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Speaker 1: Joining us now Doctor Dudley. He writes for Bloomberg opinion

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Speaker 1: of course all of his work at the New York

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Speaker 1: Fed and definitive market economics with Bill mccaval ed mckel

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Speaker 1: the years ago at Golden Sacks. Bill Dudley, thank you

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Speaker 1: for this important essay on the calculus of diminishing returns.

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Speaker 1: How efficacious is a lift in capital requirements of our

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Speaker 1: big fancy banks.

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Speaker 2: I think the question is what problem are you trying

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Speaker 2: to solve. Is the problem that we saw in the

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Speaker 2: spring lack of.

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Speaker 3: Capital among the big money center banks or is it

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Speaker 3: a problem with supervision, problem with.

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Speaker 2: Bad accounting, problem with bank management. I think the problem

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Speaker 2: is not that the big banks in enough capital.

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Speaker 3: If you remember, money was running towards the big banks

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Speaker 3: during the turmoment we saw and marked, not away from

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Speaker 3: the big banks.

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Speaker 2: None of the bank none of the big banks got

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Speaker 2: into any great difficulty in the United States.

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Speaker 3: The problem with raising capital requirements over and over again

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Speaker 3: is you're making us banks less competitive, and that's going

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Speaker 3: to push activity out into the unregulated non banking sector.

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Speaker 2: That the question that that that createses that are you

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Speaker 2: actually making the financial systems safer? Where you're actually making

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Speaker 2: more unstable.

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Speaker 1: Should we raise the capital requirements of entrepreneurial upstart banks

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Speaker 1: with a strategic gimmick to build growth.

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Speaker 3: Well, I think we certainly want to be very close

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Speaker 3: take close attention to those banks that are using novel

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Speaker 3: business models. Then, and I think, as the fit self

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Speaker 3: admitted that we need better supervision. The problems of a

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Speaker 3: silicon value bank were identified in a relatively timely way,

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Speaker 3: but then the supervisors didn't force the banks to make

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Speaker 3: the changes necessary to prevent its demise. So I think

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Speaker 3: that that better supervision, more diverse stress testing, better rules

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Speaker 3: on interest rate risk taking could could go a long.

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Speaker 2: Way to avoid these kinds of problems.

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Speaker 3: I'm not sure raising the capital requirements of the biggest

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Speaker 3: money center banks by fifteen to twenty percent it is.

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Speaker 2: The answer here.

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Speaker 3: Bill.

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Speaker 4: You talk about in your column the importance to recognize

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Speaker 4: non banking institutions as competitors, and that you really just

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Speaker 4: increase their share by restricting the lending capacity of big banks.

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Speaker 4: Should regulators be basically going down to the lowest common

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Speaker 4: denominator of less regulated non banks, or should they put

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Speaker 4: more of an eye toward non banks and regulate more

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Speaker 4: closely some of those activities.

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Speaker 3: I think they should be focusing on what's the best

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Speaker 3: solution for the resiliency of the overall financial system banks

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Speaker 3: and non banks. Obviously, if you increase requirements a lot

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Speaker 3: on banks, you're just going to have a bigger non

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Speaker 3: bank giene And the question is does that make it

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Speaker 3: safer or does that make it more vulnerable?

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Speaker 2: So I think it needs to be balanced here.

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Speaker 3: Also, I think that the real question here is what's

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Speaker 3: what was the problem and what's the right solution to

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Speaker 3: solve the So it's not clear that raising capital requirements

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Speaker 3: on large money center banks and solves the problems that

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Speaker 3: we saw in March.

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Speaker 4: With this yere can we say that the banking crisis

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Speaker 4: is over to the extent that it ever happened, and

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Speaker 4: that going forward this is not going to be some

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Speaker 4: sort of bigger financial risk that could torpedo the Goldilock scenario,

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Speaker 4: at least for the moment.

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Speaker 3: You never know, but I think that so far the

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Speaker 3: knockout effects that would happened mark pretty modest. I think

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Speaker 3: that's because it really was concentrated in a few banks.

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Speaker 2: It was all happening in plain sight.

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Speaker 3: People knew exactly why these banks were getting the difficulty.

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Speaker 3: They could see their interest rate risk disposure, they could

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Speaker 3: see what's happening to their capital on a mark to

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Speaker 3: market basis. So this is not like the Great Financial Crisis,

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Speaker 3: where everything was happening in the shadows.

