Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene with
Speaker 1: David Gura. Daily we bring you insight from the best
Speaker 1: of economics, finance, investment, and international relations. Find Bloomberg Surveillance
Speaker 1: on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course,
Speaker 1: on the Bloomberg Here's what we're not gonna do. I'm
Speaker 1: not gonna ask Glenn Hubbard dumb questions about being on
Speaker 1: the short list of the FED. He's known me for
Speaker 1: too long to know. I'm not going to ask snide
Speaker 1: little questions. But we will address the periphery of monetary
Speaker 1: policy as we can with the extinguished dean of the
Speaker 1: Columbia Business School, where he was Carson Professor of Finance,
Speaker 1: Glenn Hubbard. What I know is Eric Johnson's course at
Speaker 1: Colombia Business School Bight six one nine dash zero zero
Speaker 1: one Behavioral Economics and decision Making will be a different
Speaker 1: course as you move forward, and you know you've got
Speaker 1: them now in two thousand seventeen as well, where does
Speaker 1: Richard Taylor fit into Hubbard economics? Well, Taylor is a
Speaker 1: fabulous choice for a Nobel as a bridge between psychology
Speaker 1: and economics. In fact, my Freshman textbook is long featured
Speaker 1: behavioral economics. I think it's central, even at the basics.
Speaker 1: I have colleagues like Eric Johnson or you mentioned, but
Speaker 1: also Steve's Elvis who worked to bring behavioral economics into
Speaker 1: the practice of business with the NBA students. I think
Speaker 1: this is a great nobel for the profession. You know
Speaker 1: that the certitude of the media in the FED parlor
Speaker 1: game is just that an amateur certitude magna decide Ls
Speaker 1: writes about Hubrius about a disequilibrium state. How do any chairs,
Speaker 1: whether chair Yell and Chairman Bernankey, how do they fold
Speaker 1: behavioral economics into the crystal ball gazing that is so juvenile? Well,
Speaker 1: I think it's a really important question. Tom. You know
Speaker 1: it's going back to the financial crisis. I think ignoring
Speaker 1: behavioral factors lead the FED astray and many economists astray.
Speaker 1: I think the key right now for the FED is
Speaker 1: to ask the question, what's normal? What does that mean?
Speaker 1: How to basic economic factors and behavioral factors shape that
Speaker 1: You've written about the need to find somebody to run
Speaker 1: the FED who can quote, maintain, and explain. You've said
Speaker 1: that the personnel is policy. I wonder how much a
Speaker 1: person individual can shape or reshape the FED, and how
Speaker 1: much time that takes to do well. No one person,
Speaker 1: of course, is going to completely remake the FED, but
Speaker 1: the chair is a very important role. He or she
Speaker 1: will set a tone I think the idea maintain and
Speaker 1: explain as you ought to be able to articulate a
Speaker 1: framework for monetary policy and the lender of last resort,
Speaker 1: and explain when you deviate. The chair sets that tone.
Speaker 1: I think the board will too. The goal I think
Speaker 1: for President Trump is to appoint an entire Federal Reserve
Speaker 1: Board essentially that could carry something like that out. Do
Speaker 1: you feel satisfied that he's well on the way to
Speaker 1: doing that. Our colleague gena smile like writing a great
Speaker 1: piece last week for Bloomberg Markets magazine, and when she
Speaker 1: looked at this imbalance as it stands right now, you've
Speaker 1: got a board that has a lot of regional presidents
Speaker 1: and fewer FED governors. How problematic is it to your
Speaker 1: mind that we have that imbalanced at this point? And
Speaker 1: are you satisfied we're going to see that put into
Speaker 1: some equilibrium here in these next few months? Well confident
Speaker 1: we'll see the equilibrium. We've already seen very good choices,
Speaker 1: like Randy Quarrels to be the vice chair of the
Speaker 1: FED for Financial Supervision. Obviously President Trump will make a
Speaker 1: decision about chair. There's also a vice chair other governors.
Speaker 1: I think the team is very focused on that and
Speaker 1: it should be. I thought this weekend, which I'm sure
Speaker 1: we'll be discussed, to call me a business school Dean
Speaker 1: Hummard is the idea that if you cut corporate taxes
Speaker 1: there's almost direct extrapolation over to economic growth. Do you
Speaker 1: buy it? I do. I think the bigger story to
Speaker 1: tell economically and perhaps politically is the link to wages.
