David Bahnsen on the Incoming Trump Administration and the Financialization of the US Economy

David Bahnsen is a Wall Street veteran and is currently the managing director of The Bahnsen Group. In David’s first appearance on the podcast, he talks through multiple questions about the incoming Trump Administration, the problem with the growing indebtedness of the US government, shifts in the Republican party, the notion of financialization of the US economy, and much more. 

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Read the full episode transcript:

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. I’m glad you decided to join us.

Our guest today is David Bahnsen. David is a Wall Street veteran and currently the managing director of The Bahnsen Group. David is also a contributor to the National Review, the Acton Institute, and writes widely on markets and politics. David joins us today to help us think through what the Trump administration will mean for economic policy, as well as to discuss the ideal and notion of financialization of the US economy. David, welcome to the show.

David Bahnsen: It’s great to be with you. Thank you for having me.

Beckworth: It’s a real treat to have you on. You have your own podcast called Capital Record. My understanding is it’s affiliated with the National Review. Is that correct?

Bahnsen: Yes, indeed. We started it three years ago and just completed our 200th episode. I would add that one of those featured you, as you know. Capital Record has been National Review’s podcast attempt at addressing markets and these broader subjects in finance.

Beckworth: Yes. This show is long overdue. It’s been a while since I was on your show, but always a good time when I chat with you. I’m looking forward to getting you your very own nominal GDP-targeting coffee mug. Maybe that will come up at some point in the conversation as well. Before we get in, though, to what economic policy may be ahead of us with the Trump administration, the financialization of the US economy, let’s talk about you for a minute. Tell us about your career path to Wall Street.

David Bahnsen’s Career Path

Bahnsen: My first job in finance was at a firm formerly known as Paine Webber, which in my first year in the business was acquired by UBS, the Swiss bank behemoth. Stayed there for six years and built out a private wealth advisory practice, and moved to Morgan Stanley a couple of years before the financial crisis. From there, really grew a quite large practice and became a managing director at the firm and was there for nearly 10 years.

Then left as I was turning 40 years of age to start my own practice and start my own business. That was now 10 years ago. We were managing about $600 million at a team of eight people. We left Morgan. It was a friendly departure. It’s a great firm with a lot of still great friends there now, but I wanted something more entrepreneurial. We built that. Now we have 75 employees, 9 offices, and are managing $6.5 billion.

Beckworth: Fantastic. You are living the American dream here, huh?

Bahnsen: I believe I am. You know what’s fun is I’m living the American dream while working with other people who are living the American dream. It’s leveraged entrepreneurialism. I get to be an entrepreneur by working with entrepreneurs. It is a dream, yes.

Beckworth: Fantastic. You’ve contributed to the National Review over the years, and I’m familiar with the Acton Institute. For those who are not, it’s a think tank–like organization that connects moral foundations to markets. I actually attended one of their conferences in grad school. That was actually quite the experience, David, because they actually rejected me a few times. I wanted to go really bad to their weekend conferences, but they said, “You’re a grad student in economics. You’re not our target audience.” They finally relented, and so I was a beneficiary of their graciousness, and allowed me to participate.

Let’s talk about you a little bit more here because I was reading your bio and it was really interesting to read. As a young lad, you were reading the National Review. You were interested in economics and politics. That takes us back to a very different version of the Republican Party, when we were younger. I’ll call it Reagan Republicanism. If I had to define it, I think one unifying theme is a positive-sum view of economics. There’s gains from trade. Legal immigration is a wonderful thing for the US economy. It seems we’ve shifted to a zero-sum view in the Republican Party, almost a strain of mercantilism in it. I’m sure you’ve noticed a shift too. What are your thoughts and why do you think it’s come about?

Shifts in the Republican Party

Bahnsen: That latter question there about why it’s come about I think is the most important part. I think you’re identifying my background and my current state of thinking very accurately. I am, for whatever reason, largely affiliated, I think primarily because it was a very successful presidency with Reaganism. I think it is also just more traditional postwar conservatism that Bill Buckley at National Review was a firm advocate of.

There was a term used, I’ve discussed it on my Capitol Record podcast a lot, called fusionism that acknowledged a tension in some of the social order of conservatism that many of us believe is integral to the founding, but also a free-market commitment that at times forced difficult questions about the common good, about the objectives we have for a free society. Fusionism was an attempt to reconcile those things that I believe was largely successful, and I think philosophically is very compatible with the founding of America. In that sense, I identify as a Burkean. If we had a little bit more philosophically educated populace, then Burkeanism would be a better term than Reaganism.

