684. He Helped Clean Up the Last Crash. Does He See Another One Coming?
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Why is the finance sector considered the most interconnected part of the U.S. economy?
The US economy is made up of twenty different sectors, as the government calls them. There is the agriculture sector, manufacturing and construction, healthcare, transportation and energy. One of these twenty sectors is fundamentally different from the rest. Why? Because it intersects with every other sector with an intensity and at a scale that we have never seen in human history. I am talking about the finance sector. Listen to Gary Gensler.
Finance is a critical piece of American exceptionalism. We're about four percent or so of the world's population. We're twenty-five percent of the world's economy, but we're fifty percent of the world's capital markets.
It's easy to argue, and some people have, that we are living through the greatest period of wealth creation in history. The financial markets that support this growth are exceedingly complex, and few people understand them as well as Gary Gensler. He spent the first eighteen years of his career at the elite investment bank Goldman Sachs. He first got into government work in 1999 when his Goldman elder Bob Rubin recruited Gensler to the Treasury Department. After the 2008 financial meltdown, Gensler was asked to help clean up the markets that drove the crash. Barack Obama installed Gensler as chair of the CFTC, the Commodity Futures Trading Commission. And later, during the Biden administration, Gensler chaired the SEC, the Security.
Securities and Exchange Commission. Now he is a professor at MIT with a specialty in financial booms and busts.
The debate really is when do you have these booms that lead to just recessions and when do you have these booms that lead to real washouts? I wanted to speak with Gensler about the AI boom in particular. That's the big financial risk in the economy right now. And why is AI such a big risk? We have a parlay bet right now. It's that the model companies like OpenAI and Anthropic and so forth, and the hyperscalers like Microsoft and Google, that their capital expenditures will lead to enough revenues. And the second part of the parlay bet is That it will also lead to sufficient productivity gains in the economy in the near term. I'm not talking about in ten and twenty years. In the near term, enough productivity gains to make up for what is gonna happen.
So what is going to happen? Today on Freakonomics Radio, we get Gary Gensler to help us sort that out.
This is Freeconomics Radio, the podcast that explores the hidden side of everything, with your host, Steven Dubner.
All right, let's start with Gary Gensler's birth. October of 1957, the same month that the Soviet Union put Sputnik in the air. And the same year, 1957, that you start with artificial intelligence.
Gensler is off by a year on what people consider the birth of modern AI. That was 1956, but that's not his point. Few people
Really think AI is as old as I am, or that I'm that young. Aaron Powell And now Gensler is working at one of the epicenters of the AI revolution. Aaron Powell I'm not a card-carrying PhD, but MIT saw fit to take this old math guy and make me a professor of the practice. And I guess you don't view me as a competitor, but Simon Johnson and I started this podcast. Power and Consequences. Oh, I know. Listening to it. I like it a great deal. Well, thank you. I mean, we just try to do explainers and we're broadening out and inspired by what we do with students. But I think there's an overlap of what we're trying to do. We use data, narratives, we use historical narratives a bunch. To me, history helps inform thinking about the present and mostly what it means about the future.
I was wondering if you could just compare how it is for you to navigate three different systems, academia now, government service for a long time, and before that private sector Goldman Sachs for a long time. Aaron Powell First is similar.
I've been blessed by working with people of very high caliber professionalism. The Goldman Sachs Merger Department in its day was like the green beret of MA bankers working on various campaigns and political efforts, even when we lost, but working with really talented people.
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Chapters
8 chapters
1
Why is the finance sector considered the most interconnected part of the U.S. economy?
0:04–6:52
2
How does Gary Gensler view the current AI boom as a financial risk for the United States?
6:52–14:25
3
What were the biggest market‑structure reforms Gary Gensler helped implement after the 2008 crisis?
14:25–21:11
4
Why does the rapid rise in AI‑related capital spending threaten future economic growth?
21:11–27:20
5
What would a pre‑mortem of a 20% market correction reveal about the sources of risk?
27:20–33:59
6
How does U.S. AI investment compare with China’s, and what does that mean for competition?
33:59–39:59
7
What challenges did the SEC face regulating crypto and why were many rules overturned?
39:59–46:40
8
Should prediction markets be allowed to exploit insider information, and what are the costs?
46:40–1:06:55
Speakers
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