Speaker 1: You know, when I was a student many years ago,
Speaker 1: the view was the burden of the corporate tax was
Speaker 1: born by owners of capital. Economists today, myself included, believe
Speaker 1: that a lot of that's actually born by labor. And
Speaker 1: the reason is that the corporate tax depresses investment and productivity.
Speaker 1: So yes, there are growth effects and wage effects. And
Speaker 1: that's where the debate and the debate across Democrat and
Speaker 1: Republican politics is about the diffusion of technology across the
Speaker 1: models we learned or with our humility, the models that
Speaker 1: we're living in the right now. How do you adjust
Speaker 1: Hubbard economics Given this huge new impulse of technology, we're
Speaker 1: living well. I think corporate tax reform will help with
Speaker 1: that too. It will make sure that more of those
Speaker 1: gains get shared in productivity and wages with workers. I
Speaker 1: think the questions you're asking about growth about technology, that's
Speaker 1: how we ought to be talking about tax reform. And
Speaker 1: for me, the corporate piece of tax reform is almost
Speaker 1: a no brainer. I turned to a paper that you
Speaker 1: published this summer July tenth with the John Taylor, Kevin Warson,
Speaker 1: and John Cogan here on that you all can work
Speaker 1: together outside come back on again, but the prospects for
Speaker 1: higher economic growth. And on that paper you for stressed
Speaker 1: that it's important to emphasize the tax reform and spending
Speaker 1: reductions go hand in hand. From what you've seen from
Speaker 1: the Big six this nine page document, do you think
Speaker 1: they've tackled spending reductions enough? And are you confident you're
Speaker 1: going forward? We're going to see lawmakers do that as
Speaker 1: they put some meat on the bones here of this
Speaker 1: nine page outline. I think it's highly likely that they
Speaker 1: will be tackling that, probably not on the spending side,
Speaker 1: but more on revenue neutrality. The budget resolution almost guarantees that,
Speaker 1: and many Conservatives in the House won't vote for a
Speaker 1: budget buster. The bigger point that the John's and Heaven
Speaker 1: and I were making is that in the long run,
Speaker 1: if we want a better tax system, we have to
Speaker 1: get the entitlement state in line, and sadly I don't
Speaker 1: see any effort there. The joke is Glenn, However, without
Speaker 1: getting you in trouble with the Fed, is the idea
Speaker 1: of low rate Janet, And we can certainly say in
Speaker 1: the sense of the President low rate Donald is the
Speaker 1: rules based architecture all of the distinguished gentleman from Stanford.
Speaker 1: Is that a solution for the political pressure of a
Speaker 1: low rate model? I don't think so. First of all,
Speaker 1: it wouldn't give you the answer of low rates probably
Speaker 1: at the moment. The bigger reason is that we don't
Speaker 1: really know what the equilibrium interest rate is. You know,
Speaker 1: I eat the intercept in the rule that you mentioned.
Speaker 1: I think what's more important is for the FED to
Speaker 1: articulate the way it thinks about monetary policy, what are
Speaker 1: the goals and to explain the deviations. And that's where
Speaker 1: I fault the FED. It's it's in its ad HOCNAS
Speaker 1: we go to Cartesian Monday with Glenn Hubbard. Okay, the
Speaker 1: intercept is clipping at the y axis and out on
Speaker 1: the right side of the equation? Is the unknown? Is
Speaker 1: that epsilon which is of such challenge? Taylor would probably say.
Speaker 1: Richard Taylor would probably say, we have certitude and where
Speaker 1: we describe the intercept or the slope? How do you
Speaker 1: balance that in today's really interesting UH economy with completely
Speaker 1: fiction interest rates. Well, I mean, let me get more specific.
Speaker 1: The fed's models, the Federal Reserve Board US model framework
Speaker 1: that it uses, I don't think capture economic reality, let
Speaker 1: alone the psychological factors that UH Professor Taylor mentions. So
Speaker 1: I think there's need for more diversity and economic thinking
Speaker 1: inside the FED. UH in a real wake up call,
Speaker 1: the models and the financial crisis alone should have suggested that.