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Speaker 2: People lost confidence in their counterparties.

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Speaker 3: So I think, so far, at least, it looks like

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Speaker 3: this is a pretty modest knockout effect to the new economy.

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Speaker 4: So if that's not If that's the case and that

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Speaker 4: isn't necessarily a headwind going forward, do you lean into

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Speaker 4: this idea that maybe the if I should be done

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Speaker 4: and that we are looking at a scenario where they

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Speaker 4: have the opportunity to just wait and take a look

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Speaker 4: at the data on a longer and longer term basis

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Speaker 4: to make any decisions.

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Speaker 3: I have no quarrel with the thing waiting to get

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Speaker 3: more information. I mean, you know, they're pretty confident that

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Speaker 3: Madre policies at a restrictive level. If that's the case,

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Speaker 3: it should slow the economy down. As the economy slows,

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Speaker 3: we should have more slack than the way market and

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Speaker 3: that should puts take away some on the upper pressure

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Speaker 3: on wages and bring inflation down. I think the key

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Speaker 3: question is how restrictive is manitary policy today. It's possible

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Speaker 3: that mandre policy is not quite as restrictive as the

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Speaker 3: FED thinks, and if they find that out over time,

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Speaker 3: then they can obviously do more or keep rates higher

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Speaker 3: for longer.

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Speaker 5: Bill, I want to finish there. You wrote about this

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Speaker 5: earlier in the summer. I don't think it was picked

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Speaker 5: up on nearly enough. I've been talking about as much

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Speaker 5: as I can. This quote from your column the read

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Speaker 5: as follows, and I had to quote ready for you. Bill.

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Speaker 5: There's considerable evidence that lacks have shortened, meaning that the

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Speaker 5: economy has already found nearly all of the impact of

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Speaker 5: the Fed's actions. Bill, talk to me about that evidence.

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Speaker 5: Where do you see that evidence currently?

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Speaker 3: I think the most obvious piece of evidence is what's

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Speaker 3: happening in the housing sector. The healthing sector, you know,

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Speaker 3: obviously was hurt a lot by the backup and mortgageage

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Speaker 3: from three percent to seven percent. But recently the housing

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Speaker 3: market looks like it's bombed out and isn't having any

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Speaker 3: further weakness because of the rights and rates. Another thing

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Speaker 3: that's important to note here is Madre Polsey works faster

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Speaker 3: than he used to because the fit uses four guidance

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Speaker 3: seek guide.

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Speaker 2: The market not where it is today, but where it's headed.

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Speaker 2: So financial conditions. Most of the technique and financial conditions

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Speaker 2: have been seen over the lext couple of years. Happened

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Speaker 2: last year, not this year.

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Speaker 5: I remember Bill a conference that you and I did

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Speaker 5: together together with Muhammad al Aaron in the summer of

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Speaker 5: twenty twenty one. I think it was early summer, around

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Speaker 5: June time, and you were both talking about how inflation

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Speaker 5: may well be sticky than people think. And I remember

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Speaker 5: you Bill, throughout the number the maybe rates have to

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Speaker 5: go to five percent, five percent back then sounded absurd

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Speaker 5: with through five, with three five, and we've gone right

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Speaker 5: the way through five, Bill, what are you thinking about now?

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Speaker 5: Best case on way you think sufficiently restrictive might be.

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Speaker 6: I think that it's more likely that they hold rates

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Speaker 6: here or maybe one more rate, as opposed to go

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Speaker 6: or higher. I think where the market may be a

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Speaker 6: little bit off base is to think that the Fed's

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Speaker 6: going to ease a lot in twenty twenty four. I

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Speaker 6: think the last mile in terms of getting inflation down,

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Speaker 6: I think it's going to turn out to be pretty difficult,

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Speaker 6: and so I think that means that that's going to

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Speaker 6: take key grates higher for longer than people think, and

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Speaker 6: I think that's one of the things that is.

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Speaker 2: Feeding into the bomb market.

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Speaker 5: Went buy you to a mooch, hire Bill Dudley, Thank you, sir,

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Speaker 5: Former New York Fed president and Bloomberg opinion columnists and

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Speaker 5: fascinating insight that