In modern political history, that three-legged stool of social conservative, of strong national defense, and of a general appreciation for free markets is affiliated with Reagan. Your point on issues, it was a positive-sum view. Trade and immigration are but two examples. Then when you get to the question of what’s changing now, I think there is sometimes a bit of economic pretext thrown in, but it’s really post hoc.

I think that the issues largely driving a mercantilism, an economic nationalism is mostly cultural. That there is a frustration with some of the multiculturalism of the modern era and what is perceived to be an unfair distribution of the rewards of a more global economic order, and that takes its form of economic nationalism. I’m not convinced it’s actually driven by economic arguments, and certainly not by cogent ones.

Beckworth: That’s interesting. It may be as much of a cultural phenomenon, maybe a distributional one. That raises the question, do you think this is something that was long brewing? There’s many people who are critical of globalization, the opening up, the China shock, all the jobs in the Midwest, manufacturing belt that were lost. Others have also pointed out whenever you have a really sharp and steep financial crisis, there tends to be a slow recovery as well as a rise of populism. Do you think those things were key as well in shaping this narrative?

Bahnsen: I do. I think that there is a cultural narrative that has a complexity to it because of a number of different things that are not necessarily related but overlap with one another in history. If you look at initially the New Deal and then the Great Society, and then add to that the cultural occurrence of the sexual revolution, I think there was a very significant downward direction in terms of the priority of family and community that coincided with what we now refer to as globalization. It becomes a very difficult issue for economists to assess causation. It is riddled with opportunity for posthoc fallacies.

The fact of the matter is that when we talk about, let’s say, manufacturing and the share of US employment derived from manufacturing, from World War II until the ’90s, it was on a sharp downward trajectory. Yet we then take NAFTA in the mid-’90s and China entering the WTO in the early 2000s, and apply causative properties to the downward share of manufacturing as a share of employment when, in fact, it had been dropping precipitously for decades well before those global events.

I do think that it’s understandable in human nature that we want something to blame, often someone to blame. I believe that the cultural issues around immigration that essentially separated American immigration from Ellis Island immigration, that there was a strong economic advancement from immigrants coming in and becoming both producers and consumers in our society.

This strikes me as almost completely undeniable, one of the most noncontroversial economic statements we could say, but it was not toxic because there was a real Americanism in that immigration, and there was a desire for a cultural assimilation. The multiculturalism combined with broader immigration in a democratic society of the last 40 years, the enhanced welfare state, and I think a lot of resentment that many have about that nonassimilation, that to me is a much bigger driver of the resentments that take their form in economic nationalism now.

Beckworth: Do you think this is going to persist? Because this sounds a lot more cultural, your understanding of it, than what I was relying on, that was, oh, this is an economic phenomenon. Eventually, the economy will do well, everyone will be happy, we’ll begin to love the immigrants again, things will be hunky-dory, populism will fade. But you’re suggesting it’s a little more complicated of a story.

Bahnsen: Although I would say that my theory of the case of being a bit more complicated and having a lot of cultural causation is not inconsistent with your theory that populism will fade. You had brought up the great financial crisis. It is my view that that was the seminal moment in our adult lifetimes. I think that it is impossible to assess the current, and not just US populist moment, but global populist moment, apart from an understanding of the decline in standard of living that took place when 3.1% real GDP turns to 1.6% real GDP, when, on a global level, net of inflation and economic growth takes the secular decline and moves into what is appearing to be multidecade stagnation.

Not recession, not a deflationary spiral, but a stagnating of growth, and therefore the opportunity and quality of life standard of living that comes from such growth. Those are the moments in which things like populism resurge. Should there be economic events that reverse that, I am not convinced that resentment and wealth inequality concerns will stay. That when everybody is doing better, I think there’s a lot less focus on the distribution of those spoils. At least there has been throughout history.

The problem, of course, is that we have had a very difficult time getting a broadly distributed increase in quality of life. That there are major policy errors, I think, over the last 15 years that have facilitated greater resentment because even where there is economic growth, it does not feel like everyone’s sharing in those spoils.

Trump Administration 2.0 and Growth, the Fed, and the Financial Sector?

Beckworth: I want to move on to what the future holds with the Trump administration, but one last question while we’re here on this point about the rise of populism, its causes. One potential solution we just touched on is the prospects for robust economic growth. You might be hopeful, right? We got AI, we have an investment boom going on. What is your outlook for the next, say, five years? Are we going to get that robust economic growth that may take us to a different place?

Bahnsen: What’s interesting is I’m more potentially optimistic about five years than I am 10. Your optimism is supposed to be heavier weighted to the longer time period you afford yourself because there’s time for more things that can go right, and especially when you have a high view of human progress as I do. The reason why three to five years as an intermediate period is potentially more optimistic is some of the things you said. There are opportunities. I don’t want to call them sugar highs, but there are opportunities for substantive increases in productivity.