Speaker 1: I think David was that question we just to Chairman Hubbard.
Speaker 1: I think it's worth get one more question, very hard.
Speaker 1: Four hangs up on us never again. On the subject
Speaker 1: of research, What did you hear from Janet Yelling a
Speaker 1: couple of weeks back in Cleveland when she spoke at
Speaker 1: the name but conference. You talked about inflation modeling and forecasting.
Speaker 1: Did it stand out to you as a maya culpa,
Speaker 1: a recognition that there are flaws with the modeling. What
Speaker 1: did you hear from the chair a couple of weeks back. Well,
Speaker 1: I think the bottom line is the chair feels that
Speaker 1: we have a series of transitory factors one offset you will,
Speaker 1: that have held inflation down. And I actually agree with that.
Speaker 1: That's different though from the view of whether we're modeling
Speaker 1: inflation well, and I don't think we are. It is
Speaker 1: certainly a very big bet. If you think that they're
Speaker 1: structural factors holding inflation down, then the whole framework is
Speaker 1: in question. But on the bottom line, I would agree
Speaker 1: with the chair. Glenn terrific sport to come on with this.
Speaker 1: Many others we greatly appreciated. Dina Hubbard is the Carson
Speaker 1: Professor of Finance and Economics, Columbia Business School, and just uh,
Speaker 1: just for a now wonderful for a how just wonderful
Speaker 1: to happen, I tell you eighty four other people is no,
Speaker 1: we can't do that. Glenn Hubbard joining us on our
Speaker 1: phone lines, eager to have with us here in a
Speaker 1: political levengry of studios to day Andreas tone Bread, he's
Speaker 1: a member of the executive board off the Deutch to
Speaker 1: put his bunk yet here with us, as I said
Speaker 1: in New York before heading down to Washington for the
Speaker 1: I m F World Bank meetings, Great to have you
Speaker 1: here with us. Let's start just with a thirty thousand
Speaker 1: foot view of the regulatory landscape in Europe at this
Speaker 1: point the Bossel taxa continue. What's the status of those negotiations. Yep,
Speaker 1: you know, we just met last week and um that
Speaker 1: was on Wednesday and Thursday, regular meeting and uh meeting
Speaker 1: went well, and we're getting closer and closer together, I
Speaker 1: must say, But Basil will only be concluded once the
Speaker 1: governors and heads of supervision degree and when the G
Speaker 1: twenty endors So let's see what happens. But um, you
Speaker 1: know it, when you come together in a meeting like
Speaker 1: the one last week, you come together to agree and
Speaker 1: not to disagree. So you you know, you don't fly
Speaker 1: across the world for no reason and to argue. We're
Speaker 1: focused on timetables here with regard to your Certainly the
Speaker 1: timetable for Brexit is one of them. But how about
Speaker 1: the timetable for this this iteration of basil is it
Speaker 1: is it proceeding to the pace you'd like to see
Speaker 1: it proceeded. If we look back, we wanted to have
Speaker 1: BATTLED finished by the end of two thousand fifteen. Now
Speaker 1: we're we're in two thousand seventeen. I must say we're
Speaker 1: still working on year end of two thousand and fifteen
Speaker 1: data and numbers by the banks. So if we really
Speaker 1: go into two thousand and eighteen, I would be worried
Speaker 1: that we would be working on a two old a
Speaker 1: set of data. It's a little bit like uh, going
Speaker 1: with the with the GPS and you know, sailing and
Speaker 1: with an old GPS. So we need, you know, if
Speaker 1: we want to conclude on this basis, I would believe
Speaker 1: that we would need to conclude this year. Um it
Speaker 1: would be nice to have, um, you know, a conclusion
Speaker 1: during the German G twenty presidency, which ends, if end
Speaker 1: the end of November of this year. But this is
Speaker 1: not a must. We have to have a good result
Speaker 1: the drum G twenty presidency. I think the last time
Speaker 1: we spoke, I was incredibly rude because you were within
Speaker 1: hours or days of an ECB announcement. I could basically
Speaker 1: say nothing. We got a little more wiggle room. Now.
