1 00:00:02,520 --> 00:00:07,040 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:07,880 --> 00:00:10,320 Speaker 2: As we now turn for his unique view on balance 3 00:00:10,320 --> 00:00:13,480 Speaker 2: of power to Larry Summers, the former US Treasury Secretary 4 00:00:13,520 --> 00:00:16,240 Speaker 2: in the Clinton administration, of course, now Bloomberg Wall Street 5 00:00:16,239 --> 00:00:20,080 Speaker 2: Week contributor, Mister Secretary, Welcome back to Bloomberg TV and Radio. 6 00:00:20,120 --> 00:00:22,680 Speaker 2: Will we look back on this day as the day 7 00:00:22,800 --> 00:00:24,360 Speaker 2: that FED independence died? 8 00:00:26,960 --> 00:00:29,000 Speaker 3: It's too early to know. 9 00:00:30,120 --> 00:00:34,760 Speaker 1: And you know, we've seen a lot that has been 10 00:00:34,800 --> 00:00:39,960 Speaker 1: threatening to FED independence. An unprecedented degree of rhetorical attack 11 00:00:40,200 --> 00:00:45,279 Speaker 1: publicly from the President on the FED, involvement of the 12 00:00:45,320 --> 00:00:52,160 Speaker 1: President in criticism of the FED over a relatively minor matter, 13 00:00:52,720 --> 00:01:01,080 Speaker 1: the creation the construction of a building, announcement by the 14 00:01:01,120 --> 00:01:08,680 Speaker 1: President of various kinds with respect to the composition of 15 00:01:08,720 --> 00:01:09,759 Speaker 1: the Federal Reserve. 16 00:01:10,319 --> 00:01:11,560 Speaker 3: So I don't think there's any. 17 00:01:11,480 --> 00:01:17,560 Speaker 1: Question that we're facing the most severe challenge to FED 18 00:01:17,640 --> 00:01:20,840 Speaker 1: independence in the last two generations. 19 00:01:21,680 --> 00:01:24,040 Speaker 2: And I don't safe to say this is the beginning 20 00:01:24,040 --> 00:01:25,480 Speaker 2: of the politicization of the FED. 21 00:01:26,319 --> 00:01:29,119 Speaker 1: Well, I think that I don't know that i'd want 22 00:01:29,120 --> 00:01:31,240 Speaker 1: to call it the beginning. There have been various things 23 00:01:31,240 --> 00:01:33,720 Speaker 1: that have happened in the past, but I would say 24 00:01:33,760 --> 00:01:41,000 Speaker 1: it's the gravest, most extensive politicization of the FED in 25 00:01:41,160 --> 00:01:46,560 Speaker 1: more than fifty years. And what we know from experience 26 00:01:46,640 --> 00:01:50,600 Speaker 1: around the world and from our own historical experience, for 27 00:01:50,680 --> 00:01:54,680 Speaker 1: example with Richard Nixon and the then Chairman of the FED, 28 00:01:55,240 --> 00:02:01,800 Speaker 1: Arthur Burns, is that when monetary policy politicized, and when 29 00:02:01,840 --> 00:02:08,920 Speaker 1: it is perceived as politicized, everybody expects higher inflation. And 30 00:02:08,960 --> 00:02:14,280 Speaker 1: then that expected inflation as wage earners bargain, as price 31 00:02:14,320 --> 00:02:21,200 Speaker 1: setters set prices, becomes a self fulfilling prophecy, and you 32 00:02:21,360 --> 00:02:24,560 Speaker 1: get higher inflation. And if you want to do something 33 00:02:24,600 --> 00:02:29,000 Speaker 1: about it, then when everybody's expecting higher inflation and pushing 34 00:02:29,040 --> 00:02:33,800 Speaker 1: prices way up, if you don't validate that by printing money, 35 00:02:34,280 --> 00:02:37,960 Speaker 1: you end up getting a recession. So it makes it 36 00:02:38,000 --> 00:02:43,359 Speaker 1: harder and worse for everybody. And that's why most countries 37 00:02:43,400 --> 00:02:47,440 Speaker 1: in the world have moved to having institutions based on 38 00:02:48,160 --> 00:02:54,160 Speaker 1: independent central banking. And you saw a bit of market response. 39 00:02:54,240 --> 00:02:58,919 Speaker 1: It wasn't a dramatic market response last night, but it 40 00:02:58,960 --> 00:03:03,040 Speaker 1: was a revealing one. You saw short term interest rates 41 00:03:03,080 --> 00:03:06,520 Speaker 1: go down because people thought, gee, if it's so political, 42 00:03:06,600 --> 00:03:07,920 Speaker 1: the Fed's going to cut more. 43 00:03:08,480 --> 00:03:09,760 Speaker 3: You saw long term. 44 00:03:09,560 --> 00:03:13,359 Speaker 1: Interest rates go up because people thought we're headed for 45 00:03:13,680 --> 00:03:17,800 Speaker 1: more inflation. And you saw a dollar go down because 46 00:03:17,880 --> 00:03:20,080 Speaker 1: even though you could earn a higher interest rate on 47 00:03:20,160 --> 00:03:23,480 Speaker 1: the dollar, market judgment was that it was going to 48 00:03:23,480 --> 00:03:26,959 Speaker 1: be a less valuable currency over time because of all 49 00:03:27,080 --> 00:03:31,560 Speaker 1: the money that was going to be printed by a 50 00:03:31,680 --> 00:03:36,680 Speaker 1: political fed. So it was a sign that we were 51 00:03:36,720 --> 00:03:42,280 Speaker 1: looking more like an emerging market country. 