Yet those things are up against a headwind that I think is more long term than intermediate term in its negative effects, and that is the drag on growth from excessive government indebtedness. I don’t think we have any plan for dealing with the contraction from GDP that this excessive indebtedness represents. It’s a term that I’ve used many, many times in my own writings, Japanification, that we have a forced use of both fiscal and monetary policy tools that I think represent hair-of-the-dog economics.

It is necessary to policymakers to feel like they’re doing something and to kick the can, but it does have the effect of putting a drag on forward growth. And yet there is almost no way to avoid paying the piper on not just what is now an accumulated $36 trillion of debt, $28 trillion of public debt, but still adding to that with a budget deficit as a percentage of GDP in a time of nonrecession and nonwar that is simply unfathomable. That is the negative headwind that I think about in terms of five, 10, and 20 years, but in three to five years, there are a lot of positive things that could happen by way of productivity.

Beckworth: That’s interesting. I thought you might say the big worry is the decline in population growth rate.

Bahnsen: Well, it is.

Beckworth: That’s just adding more fuel to the fire on top of the debt worries that you have, I suspect—

Bahnsen: The birth rate is both a concern and an opportunity. I’m not Pollyannish about it, but I’m also not fatalistic. The US has had a very weird—partly because of our religious pluralism. We can go from three kids to one and a half kids per household decade by decade. The way in which the fertility rate changed from the baby boomers to Gen X to where we are now, I don’t know that Gen Z is going to follow Gen Y in, first of all, not getting married until much later, and then having one to two kids per household instead of two to three kids.

It’s very possible, and that component of population growth would be very bearish on my economic outlook if it were to continue. Maybe Gen Z will decide that the very low birth rate of Gen Y did not exactly make them happier and will reverse course. I see it as two sides to the coin.

Beckworth: I appreciate your optimism as we record this here as we begin the new year. Let’s hope we do see a pickup in fertility rates. I guess my big hesitation there is I think there’s a lot of reservation about having families because of the housing stock and the price. It seems to be a big deal. 

Let’s move into Trump because I want to spend some time there discussing what you expect to happen. We have already touched on one of the areas, and that’s debt and deficits. It seems to me this is something that won’t be addressed, as you suggest. I want to talk about DOGE in a minute, but what I’ve seen so far, nothing they have discussed has included what would be needed to really rein in the debt-to-GDP ratio, and that would be entitlement reform, fundamentally. You can nibble on the margins here and there on discretionary spending, maybe reducing federal employees, but that’s really not going to make a big dent. Do you see any prospect for them ever addressing entitlement reform?

Bahnsen: Not in this administration. If a president runs on a basis of I’m going to address entitlement reform, there’s still a chance they won’t do it. When a president runs on the statement that they’re not going to address it, that’s a promise I think you have to assume they’re going to keep. Nobody wants to address it. President Trump was perfectly willing to just say out loud, “I’m not going to address it.” In the semiprimary that they had, he was extremely critical of a couple of the candidates that did claim that they wanted to take it on.

This is a major shift within the political right in 12 years since Paul Ryan was famously demonized by the left for pushing granny off a wheelchair in commercial ads by daring to talk about various knobs that needed to be turned to assess the fiscal stability. By the way, I do not blame President-elect Trump alone here. The most bizarre addition, you could call it rank and crass politicking with the Paul Ryan commercials and efforts of the left 12 years ago, but it was President Obama who appointed, with a lot of political capital, the Simpson–Bowles Commission.

It was a very serious effort to assess the situation. It was bipartisan. There were things that were out of that commission that I wouldn’t have agreed with necessarily, but I very much agreed with their approach to the seriousness of it and the idea that there were going to be some painful policy prescriptions necessary to fix that unfunded liability in Medicare and Social Security. That President Obama dismissed his own commission’s findings really put us on a path where everybody’s very content to kick the can all the way up to the point of the Reaganite party running someone very popularly who said, “No, I’m not going to touch this. We’re not going to look at it.”

There will be a moment where entitlement reform is addressed. It’s entirely possible that it’ll be a topic in debates in a 2028 election. It’s also entirely possible that, like Fannie Freddie, it ends up getting dealt with by a future president who ends up with a gun to their head, or Congress with a gun to their head, with the American people dealing with a crisis as opposed to some form of preemptive addressing. Two things are true at once here. It’s the most important thing I can say on this topic. One, there is no resolution or solution ever coming that doesn’t involve some pain. Two, right now we could fix it. There is a spreadsheet and math that can fix it. There is not, however, political will.