Speaker 1: I think our listeners across this nation and worldwide, our
Speaker 1: our world audience has somewhat of an idea of the
Speaker 1: Bank of England. They've got an idea of the FED,
Speaker 1: They've got an idea of this that the other and
Speaker 1: the Bundesbank is an enigma. It is is something we
Speaker 1: don't understand. Explain the day to day structure of the
Speaker 1: leadership of the German Central Bank. We are six in
Speaker 1: the leadership. Our president sits on the board of the ECB.
Speaker 1: So whilst in the past um the board of the
Speaker 1: Buddhist Bank crafting monetary policy for Germany, whilst whilst we
Speaker 1: still have the Dutch MK, now we are participating through
Speaker 1: our president in the decision making of the European Central Bank.
Speaker 1: So we are now have a smaller room than we
Speaker 1: had before, but for a much bigger game, if you want.
Speaker 1: How has it changed? I remember visiting with atmar Issing
Speaker 1: in brand new Frankfort, a brand new ECB. The tower
Speaker 1: wasn't actually Professor Hassening showed me the blueprints for the
Speaker 1: tower when I was in the office a million years ago.
Speaker 1: How is the Bundesbank relationship with Frankfort change from the
Speaker 1: beginning to where we are now. Now let's don't forget
Speaker 1: that the ECB was set up with the Bundesbank as
Speaker 1: a model. Yes, so the independence of the Buddisbank was
Speaker 1: you know, taken to the e c B, etcetera, etcetera.
Speaker 1: When you give up your monetary policy, your direct influence
Speaker 1: on monetary policy, of course there you have somewhat of
Speaker 1: a shock, but you do this for the greater good
Speaker 1: of things. So I would think that in nine out
Speaker 1: of or nineteen out of twenty instances, the Bundesbank and
Speaker 1: the ECB agree on the issues. In maybe in twenty
Speaker 1: out of twenty instances we have the feeling that we
Speaker 1: have the same judgment. But it really depends on how
Speaker 1: you react, how you implement, what do you do, and
Speaker 1: then you know, the glass can be held full or
Speaker 1: half empty. But it's not that we constantly disagree with
Speaker 1: the CB. I sit on what it's called the Supervisory
Speaker 1: Board of the CB. So there's the governing Council of
Speaker 1: the monetary policy is crafted and then there's the bood
Speaker 1: of Board of Supervisors. There's a Chinese ball in between,
Speaker 1: and I sit for Germany on that one, and we
Speaker 1: also UM very much agree, but we also argue we
Speaker 1: are not living in a Soviet system where where everybody
Speaker 1: has to agree all the time and everybody has to
Speaker 1: collect their heels. But it's only normal that you do that,
Speaker 1: you do discuss issues. But should there be ever, will
Speaker 1: be a decision um in the e c B, the
Speaker 1: Buddhas Bank will properly execute with that decision. As we
Speaker 1: watch this Brexit process unfold, companies have made announcements they
Speaker 1: intend to move more workers to Germany in other places
Speaker 1: within Europe. How does that change your regulatory responsibilities? In
Speaker 1: other words, if you have an influx of more commerce
Speaker 1: or more personnel, has that change the role that your
Speaker 1: bank is going to plan. First of all, let me
Speaker 1: say UM that I personally regret that this Brexit referendum
Speaker 1: led to what it led, and that I could have
Speaker 1: lived perfectly with the system as it was as it was,
Speaker 1: and that but that is you know, we have to
Speaker 1: face we have to face um reality, which means that
Speaker 1: a heart Brexit is the scenario the banks are preparing for.
Speaker 1: It may not be a heart Brexit at the end,
Speaker 1: but as a scenario that's the most probable and most
Speaker 1: likely scenario. So if you prepare for that, which would
Speaker 1: mean that you would have no free trade agreement really
Speaker 1: at the end of this two year period. If that
Speaker 1: is happening, you know many many banks will have to
Speaker 1: shift part of their business into Europe, which means that
Speaker 1: they will come to certain cities on the continent. Just
Speaker 1: Brexit threatened Conrad an Hour's Europe, No, not at all.