52 00:03:42,760 --> 00:03:44,280 Speaker 3: And I think that's. 53 00:03:44,160 --> 00:03:49,840 Speaker 1: The way this is going to be read very broadly 54 00:03:50,680 --> 00:03:55,680 Speaker 1: over time. If we know anything, it's that these things 55 00:03:55,760 --> 00:04:01,760 Speaker 1: don't happen smoothly. It's like Hemingway said, go bankrupt first, slowly, 56 00:04:01,880 --> 00:04:06,520 Speaker 1: then quickly, and if we lose our credibility, if at 57 00:04:06,520 --> 00:04:11,960 Speaker 1: a certain point our credibility tips over only takes it 58 00:04:12,000 --> 00:04:16,200 Speaker 1: takes decades to grow a farce, but it takes only 59 00:04:16,800 --> 00:04:21,600 Speaker 1: an hour to burn one down. And credibility is a 60 00:04:21,600 --> 00:04:28,080 Speaker 1: bit like that. And we're putting ours at risk. And 61 00:04:28,360 --> 00:04:32,640 Speaker 1: it's made worse by the fact, by a couple of things. 62 00:04:32,680 --> 00:04:38,160 Speaker 1: It's made worse by the fact that the president's proposals 63 00:04:38,200 --> 00:04:43,479 Speaker 1: for monetary policy are outside of the reasonable range of debate. 64 00:04:43,600 --> 00:04:46,320 Speaker 1: You can argue as to whether we should cut rates 65 00:04:46,360 --> 00:04:49,760 Speaker 1: fifty basis points or one hundred basis points. There is 66 00:04:49,920 --> 00:04:54,720 Speaker 1: no one outside of those politically attentive to the President 67 00:04:55,320 --> 00:04:58,120 Speaker 1: who defends the idea that we should cut interest rates 68 00:04:58,160 --> 00:05:02,719 Speaker 1: to anything like the one that the President has talked about. 69 00:05:03,240 --> 00:05:09,000 Speaker 1: No one that's not a serious idea. And by the way, 70 00:05:09,760 --> 00:05:14,479 Speaker 1: I just have to say, this, is it really this 71 00:05:14,680 --> 00:05:20,640 Speaker 1: president who is treating saying things that don't turn out 72 00:05:20,680 --> 00:05:25,520 Speaker 1: to be exactly accurate on our real estate related loan 73 00:05:25,640 --> 00:05:30,680 Speaker 1: application as being the end of the world. That is 74 00:05:30,760 --> 00:05:38,919 Speaker 1: a sin of which the President has stood accused on many, 75 00:05:39,040 --> 00:05:46,240 Speaker 1: many occasions, has been found guilty by courts, has engaged 76 00:05:46,360 --> 00:05:53,240 Speaker 1: in settlements, has paid a fines. And so if somehow 77 00:05:54,680 --> 00:06:02,800 Speaker 1: misleading statements on loan applications are disqualifying, I think that 78 00:06:02,800 --> 00:06:09,040 Speaker 1: that's a brush that should paint very very broadly. 79 00:06:10,960 --> 00:06:15,200 Speaker 2: Secretary the current Treasury Secretary, Scott Besstt said today in 80 00:06:15,240 --> 00:06:18,760 Speaker 2: the President's Cabinet meeting, the Fed's independence comes from a 81 00:06:18,880 --> 00:06:23,120 Speaker 2: political arrangement between itself and the American public. Having the 82 00:06:23,160 --> 00:06:26,320 Speaker 2: public's trust, he said, is the only thing that gives 83 00:06:26,320 --> 00:06:29,280 Speaker 2: it credibility. Lisa Cook is going to fight this. The 84 00:06:29,360 --> 00:06:32,720 Speaker 2: lawsuit is coming today. How important will it be for her? 85 00:06:32,760 --> 00:06:35,520 Speaker 2: To win this lawsuit on a precedent setting level to 86 00:06:35,600 --> 00:06:37,360 Speaker 2: maintain that credibility. 87 00:06:38,200 --> 00:06:42,640 Speaker 1: Look, I don't think we have yet had access to 88 00:06:42,720 --> 00:06:46,000 Speaker 1: all the facts. I don't think the President has access 89 00:06:46,040 --> 00:06:49,960 Speaker 1: to all the facts. And that's why jumping to any 90 00:06:50,040 --> 00:06:54,520 Speaker 1: conclusion without any sort of process, without any sort of 91 00:06:54,600 --> 00:06:59,640 Speaker 1: fact finding, was I think completely inappropriate. So I don't 92 00:06:59,720 --> 00:07:04,120 Speaker 1: feel in a position to judge the results of lawsuits, 93 00:07:04,640 --> 00:07:08,640 Speaker 1: but I can judge the process. And I have to say, 94 00:07:08,720 --> 00:07:13,720 Speaker 1: I don't understand quite what Secretary Best was saying. 