Debunking ZIRP

Francis Zierer and Daisy Alioto in conversation with Joe Weisenthal, one half of Bloomberg’s Odd Lots podcast and one of the biggest names in Finance Twitter.

In September, Francis Zierer and I interviewed Joe Weisenthal for Tasteland. Joe is one half of Bloomberg’s Odd Lots podcast and one of the biggest names in Finance Twitter.  

We talked about whether ZIRP—aka "Zero Interest Rate Policy"—really explains the startup culture millennials came of age in, or whether the dynamics at play are more complex than acknowledged. We’re re-sharing the episode (heads up, we had some sound issues) and a condensed version of the interview below. Keep scrolling for this week’s episode with Joshua Citarella.  — Daisy Alioto 

Francis Zierer: You used to be just a writer and then you did TV for a while. And now I feel like podcasting is kind of your main thing. How has each medium changed how you think about your subject matter?

Joseph Weisenthal: I started at Business Insider in 2008. It was an incredible time for media and the rise of blogs and there was so much to talk about. I was writing 15 posts a day. 

Daisy Alioto: What an auspicious time to start at Business Insider. 

JW: If the opportunity arises, and I don’t think it ever will, to write like that again, I wouldn’t be against it. It’s pretty fun and satisfying, actually. The problem is that tweets are too easy. Do I want to spend 30 minutes writing this blog post? Because I can basically get the gist out in 30 seconds in a tweet. Podcasting allows me to go much deeper. There’s a disciplining effect.

DA: You’re going to be in our Neuralink in two decades teasing the jobs report. So, the Fed just cut rates by half a percentage point. Obviously, that was an event on Finance Twitter and an opportunity for memes. 

JW: Believe it or not, it was also an event like in the real economy of trillions of dollars. But go on. 

DA: Well

FZ: No…

DA: What impacts do you think this will have on startup land in the short term, if any? I think most people's understanding of the interest rate is like, they were low and now they're high. And people attribute a lot of dynamics in Silicon Valley to ZIRP. There's a sort of contrarian take, or maybe it's the mainstream take in your world that ZIRP is an oversimplification of why more companies were funded during a certain period.

JW: That's right. So first of all, I would say generally, I think to a significant extent, ZIRP as a phenomenon, it's not a terrible shorthand to sort of talk about the economic conditions of the post-Great Financial Crisis era. 

But to my mind, one of the most important things was not the low cost of capital but the low cost of labor, because we had high unemployment. 

And so if you look at a lot of the biggest names from that era, It’s hard to imagine Uber being launched at a time when unemployment is at 4%. Airbnb is probably another one. Why did people want to open up their homes to let someone stay there? Well, probably because there were a lot of empty homes or people needing more money for their vacation homes or whatever. 

It helped on some level that there were a lot of VCs wanting to plow money into them. But there was just this spare physical capacity. You could say the same about WeWork and empty office space. So I think this is a really important dynamic to understand about ZIRP. The reason interest rates were low is because the economy was poor and the Fed was trying to stimulate the economy, but the economy being poor also meant high unemployment. It also meant a lot of empty homes. It also meant a lot of vacant office space. 

Even the Sweetgreens and stuff of that era were a labor phenomenon, because they catered to the rise of millennial taste and millennials in the workforce in addition to cheap online ordering and abundant labor. 

DA: Well, it's also a chicken and egg thing, though, too, right? Because which came first, the millennial focused startups or millennial taste?

JW: Yeah, that's for you to answer. My definition of the Millennial/Gen X cutoff is did you have Facebook in college? Because I didn’t. 

FZ: That's interesting. I'm like a Millennial/Gen Z cusp. I was born in ‘94 and I had Facebook when I got to high school. Maybe the Gen Z cutoff is whether you had it in middle school. 

JW: It’s a good question. Just to finish the thought on interest rates: a big thing that happens when the Fed cuts rates is that mortgage rates go down. Except that mortgage rates have been falling for a year and a half because everyone knew that inflation had peaked. So as inflation started to come down, people started thinking ok, at some point, the Fed is going to cut. 

So the key thing I would argue is that very little actually happens on the day of the rate cut announcement because if you wrote a mortgage three weeks ago it’s already priced in. Daisy, maybe that actually vindicates your point. Maybe it really is just a Twitter thing. Now that I think about it, I think you're actually right that when it comes to the actual day of the rate cut announcement, maybe the only story is the memes.

DA: But it impacts the very, very small sector of the economy that makes emotions-based and vibes-based investments. Going back to ZIRP, money was free for people building technical software businesses, which are primarily theoretical until they are not. 

And then, but you're making the point, there's all these things in the world that were actual physical conditions of surplus that we have to count. Airbnb was a surplus of housing, gig economy is a surplus of labor, Facebook is a surplus of hot people. So in the same way, for anything that is actually tangible, yes, the rate cut was probably already priced in.

But for the small, small number of VCs that are disproportionately loud, that now gives them the permission to make the emotional investments that they were always going to make. But now they have an alibi for it, which is this specific financial point.

JW: So I think that here's a key point that relates to sort of the VCs and the market and the world, which is real and which sort of does connect back to the very recent Fed rate decision. I think what really matters is the stock market because ultimately there, you know, if you're funding a startup, there are two ways you can monetize that, which is one, the company could one day go public or two, sell it to a public company, usually with that acquisition in share price.

And so the level of the stock market at any given time is hugely important. The Fed decision was on Wednesday, the tech stocks surge like 3% Thursday afterwards. What that half point cut vs. a quarter point symbolizes is the Fed is very serious about doing whatever they can to forestall a recession and recessions almost always coincide with a decline in the stock market. 

We are no longer so concerned about inflation such that, you know, like a year ago, they might've said, you know what, a recession is an okay price to pay for killing inflation. By going 50 at this most recent meeting, they're basically saying, we're really not concerned that much about inflation anymore. Our main priority is forestalling that recession. So then you saw the stock market take off. And then you see the trickle down effect from that to the real economy. 

VCs see that and think the stock market determines the degree to which we can monetize our investments and it's up. So they might write some checks. 💵

NEW IN TASTELAND

Josh Citarella is an artist, writer, podcaster, and researcher who is best-known for his work researching online Gen Z political extremism. He’s the founder of Do Not Research, a non-profit artist community. He’s currently a dozen episodes into Doomscroll, an in-person video talkshow exploring online culture and politics.

We talked about accelerationism, the post office and manifestos.