Beckworth: Yes. What you said earlier, that we may have a nice run over the next five years due to the AI boom, investment boom, that may provide enough of a cushion to make it easy to put off the hard decisions. If we think of debt to GDP, if GDP, that denominator, is going to be growing pretty rapidly, then there’s less urgency on behalf of Congress, the voters to make any change. 

Let’s talk about some of the appointments, and specifically related to financial policy and use that as a segue to talk about financial policy more generally. At Treasury, we have Scott Bessent, the SEC, Paul Atkins. Also, just an interesting story that came out last week in The Wall Street Journal, the Trump administration is considering consolidating the federal banking agencies, the regulators, at the federal level. A lot of people freaked out. Now, what they did not say is they’re going to get rid of deposit insurance, but that was the takeaway from many commentators. What they are saying is let’s consolidate, maybe move deposit insurance to another agency. What is your sense of where this is all going?

Bahnsen: What’s funny is that article and many of the follow-on articles that came had almost no sources or quoted people. Myself being in almost daily communication with some of the folks inside of the incoming administration and the significant economic policy advisers to the president-elect, I thought it’s funny that they’ve never brought this topic up at all. It’s very necessary. The alphabet soup of financial regulatory apparatus is one of the most ghastly, inefficient, and bizarre forms of regulatory arbitrage, cronyism, and just inefficiency available for observers to see.

FDIC, if it were to be placed under another home, let’s say Treasury, with more direct oversight, there is no attempt and no effort to eliminate depositor insurance, whether people believe it should or should not be. In fact, given the populism and those instincts of the president-elect and some of his people, I would not be surprised if they sought to expand deposit insurance level.

Beckworth: Wow.

Bahnsen: We already saw, by the way, in the Biden administration, it was done in accord with FDIC, Treasury, and the Fed—whenever things get hairy on a weekend and it’s a Sunday afternoon, all three parties are always involved. There’s precedents I could get into in the last 15 years of my own career that attest to this. With Silicon Valley Bank fall, nobody blinked at them expanding unlimited depositor insurance on the troubled bank as a means of not protecting Silicon Valley, which was already put into FDIC receivership at that point, but basically to calm the run on the bank that was taking place at other midlevel and regionals and even superregional banks.

That systemic risk factor is still the largest driver of what keeps most central bankers up at night. There is just no president in our lifetime who is going to allow a systemic amount of depositor losses. I wouldn’t be surprised if Congress sees it as an opportunity for a tradeoff to say, “Let’s just codify that too-small, -medium, and -big-to-fail reality, there’s no political will to allow bank failures. Why not make it official and gather a greater either fee capturing component out of it, or at least a regulatory component out of it?”

Beckworth: While we are on banks, let’s talk about choke point 2.0, or debanking, which has become really popular. Now, it’s been an issue for some time. Marc Andreessen discussed it on the Joe Rogan show and everyone came out to say, “Oh, yes, I’m a party to this. I’ve been victimized. I’ve lost my banking privileges.”

Just in general, there’s been these concerns about the politicization of financial policy more broadly, not just debanking. The SEC, for example, I mentioned Paul Atkins will be leading it in the Trump administration. Maybe a different view toward crypto. What is your sense? Do you think the Trump administration is going to make a concerted effort to depoliticize, at least how they view it, across the financial federal agencies?

Bahnsen: I think there’s two different topics that you brought up there. The deregulation situation is very important in terms of economic growth and the return on equity that is available to banks. Most of our banks right now is a blended asset class as a sector, trading about two times book value. They spent most of the time since the financial crisis trading at one times book value, or somewhere between one and two. Yet precrisis, most were trading well over three times.

You have expanded multiple in recent years, but still very contracted, and yet that is almost perfectly in concert with their return on equity. They simply can’t do that much to make money. It’s a very boring business, and without being able to take risk with their own balance sheets, there’s not a lot that can drive it more. Now, the big megabanks are diversified.

When you look at the J. P. Morgan’s, for example, that have an investment banking franchise and institutional securities and trading franchise, and then of course, just the massive deposit behemoth that makes them a lender and a depository institution that captures a lot of net interest margin, there’s a high capacity for profits, but not a high capacity for profit growth.

That in a post-Dodd–Frank and just post-GFC environment is mostly the way people want it. What you had is financial innovations, and I think this is going to end up becoming something we talk about when we get to my recent paper on financialization, where financial markets innovated on their own to move a lot of risk-taking in the economy off of the balance sheets of banks and off of depositors and into elements of the private economy that I think are very safe and isolate risk where it ought to be, which is with risk-takers.