Speaker 1: It is it is a Brexit is a UM. It
Speaker 1: is a UM step which was taken. But it does
Speaker 1: not mean that for example, UM Britain leaves the NATO,
Speaker 1: Britain leaves the G seven, that Great Britain leaves the
Speaker 1: G twenty. It means they're leaving a common European Union,
Speaker 1: which in itself is a pretty problematic issue, but it
Speaker 1: still means that we can work very closely together. Not
Speaker 1: to answer your question, we will have inflows of a
Speaker 1: broker dealers into Europe also into Frankfort I must say,
Speaker 1: and we have never really supervised large broker dealers, so
Speaker 1: there's going to be a challenge to the roles of
Speaker 1: the supervisors and how do we deal with broker dealers.
Speaker 1: But we are confident that we can do that. This
Speaker 1: is not really a financial stability risk. This is coming
Speaker 1: with a two year time horizon, so the market can
Speaker 1: really understand and anticipate what's happening. What it gets your
Speaker 1: perspective on this moment in central banking or monetary policy.
Speaker 1: I go back to centrip Portugal, where you had are
Speaker 1: the leaders of many central banks. They're talking for more
Speaker 1: communication cooperation pick the word uh, and you know we
Speaker 1: see here the US trying to unwind QI normalize the
Speaker 1: balance sheet. Where do things stand as you observe it
Speaker 1: from from where you sit in Frankfurt? Why is it? UM?
Speaker 1: I think that the debate is um. How can we
Speaker 1: best interpret the pretty strong economic numbers we're having across Europe,
Speaker 1: the much better situation a UM consumer price inflation, which
Speaker 1: is UMU at one point five pc, going towards our
Speaker 1: definition of price stability, a core inflation rate strengthening, with
Speaker 1: the highest consumer confidence we've had for a long time. UM,
Speaker 1: Why why are we why are we doing better? Why
Speaker 1: is eurosclerosis differently away? Yeah? Because first of all, there's
Speaker 1: no deflation scenario, if they ever was one. I can
Speaker 1: actually see UM and we're seeing growth now UM in
Speaker 1: almost all member states of the U area. We have
Speaker 1: really bottomed out, and the economic environment is much better,
Speaker 1: and the political risk we've been debating half a year
Speaker 1: a year ago no longer is really there. Is it
Speaker 1: because of business practices which you studied a JP Morgan
Speaker 1: at Rath Childhood Bank of America are becoming more Anglo American. No,
Speaker 1: because the situation is so much better. From an economic
Speaker 1: point of view, we still have a credit based economy
Speaker 1: and not yet an Anglo saxon Um capital markets based economy.
Speaker 1: In that so diplomatically, David, it's just amazing bat that
Speaker 1: right back over than that. So we're not there yet,
Speaker 1: And we're not there, you know, and and and and
Speaker 1: we're doing we're still doing much better. So now that
Speaker 1: from a monetary policy perspective, you really have to think, so,
Speaker 1: what do you make out of this um stronger enemy,
Speaker 1: better numbers uh more going towards uh the definition of
Speaker 1: price Deputy, So my question would be what now the
Speaker 1: Governing Council, and I'm not a member of the Governing Council,
Speaker 1: would have to debate how to react. Well, I think
Speaker 1: the goal will be to get Swiss tenure yields under
Speaker 1: above positive again, that would be a good sir, this
Speaker 1: is manager. Can you do this every week and our
Speaker 1: studios on a weekly basis? That would be a good
Speaker 1: thing from time to time. Addressed, Thank you very much again,
Speaker 1: Executive member the Executive Board of the Dutch Bundesbank. Joining
Speaker 1: us here in a plibical eleven three studios in New York. Yes, great, Evan,
Speaker 1: you're heading to Washington as well. Like this week, I
Speaker 1: should mention Tom, it's a rumor I will be there.
Speaker 1: It's a it's a rumor right now, be there. No,
Speaker 1: we've got some wonderful interviews lined up at the I
Speaker 1: m F meetings. And now joining us the Laureate Robert
Speaker 1: Schuller Yale University is he celebrates UH the announcement of
Speaker 1: Richard Taylor to a Nobel Prize Taylor's course of Chicago,
Speaker 1: out of Case Western and out of the University of Rochester.
Speaker 1: Bob Schiller inform our audience as to the distinction of
Speaker 1: Taylor economics versus Schiller economics or Becker economics or the others.