95 00:07:14,640 --> 00:07:17,080 Speaker 3: The view that previous. 96 00:07:16,800 --> 00:07:23,240 Speaker 1: Administrations have had is that the independence of the FED 97 00:07:24,360 --> 00:07:29,640 Speaker 1: is in part reflected in statute that it reports to 98 00:07:30,480 --> 00:07:33,680 Speaker 1: the Congress, that it is not part of the executive branch, 99 00:07:33,880 --> 00:07:37,840 Speaker 1: what the Supreme Court recognized when it distinguished the FED 100 00:07:38,000 --> 00:07:42,440 Speaker 1: from other agencies with respect to the president's ability to 101 00:07:43,000 --> 00:07:47,640 Speaker 1: hire and fire. So, in part it's rooted in law, 102 00:07:48,440 --> 00:07:53,960 Speaker 1: and in part it's rooted in a tradition. Secretary Ruben 103 00:07:54,000 --> 00:07:58,320 Speaker 1: and I I remember very well told President Clinton that 104 00:07:59,120 --> 00:08:03,160 Speaker 1: it was our advice to him that engaging in public 105 00:08:03,200 --> 00:08:07,160 Speaker 1: debate with the FED was a fool's game because the 106 00:08:07,200 --> 00:08:11,040 Speaker 1: FED wouldn't listen, and so short term interistrates wouldn't be 107 00:08:11,160 --> 00:08:15,440 Speaker 1: changed very much, but the markets would listen as credibility 108 00:08:15,600 --> 00:08:21,200 Speaker 1: was lost, and long term interstrates would rise. And that's 109 00:08:21,280 --> 00:08:26,800 Speaker 1: why we have an established tradition of which Secretary Best 110 00:08:27,160 --> 00:08:35,280 Speaker 1: has endorsed very recently, of administrations not engaging on the 111 00:08:35,440 --> 00:08:40,200 Speaker 1: question of monetary policy and how interest rates should be 112 00:08:40,240 --> 00:08:44,240 Speaker 1: set and at what level they should be set. But 113 00:08:44,960 --> 00:08:53,640 Speaker 1: we have an administration that is disregarding the superstructure of norms. 114 00:08:53,679 --> 00:08:57,679 Speaker 3: That has really been what has made. 115 00:08:57,480 --> 00:09:03,280 Speaker 1: Our democracy and our economy so strong for decades. 116 00:09:04,120 --> 00:09:07,680 Speaker 3: This is of a piece with sending. 117 00:09:07,360 --> 00:09:13,480 Speaker 1: The FBI to former officials homes with threatening people with 118 00:09:14,440 --> 00:09:21,280 Speaker 1: criminal prosecutions, and I think over time it runs very 119 00:09:21,360 --> 00:09:25,000 Speaker 1: very substantial risks for our national economy. 120 00:09:26,160 --> 00:09:28,080 Speaker 2: Secretary, I'm out of time. I just want to know, 121 00:09:28,280 --> 00:09:31,160 Speaker 2: to the extent that you understand it. Can J Powell 122 00:09:32,000 --> 00:09:35,360 Speaker 2: keep Lisa Cook employed as long as he thinks it's correct? 123 00:09:35,440 --> 00:09:37,280 Speaker 2: Is he the one who controls her paycheck? 124 00:09:37,480 --> 00:09:39,440 Speaker 3: I don't think it's I don't think so. 125 00:09:39,640 --> 00:09:43,200 Speaker 2: I'm not so Donald Trump can cut off her paycheck. 126 00:09:43,240 --> 00:09:43,800 Speaker 3: I'm not an. 127 00:09:43,720 --> 00:09:49,240 Speaker 1: Expert on the lead on the legalisms, but remember that 128 00:09:49,800 --> 00:09:53,560 Speaker 1: whereas the Deputy Secretary of State reports to the Secretary 129 00:09:53,600 --> 00:09:57,760 Speaker 1: of State. The governors of the Federal Reserve are not 130 00:09:57,920 --> 00:10:03,280 Speaker 1: subservient to the chairman and don't report to the chairman. 131 00:10:03,679 --> 00:10:07,079 Speaker 1: So I think this is something that will be worked 132 00:10:07,120 --> 00:10:08,760 Speaker 1: out in court. 133 00:10:10,320 --> 00:10:13,199 Speaker 2: Fascinating conversation we wanted to bring you with Larry Summers, 134 00:10:13,240 --> 00:10:16,480 Speaker 2: the former Treasury secretary in the Clinton administration, Bloomberg Wall 135 00:10:16,480 --> 00:10:19,360 Speaker 2: Street Week contributor, mister secretary, thank you as ever.