The banking sector can benefit from deregulation. The depoliticization element presupposes that there’s been mass politicization. I would argue that there has been rather outlier incidents. I know this because I brought a shareholder resolution against J. P. Morgan. I’ve been a heavy shareholder of it myself for over 15, nearly 16 years, since right out of the financial crisis. We own well over $100 million of it at my firm.

There was a famous debanking incident that allowed us to bring a resolution to ask them to investigate what was going on and basically come up with a really solid plan to stop it. Their C-suite said, “It isn’t happening. We have no policy against it.” I said, “Then great. You shouldn’t have any problem with my resolution.” They denied putting my resolution on the ballot, which was a really silly thing to do.

We sued and the SEC ruled in our favor, which then allowed it to become a front-page Wall Street Journal story. It put me on Fox and Bloomberg and everything, being able to talk about it a lot, and ultimately got Jamie Dimon, CEO of J. P. Morgan, to say, “Where these things that happened, they’re not going to happen anymore. People lose their jobs over it.” They had bought a payment processor that had some really stringent rules where they could stop accepting payments for people that apparently violated certain speech and other belief guidelines. They got rid of all those guidelines.

We were just very impressed with the steps that were quite actionable taken by investor relations in the C-suite at a behemoth bank like J. P. Morgan. I’m a little hesitant on this broader subject, I heard Marc’s comments to Joe Rogan, because I run a private wealth advisory firm and I do not want anyone telling me who I have to work with. I made the mistake of openly soliciting for people to share their stories with me if they had been debanked and I got blown up with hundreds of people saying things that happened.

It was well over 90% of the time that when we investigated, it was people who weren’t providing paperwork and weren’t complying with the KYC rules—know your customer—where just there are certain requirements necessary to open a financial account in our country. Politicization of our banking system is a problem. Free speech is a very important thing. There’s a way in which those things can be held in tension in a free society.

I’m afraid of overly egregious stuff that will make banks work with people they don’t want to work because as a wealth manager, I don’t want to have to work with certain people that I chose not to work with. That freedom of choice is also an important component in our aspiration for society.

Beckworth: Let’s move on to the Fed. We’ve talked about the Fed before on your program quite extensively, but I’m wondering what you think the Trump administration will mean for the Fed.

Bahnsen: It’s a very interesting timing that Chairman Powell, who President Trump famously jawboned with quite a bit in his first term, particularly in 2018 when Chairman Powell was in the midst of tightening, Chairman Powell became quite an ally to the Trump administration’s economic agenda, whether intentionally or not, in 2019, well before COVID, when his quantitative tightening reversed the quantitative easing again. And when he reversed course on rate policy and moved a dot plot that had a 2.25 Fed funds rate that was supposed to get to 3.5 instead back to 1% where it went in advance of COVID. Then, of course, he famously went back to ZIRP.

My bringing this up is not to say that he was right or wrong in any of these actions, but as much to just simply say that there was this tension. Now you have a Federal Reserve chairman whose term will end in May of 2026, so let’s call it 16 months into the new president’s term. I believe that there’s no question that President Trump intends to nominate Kevin Warsh, my old colleague at Morgan Stanley, as the next Federal Reserve chairman. Kevin was a Fed governor before in the Bush administration. He is a very competent economist and one who I think President Trump will be naming.

Then that leaves 16 months for Chairman Powell where, by all indications, Chairman Powell was well before the election intending to spend 2025 cutting rates. There’s almost coincidentally no opportunity for President Trump to conflict with Chairman Powell. I don’t agree or approve of some of the ways President Trump has handled this in public communication, but every president wants the Fed chair cutting rates.

Every Fed chair wants easy policy. This is a Nixon–Burns dynamic. This is a Reagan–Volcker dynamic. It was quite on display with Clinton–Greenspan. Then a lot of our zero-rate policies over the years were not about a president enjoying it, but as much as we were in the midst of this massive deflationary spiral out of the GFC where they just happened to leave rates very low for a long time. I don’t think anyone liked what was predicating that, but it was a different political environment, obviously.

The Fed is going to be continually politicized. People are going to disagree or agree with actions they take. I think Chairman Powell, whether we had a President Harris or a President Trump, was going to see a Fed funds rate by the end of his term with a three-handle on it. That is a nonpolitical policy objective. He will get the Fed funds rate down another, from where it is now, 150 basis points, or at least 100, by the time he leaves this chairmanship.

Beckworth: It’s been reported that Trump wants to be involved with the FOMC decisions. Maybe you were alluding to this when you talked about his communication on this issue. Is that just, again, unfounded reporting, or is that just presidents being presidents, and we can expect the Fed to be independent? When Kevin Warsh takes over, will he be resolute and say, “No, Mr. President, we have to do this policy because this is what’s optimal for the economy”?