Speaker 1: What is distinctive about Richard Taylor. But he UH has
Speaker 1: helped promote a revolution that in economics, namely behavioral economics,
Speaker 1: that makes economics more a real world and also that
Speaker 1: leads to public policies that can be tested and found
Speaker 1: to work. Uh there has been a tendency to rely
Speaker 1: too much on abstract models of economic behavior. Uh as
Speaker 1: if everyone we're paying attention and everyone we're optimizing, but
Speaker 1: they're not. So we're coming back to the reality. I
Speaker 1: know David Gurw wants to jump in here, but very quickly.
Speaker 1: If you go back to the Carnegie Rochester sessions of
Speaker 1: eighty two where you were there with Lars Peter Hansen,
Speaker 1: Jacob Frankel and others. If you go back to the
Speaker 1: Battle of seventy nine Common Diversity, the Battle of Sailor
Speaker 1: eighty writing originally the battle that you fought at two,
Speaker 1: describe to our listeners how the Rational Expectations Crew they
Speaker 1: hated you people. What was it like that? Because that's
Speaker 1: strong where some of them probably did. Although I have
Speaker 1: to say academia does come across as open minded. There
Speaker 1: they may have hostile emotions. I once spoke to Eugene Fama,
Speaker 1: who is you might call him my enemy, how that
Speaker 1: we won the Nobel But he's not my enemy. He's
Speaker 1: a thorn in my side. And it's probably good. But
Speaker 1: he once told me that he has refereed and accepted
Speaker 1: many important behavioral economics articles. Uh. I think people in
Speaker 1: academia are not all that bad, but they do get emotional.
Speaker 1: That's just human nature. Bob Sla, let me ask you
Speaker 1: about Richard Taylor, the public intellectual. We've we've seen him
Speaker 1: in the Big Short playing poker or blackjack or whatever
Speaker 1: it was, alongside Selina Gomez. We've we've we've heard him
Speaker 1: lecture to popular audiences, has written books that have been
Speaker 1: popularly consumed as well. How much has he made a
Speaker 1: difference here in popularizing behavioral economics, Well, he has been
Speaker 1: enormously important. I think, uh As I say it's a revolution.
Speaker 1: If if you were to summarize what important has happened
Speaker 1: in economics in the last twenty years or so, I
Speaker 1: think behavioral economics would come now one. And to me,
Speaker 1: it's really inspirational to get back to reality because we
Speaker 1: have just disrespected in economics. Other social sciences have been
Speaker 1: quietly working away and coming up with new information about
Speaker 1: how people really behaved. How could we have ignored that
Speaker 1: for so wrong? So to me it's refreshing. Someone had
Speaker 1: to had to call out the fallacy of relying exclusively
Speaker 1: on rational optimizing models. Finally it's been done. And you know,
Speaker 1: Dick Taylor was the president of the American Economic Association.
Speaker 1: He's the profession has come around to appreciate what can
Speaker 1: what can what can President Trump learn from Richard Taylor? Okay, Well,
Speaker 1: you know President Trump himself is a bit of student
Speaker 1: of psychology, but not such academic psychology. If you read
Speaker 1: his books, and I think they were not just totally
Speaker 1: totally goest writain, he had some input into them. He
Speaker 1: is very aware of human psychology. Uh and uh, well
Speaker 1: he has Art of the Deal is based on it.
Speaker 1: But I think Donald Trump has a lot more he
Speaker 1: could learn from Dick Sailor. Professor Schulder, thank you so much.
Speaker 1: Honored to have you with us again. Robert Schiller of
Speaker 1: Yale University of course, uh not two thousand thirteen Nobel
Speaker 1: Laureate on his colleague, particularly with great work at NB
Speaker 1: er with Richard Sailor as well. Um, David, we've had
Speaker 1: a Sailor's siding. We got a wonderful note from an
Speaker 1: extremely beliaguered Richard the conference. Yeah, and we will have
Speaker 1: him later this week, which I think is probably better
Speaker 1: for our Listen. We've talked about saltwater and freshwater and
Speaker 1: brackish water. Is this a high water mark for behavior economics,
Speaker 1: Tomm you mentioned, Yeah, it was widely presumed that Robert
Speaker 1: Schiller would win award. But this is a further uh
Speaker 1: codification of behavioral economics into the canon. David gerin Tom Keenan,
Speaker 1: New York. This is Bloomberg. We are blessed and that
Speaker 1: we have just had on the Laureate Robert Schiller on
Speaker 1: Richard Taylor. Professor Taylor will join us later in the week.
