If his constituents knew that, they wouldn’t be happy. So here we have a financial product of no social use and massive negative uses that is being integrated with our core banking and financial system. Now, I’m sure it’s a coincidence, Paul, that the President is getting filthy rich on crypto.
The problem is that the downside of crypto is not going to fall only on the people getting rich on it. Once they connect it up to the banking and financial system, which they’re doing across the board, we are going to see problems. In many ways, I think what’s happening now is worse than what happened before the ‘08 crash. Before the ‘08 crash, we had subprime. Well, we not only have financial craziness going on, we have this entirely new multi-trillion dollar financial product that has no value, is incredibly volatile, and is rife with conflicts of interest. It is going to be a core part of our banking system within the next twelve to thirty-six months.
Krugman: Okay. This is a broader question of what happened to the political system. Massive campaign spending, but also a lot of effective bribery. You’ve been going after that. And it is kind of shockingly bipartisan. I mean, obviously, nobody has ever been “bribed.” The bribery of Donald Trump is, as he would say, “like nothing anybody’s ever seen before.” But it does extend across the political spectrum. You’ve been writing about that [https://bettermarkets.org/?s=crypto], right?
Kelleher: Well, unfortunately, it has. Any ordinary person looking at what’s happening would think it was bribery. Unfortunately, it’s not technically bribery because the Supreme Court has made that almost impossible to prove in a political context. So we have politicians taking massive amounts of money from the crypto industry and then prioritizing their special interests over the American people. Poll after poll—and we have this on our website [https://bettermarkets.org/?s=crypto]—shows that very few people in America use or own crypto. These are not our polls; these are from Pew and other non-industry sources. Even the FDIC and the Federal Reserve’s own surveys show this.
If you look at the polls looking at what voters think, including one right before the 2024 election that looked at swing voters in six states, 68% of them had a negative view of crypto. That’s why crypto doesn’t mention crypto in its ads. But you have all this money coming into the political system, and now Democrats want that money too. Their view is: “Elections cost a lot of money. We need to neutralize this money cannon from crypto.”
Therefore, they deliver for them so the industry doesn’t fire that money cannon against them—or better yet, gives them some of it. They do that directly through campaigns, independent expenditures, and Super PACs. They also do it through the revolving door where the industry hires former public officials, including Congressmen and Senators. They purchase them like you go to a vending machine. They give them a ton of money, and next thing you know, they’re mouthpieces for the crypto industry. They also hire lobbyists who are family members of very important people.
There was a story that Senator Gillibrand’s twenty-two-year-old son has founded a company.
That company is being funded by billionaires and other financial types because apparently he has a brilliant idea and they randomly found him in a phone book, Paul. Everybody is pretending it has nothing to do with the fact that his mother is a powerful Senator from New York who is
the leading cheerleader for crypto special interests. She also happens to be the chair of the DSCC—the Democratic Senatorial Campaign Committee—which raises the money to elect Senate Democrats.
You can just read the media reports. You have to ask yourself: how are all these billionaires putting money into this startup? The spokesperson said these people are “longtime friends” of the son. When you’re twenty-two years old, how do “longtime friends” really work? Where do you run into billionaires? I know if you’re a Princeton professor they’re all over the place, but where I come from, running into a billionaire just isn’t common. Getting them to give you money for a startup at twenty-two might be the American Dream, but it ain’t working the way it’s supposed to.
Krugman: I’m not a Princeton professor anymore, and there are very few billionaires at the City University of New York. But okay, there’s so much here. Any quick thoughts about AI? It’s monopolizing attention, but where is the financial side of that?
Kelleher: I think in some ways it is monopolizing attention too much, and in other ways it’s not getting enough attention in the right places. We think that we’ve got a huge problem here. AI is inevitable; the real issue is what the safety features will be. Cars were a great innovation, but they killed a lot of people until we got airbags and protective glass. There is a fight now between people who think AI should proceed unregulated and those who think it should have regulation. We think you need a balance.
The American people are on to this. They know it’s going to impact them. For one, these gigantic data centers are sucking up electricity and driving up bills, straining the electrical grid to the point where the entire country could be subject to blackouts. But also, AI is going to have a very big impact on whether you get a loan or at what rate. It’s not just your energy bill; it’s your local bank. When everything becomes automated, how does a community bank keep up?
Community banks provide loans to the auto dealer or the local grocery store. They are going to come under enormous pressure because they can’t keep up with the infrastructure spending they’ll need. We have some ideas on how to strengthen them because they are so vital to our economy—providing 40% of small business lending. You lose community banks, you lose small business.
And then there’s the gigantic banks’ use of AI with infrastructure and spending. Community Banks are gonna need to make major investments if they’re gonna keep up. I mean, as I said earlier, forty percent of the lending to small business in the United States comes from community banks. You lose community banks, you lose small business, you lose community. So that’s just one way, but it’s all the way up the chain.
Another issue is that the people writing the algorithms are importing their own bias. Who’s guarding against that? There’s the “fat finger” problem where traders make mistakes, but who is testing AI machines pre-deployment? Representative Ro Khanna from California has made this point before, as have others. Truthfully, whether you like him or not, or you agree or don’t agree, you should listen to him because he’s got lots of thought provoking ideas on topical issues people really need to think about, and this is one of them.
It’s like thinking: “Let’s open a nuclear plant in our neighborhood.” Everybody would say you wouldn’t do that without checking a million things first. AI is the same, if not worse, because it’s less visible. Better Markets is putting out a “people-centered agenda” on how we should find the right balance so we can get the best of AI while avoiding the bad parts—many of which are unknown. We shouldn’t be putting AI on autopilot. And you know, just like we’re not letting cars on the road running on autopilot without thoroughly testing them and making sure they’re not going to kill everybody. We sure as heck shouldn’t be putting out AI on autopilot.
Krugman: Okay. This altogether makes me justifiably much more nervous.
Kelleher: Then, let me end on an up note. I thought your piece this morning on jury duty [https://paulkrugman.substack.com/p/an-encouraging-encounter-with-real] service was interesting. I’m optimistic because the vast majority of the American people are reasonable and community-minded. The problem we have is that there’s so much money flooding into the system, and that money represents the extremes. The extremes are buying the political system. We need to figure out how to get more Americans involved so the reasonable people can have civil conversations. I do think most Americans agree on striking a balance within a reasonable range. Our problem is a Supreme Court empowering billionaires, and we have a president that doesn’t care about laws, norms, customs, or rules.
What we’re trying to do at Better Markets—we just did this with our SEC campaign—is engage people. We engaged retail investors, and to our shock, two hundred thousand of them commented on an SEC rule. That is a historic high. So there are people out there, and we need to identify them and get them engaged. If we do, then I believe the core of the American Dream can be reflected in our political system.
Krugman:
I think that’s an upbeat note on which to end. Thanks so much.
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