Bahnsen: I would add the compliment I’m about to give Kevin Warsh to J. Powell as well because I think it’s appropriate to say about Powell: A lot of this is the skill that goes into managing that communication and managing that relationship with the president. I think it is inappropriate for the president to have his finger on the scale. The Fed chair has to, all at once, not allow interference to affect those determinations, but recognize that there is a public dynamic playing out.

I’m one who does not believe it is as simple as the Fed is doing what the White House wants, and at the same time, the notion of the Fed being completely depoliticized, I think, is a fantasy. Will Warsh be able to resist temptation to see the president recommend something that he deems to be inappropriate monetary policy? I have no doubt he would, yes.

Financialization and Missed Boats

Beckworth: Let’s move on to your paper. Your paper’s title is “Financialization and Missed Boats: When Mythology Papers over Reality.” Why don’t you give us the executive summary of it, and we will work our way through the sections?

Bahnsen: I believe that there has been a resurgence of critique of financial markets that the term financialization is often attached to. This has been reasonably common from the left for some time, and then it’s become much more common from the so-called new right, sometimes very populist, sometimes very nationalist. Nevertheless, they share a foe with the Elizabeth Warren left.

That is basically, for shorthand, referred to as Wall Street, more specifically financial actors across the economy, whether it be the banking system, whether it be asset managers, whether it be the hedge fund community, and, of course, everybody’s favorite over the years, just the major Wall Street firms and investment banks themselves. I think it takes on a really popular approach in that it lacks specificity. To the extent that critics of financialization use rhetorical weaponry well because it taps into a stealth class warfare is fair game, but it’s on the cheap and easy to come by. Just in a covetous society, it’s not very hard to demonize Wall Street.

It wouldn’t be much different than just a generic demonization of wealthy people. But in this particular case, still not all that far removed from 2008, and in the context of new terms—BlackRock, private equity, high-frequency trading—it’s almost like when you used to be able to just say Goldman Sachs and you didn’t have to say anything. You just said the term Goldman Sachs and people assumed that there was something villainous in the air. It is anti-intellectual and unfair, and yet what I tried to do in the paper is dig deeper into what the real policy critiques are.

What I found is that where they actually get past rhetoric and into specific policy critiques, they’re almost entirely wrong. Not only are the things that they’re demonizing not harmful in the way that it is being described, but are often significant net positives to society and the economy. 

Then more egregiously to me is what they don’t target, which is what I’m willing to target, which is those things that actually are contributing to unproductive economic activity that puts downward momentum on economic growth. I, all at once, argued that what is deemed financialization is poorly deemed as such, and that what is truthfully financialization is almost entirely ignored.

Beckworth: You mentioned private equity, hedge funds, high-frequency trading as examples of activities that get this label. Would you also add some of the interest from progressives in the crypto world? Is that something different, or would that fall under that category?

Bahnsen: To me, it’s very different. This could end up being a rabbit hole, but I’m perfectly content for a highly deregulatory approach to crypto as long as it is done with what I think all risk-taking should be, which is an absolutely vicious sense of risk-takers holding risk. Less regulation, no problem, just make sure that people who suffer suffer. There’s nothing remotely systemic about it. It is not in the banking system. It will isolate losses.

Where I would make a difference is I can make an argument for production of goods and services that are growing the economic pie with private equity, with M&A, with investment banks, with hedge funds, even to a sense with high-frequency trading to the extent that it contributes to better liquidity and market-making in society where capital becomes a tool toward these aims of goods and services being produced. I don’t feel that way about crypto, but I have no problem with those who do wanting a less-regulated environment. But crypto is not wealth-building.

Beckworth: We will avoid the discussion of the Strategic Bitcoin Reserve on this show. We’ve covered it on a previous one, but I think that would be an example of something along those lines. 

Let’s go to the topics and the examples you bring up. So practices like dividends, stock buybacks and mergers, acquisitions: Explain the story that should be told as opposed to the one we get with financialization.

Bahnsen: It would be very useful for people to remember when we talk about dividends or stock buybacks, I have a little added authority here in the sense that I’m a huge defender of stock buybacks, even though I’ve built a career and a multibillion-dollar business doing something very different. In the sense that I believe dividends to be a superior mechanism of returning capital to shareholders from the investment merit standpoint. In other words, if I were talking my book, it would behoove me to join the fray in demonizing stock buybacks since they are somewhat in competition with the investment vehicles that I prefer for myself and my clients, which is dividends.