Speaker 1: I got a lovely note from him this morning. He's beleaguered,
Speaker 1: as you can imagine, and we'd much rather do a
Speaker 1: more thoughtful interview with the Laureate later this week. But
Speaker 1: now is the most important interview of the day. This
Speaker 1: is Randall Krosner. You know him as a governor of
Speaker 1: the Feederal Reserve System. He is without question our premier
Speaker 1: financial economist of his generation, and he has to work
Speaker 1: in the behavioral soup of the Fortress Becker every day
Speaker 1: at Chicago. Randy Krosner, what is Gary Becker? What is
Speaker 1: the legacy of the Becker years? Followed on to Richard Taylor,
Speaker 1: what does behavioral economics mean to your Chicago m hmm.
Speaker 1: I'm delighted to be here and I'm thrilled to be
Speaker 1: able to share the excitement that Chicago Boost School business
Speaker 1: has for Sailor getting the prize. I mean, we have
Speaker 1: a pretty broad range of people. I mean, obviously we
Speaker 1: have Gary Becker, who unfortunately no longer with us, to
Speaker 1: Wonderable Prize just in two thousand thirteen, Gene Fama of
Speaker 1: the proponent of efficient markets Wonderable Prize, and Dick Taylor, who,
Speaker 1: now that's a very different approach of a behavioral economics
Speaker 1: approach that says, we've got to really think about people
Speaker 1: as people think about their their foibles, their flaws, and
Speaker 1: how they make decisions. And so he takes a very
Speaker 1: different approach to financial markets and economics overall than they do.
Speaker 1: But they're all together. To take it back to when
Speaker 1: you were with Frank Knight in not that all, but
Speaker 1: to George Stiegler, and to take it back to Frank Knight,
Speaker 1: are our measurements of risk and uncertainty more uncertain now
Speaker 1: because of Schiller and Taylor. When you guys are at
Speaker 1: the FED trying to figure out what to do? Do
Speaker 1: you do it with less certainty than we did years ago? Actually,
Speaker 1: I think um, quite the opposite. It has been helpful
Speaker 1: in making sure that we have a broader perspective. I think, UM,
Speaker 1: let's say, you know, Knight certainly introduced very important ideas, UM,
Speaker 1: but I think people uh working in behavior economics helped
Speaker 1: to make that a little bit more concrete. Well, what
Speaker 1: are some of those sources of that? What is it?
Speaker 1: What could it be from people's behavioral perspective that might
Speaker 1: be generating uncertainty or why things might not follow a
Speaker 1: simple model that we would have had in the past
Speaker 1: right across. He was asked at the press conference following
Speaker 1: the announcement of the award this morning about the impact
Speaker 1: of his work, what he hopes the impact would be
Speaker 1: or has been, and he said a quote, it's the
Speaker 1: recognition that economic agents are human and that economic models
Speaker 1: have to incorporate that. When you look at the profession
Speaker 1: written large outside of the narrow niche of behavioral economics,
Speaker 1: how well incorporated is this line of thinking now into
Speaker 1: two other veins of economic thought. So I think it
Speaker 1: is much more so than it used to be. So
Speaker 1: just in the twenty seven years that I've been at
Speaker 1: at Chicago, so roughly half of my life, I've seen
Speaker 1: an amazing transformation occur. Um. Very few people when I
Speaker 1: first got here really focused on these these broader issues,
Speaker 1: and I would say now that a very high fraction
Speaker 1: of the younger people that we have hired over the
Speaker 1: last five to ten years, whether it's in economics, finance,
Speaker 1: or other areas at the school, are focused on these
Speaker 1: kind of broader issues of trying to introduce humanity into
Speaker 1: into economics and finding a lot of very rich empirical
Speaker 1: UH veins to tap. For example, Sailor has talked a
Speaker 1: lot about the mental accounting that the way you treat
Speaker 1: a dollar in your pocket may be different than the
Speaker 1: way you treat a dollar in your UH, in your
Speaker 1: in your bank, or in your savings account, and UM
Speaker 1: economist traditionally said, if you have a dollar, doesn't matter
Speaker 1: where it is, it's a dollar, the same decisions associated