Regardless of what we’re talking about between dividends and stock buybacks, in both cases we’re talking about a company decision around the use of after-tax profits. If what we are demonizing is the profits themselves, then let’s say so, that we believe companies make too much money or we believe that they are not paying enough in wages, and so there is too high of profits because we have a certain view on what labor policy should be or whatever else.

The fact of the matter is that dividends are a return of capital to risk-takers. They are a form of income to passive investors that are minority investors, that attract capital, create capital formation, and allow for financial markets to, at the basis of the promise of this cash flow, attract capital that is necessary to create the profit-making endeavors to begin with, that allow for the after-tax profits from which the dividends end up being paid. There’s a life cycle of economic activity here that is entirely missed by critics of dividend payment where I believe the vast majority of them are mistaking their real critique, which is a Marxian critique of profit-making, not of what companies are doing with their after-tax profits. 

Why these financialization camps I’m describing would want companies to not distribute after-tax profits to shareholders and instead hoard them, or continue to reinvest in activities until they’re able to set money on fire, or do an excessive amount of CapEx above and beyond the rational use of capital that is deemed to be most efficient by the stewards of that capital is beyond me. I’m constantly being told about corporate greed, so why would we not want these companies to distribute and part ways with the capital as a means of mitigating corporate greed and control because they’re returning capital to their highly democratized ownership base? 

Now, with stock buybacks, there is first and foremost the massive problem that people do not realize that almost all stock buybacks are running in place. That they are not goosing earnings per share by excessive amount of stock buybacks. They can only buy back stock with after-tax profits, and that there is such a heavy democratization of ownership in companies via restricted stock units, incentive stock options, and other forms of equity compensation that has been put to the masses of companies, not just the C-suite. There are stock option plans available to employees of almost every publicly traded company, and that stock is largely replaced with company stock buybacks.

It also, of course, is a vehicle of returning capital to shareholders tax-efficiently, because you do reduce the share count denominator when you’re doing stock buybacks net of new stock issuance through compensation, and therefore increase the amount of earnings per share that is available to the owners of the business. 

None of this is remotely nonproductive. None of this is something that any of us could even fathom a senator in Massachusetts or congressperson in Ohio having a greater sense of what is in the best interest of the companies and their efficient allocation of capital than the stewards of the business and the owners of the business who have that skin in the game.

That stock buybacks are pitted as something against the best interest of labor is Marxian false dilemma, and ultimately blatantly ignores the testimony of modern history that a significant amount of laborers have gotten wealthy owning stock in Apple and Tesla, and not to mention countless, much smaller and less high-profile companies.

Beckworth: I find that very convincing, David. But people still talk about financialization. What are the real culprits here? What are we missing, confusing when we still have that instinct?

Bahnsen: I believe that the excessive government indebtedness that I brought up earlier in our conversation is the culprit. That to the extent we all recognize we need a government, and there is a cost to that government, and preserve the liberties and secure the rights that we read about in our Constitution and believe in a civilized society, let alone a superpower like America, there will be a cost, but that there are tradeoffs. When that cost as a percentage of GDP exceeds certain levels, it puts downward pressure on growth. I believe postfinancial crisis has led to various decisions in both fiscal and monetary policy that redirect assets out of their most productive use.

Fundamentally, when capital is directed into something that is less productive than would be natural, it is, in my opinion, financialization. If we were to have an excessive amount of monetary accommodation that motivated risk-takers to leverage up incumbent assets as opposed to creating new assets, that is financialization. This does beg a lot of questions, I recognize that, as to what the natural rate is, what the natural rate should be, what the role of a central bank and setting it should be.

I’m far more open to issues around nominal GDP targeting than many of my friends in the Austrian school might be, but I will say this. What I don’t want is monetary policy to be used as a mechanism of facilitating excessive government debt at the expense of an optimal allocation of capital. I think that that is what has happened. More risk-taking, more business investment, more CapEx, again, being directed by stewards of capital that are rationally allocating resources, these are all good and noble things.

I think that when we distort the price of capital and when we distort the resources available in the economy because of excessive government indebtedness, that is a term that would be appropriate for financialization. In other words, if the most famous users of the term financialization in elected government are Liz Warren and Bernie Sanders, they may be the most guilty culprits of it.

Beckworth: Let’s park there for a few minutes on this debt issue because I do think it’s important. How do you make sense of the fact that we’ve had these large peacetime, nonrecessionary-time deficits? Huge. Several trillion dollars. In fact, our interest payments on the debt are close to $1 trillion. It’s more than defense spending. Crowding out prospects, fears of fiscal dominance kicking in.

I don’t think we’re quite there, but it definitely seems closer, making the progress toward that outcome. Yet I look at a 10-year treasury and it’s just above 4%. How do I reconcile what the market is telling me and what seems to be hard facts on the ground that we’re getting closer to a world of fiscal dominance?

Bahnsen: I think that right now, the fact that the 10-year is sitting around 4% reinforces the point I’ve been trying to make for most of our time post-GFC, which is 4% is on the high side of the 10-year over the last 15 years. While we flirted with 5% for a few minutes in the Fed tightening cycle of the last two years, the fact of the matter is that well after QE3 wrapped up, with the Fed providing absolutely no purchases on their balance sheet of Treasury issuance, we were with a two-handle on the 10-year for years and years. 

I believe that the longer end of the curve is ultimately a measurement of the structural expectations of the economy. In other words, nominal GDP. If expectations 10 years out are for 3% to 4% economic growth, I believe you will have a 3% to 4% 10-year regardless of where they set the Fed funds. That the Fed funds can be set to manipulate and alter and affect the short end and of course most short-end borrowing, but that the structural expectations of the economy, right now the bond market and the trillions of dollars associated therewith—the Fed is a net seller by the way right now, not a net buyer. We still, even though it’s very modest levels, are in quantitative tightening. I think that goes away here in the new year of 2025. Regardless, the Fed is not controlling the long bond rate with Operation Twist or quantitative easing. They’ve been a net seller via roll-off of the balance sheet. 

The economy, the market, insurance companies, banks, and private savers are the ones indicating that they expect something closer to 4% nominal. If you get the Fed’s inflation target of 2%, you’re talking about real GDP growth of 2%, and that assumes the rate holds at 4%. I think it is headed to 3.5%. Therefore, one could conclude that we are looking at 1.5% real GDP growth. Again, half of our post–World War II average for the years ahead. That to me is the economic story of our day.

Beckworth: Circling back to the financialization story, I wonder what you think its future is. A lot of the demonization comes from people that you mentioned pointing out problems, and people latch onto those as opposed to all the good that the financial sector is doing for the US economy. Do you see any developments, products? For example, after the great financial crisis, there was talk of more state-contingent debt instruments, so your student loan is tied to your income.

I believe Robert Shiller had a book where he argued for income-based GDP bonds where a country would pay based on what it was actually producing. Innovations like that or in the crypto space, what do you see the future of this, and will it lend to a more favorable view of the financial sector?

Bahnsen: That last part is a tough one because I generally believe most of the negativity in our financial sector is associated with class envy. I don’t think that’s likely to change. I do think that a positive development in the next four years will be that I don’t think any of these things about financialization and some of the demonization of our financial sector are shared by the president-elect. There could be opportunities for lip service. I do think his vice president might be sometimes a bit more comfortable with some of that rhetoric. Again, even the vice president-elect is a venture capital professional that has a rather sophisticated understanding of financial markets.

President Trump himself is obviously a lifetime real estate mogul, used to dealing in complicated debt markets and whatnot. He put Gary Cohn as head of his NEC at the first term and then immediately moved to Larry Kudlow. Kevin Hassett has been named the NEC head now. Scott Bessent is an extremely famous, well-known, and successful global macro trader coming in to run Treasury. For all the populist rhetoric that’s associated with trade and immigration in the incoming administration, I don’t think they share a demonization of financial markets.

What would keep the populist rhetoric alive against private equity and just Wall Street, in general, would be if you continue to have lower-income spheres stagnating while higher-income spheres grow. The trend in the first Trump administration was good real wage growth at the bottom deciles of wage earners. I’m reasonably optimistic that some of the intensity of class angst can go away. Not permanently though. I think it’s embedded in the human condition, unfortunately. 

Look, we are benefiting right now as a society immensely with the amount—and this is in the trillions of dollars now—of private credit that is extended to largely productive activities that is outside the banking system. There are private investors that are able through the asset management tools, not commercial banks, to lend to projects that commercial banks are unable to, either because of risk-weighted capital or other factors around liquidity. You want vibrant capital markets investing both debt and equity into these types of projects. This is an evolution that has taken place outside the political sphere. What could go wrong? You’ll have losses at some point, private credit, and will then people use those losses as an opportunity to try to regulate or just allow risk-takers to absorb losses, for God’s sake? That will be the need of the hour.

Beckworth: That is a great statement to end on. Let’s let risk-takers absorb the losses they make and let’s let the financial sector do what it does well for the economy, support economic growth. With that, our time is up. Our guest has been David Bahnsen. His paper title is “Financialization and Missed Boats: When Mythology Papers over Reality.” David, thank you for coming on the program.

Bahnsen: Thank you so much. Really enjoyed it.