Speaker 1: with it. He said, you just think about it. If
Speaker 1: there's a dollar in your pocket and you want something,
Speaker 1: you may go spend that dollar. If that that opportunity
Speaker 1: is right in front of you. If you had to
Speaker 1: go down to the bank, withdraw that dollar, you may say,
Speaker 1: not so sure about that. To take the endowment effect further,
Speaker 1: does the central bank has any given central bank? And
Speaker 1: let's pick on the Americans. Do they have an endowment
Speaker 1: effect of the policies they have? Now? Are they so
Speaker 1: wedded to their policies that they have to live them
Speaker 1: because they're endowed to them? So? Um, I think that's
Speaker 1: slightly different than the endowment effect, But it is another
Speaker 1: mental effect that there's sort of a framing effect that
Speaker 1: comes in if you frame the world through a particular
Speaker 1: lens or particular set of set of questions and see
Speaker 1: it that way. And so if you see the world
Speaker 1: as now subject to a lot of fragility, if you've
Speaker 1: experienced the financial crisis, you've worked hard to try to
Speaker 1: fight the financial crisis, you may be more reluctant than
Speaker 1: someone from the outside to say, Hey, things have normalized. Now,
Speaker 1: let's move back to uh, to our normal situation quickly.
Speaker 1: You may say, Gosh, I've got the scars of the
Speaker 1: financial crisis on me. I'm going to move much more slowly. Besides,
Speaker 1: because I've lived through it. And I think that's some
Speaker 1: of what we're seeing with central banks that you know,
Speaker 1: they're very leery of declaring victory because they've they've been
Speaker 1: in the trenches and they don't want to lose the
Speaker 1: benefits that they have they feel that they have have
Speaker 1: gotten over the last few years by undertaking quantitative easing,
Speaker 1: zero interest rate policies, etcetera. Randy, let's personalize this if
Speaker 1: we could. Let's go to south Woodlawn Avenue and I
Speaker 1: wonder if you can think of a time when you're
Speaker 1: having a cup of coffee with Taylor or just chatting
Speaker 1: with him in the halls of the booth school when
Speaker 1: he said something that made you change or think about
Speaker 1: what you thought about in the past. And so uh.
Speaker 1: He he has been a very important intellectual force of
Speaker 1: UM of really I think opening people up to be
Speaker 1: be much broader in the way they approached things. For example,
Speaker 1: a lot of the work that he's done on let's
Speaker 1: say UM mutual funds, where you have these closed and
Speaker 1: mutual funds, which means that it's not like an exchange
Speaker 1: tredded fund. It's closed in the amount of assets that
Speaker 1: that are owned, but sometimes that can trade above or
Speaker 1: below the value of the underlying assets, the so called
Speaker 1: net asset value and I remember having a discussion with
Speaker 1: him about that. That was something that had always puzzled
Speaker 1: me when I was in graduate school. But he and
Speaker 1: co authors and students have really kind of fleshed that out.
Speaker 1: Try to understand that my better to help us to
Speaker 1: get um measures of um exuberance or pessimism. So gets
Speaker 1: back to what Tom was talking about before, here's a
Speaker 1: an example of where rather than just sort of dismissing
Speaker 1: it as well, that just doesn't make any sense to her.
Speaker 1: You know, there must be some sort of transaction costs
Speaker 1: that's in there. Dick took a different approach and said, well,
Speaker 1: it's suggestive of either enthusiasm or pessimism, and some people
Speaker 1: have used that as a way of a thing. Well,
Speaker 1: this can give us broader market measures of pessimism or enthusiasm.
Speaker 1: Generous of you to rip up your morning to come
Speaker 1: on with this. Randy Krasner of the Booth School, Chicago,
Speaker 1: and celebration of his colleague Richard Taylor. Richard Taylor winning
Speaker 1: the Nobel Prize. Thanks for listening to the Bloomberg Surveillance podcast.
Speaker 1: Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or
Speaker 1: whichever podcast platform you prefer. I'm on Twitter at Tom Keene.
Speaker 1: David Gura is at David Gura. Before the podcast, you
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio