WEBVTT - Larry Summers Talks Fed Independence

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>As we now turn for his unique view on balance

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<v Speaker 2>of power to Larry Summers, the former US Treasury Secretary

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<v Speaker 2>in the Clinton administration, of course, now Bloomberg Wall Street

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<v Speaker 2>Week contributor, Mister Secretary, Welcome back to Bloomberg TV and Radio.

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<v Speaker 2>Will we look back on this day as the day

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<v Speaker 2>that FED independence died?

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<v Speaker 3>It's too early to know.

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<v Speaker 1>And you know, we've seen a lot that has been

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<v Speaker 1>threatening to FED independence. An unprecedented degree of rhetorical attack

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<v Speaker 1>publicly from the President on the FED, involvement of the

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<v Speaker 1>President in criticism of the FED over a relatively minor matter,

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<v Speaker 1>the creation the construction of a building, announcement by the

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<v Speaker 1>President of various kinds with respect to the composition of

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<v Speaker 1>the Federal Reserve.

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<v Speaker 3>So I don't think there's any.

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<v Speaker 1>Question that we're facing the most severe challenge to FED

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<v Speaker 1>independence in the last two generations.

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<v Speaker 2>And I don't safe to say this is the beginning

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<v Speaker 2>of the politicization of the FED.

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<v Speaker 1>Well, I think that I don't know that i'd want

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<v Speaker 1>to call it the beginning. There have been various things

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<v Speaker 1>that have happened in the past, but I would say

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<v Speaker 1>it's the gravest, most extensive politicization of the FED in

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<v Speaker 1>more than fifty years. And what we know from experience

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<v Speaker 1>around the world and from our own historical experience, for

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<v Speaker 1>example with Richard Nixon and the then Chairman of the FED,

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<v Speaker 1>Arthur Burns, is that when monetary policy politicized, and when

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<v Speaker 1>it is perceived as politicized, everybody expects higher inflation. And

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<v Speaker 1>then that expected inflation as wage earners bargain, as price

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<v Speaker 1>setters set prices, becomes a self fulfilling prophecy, and you

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<v Speaker 1>get higher inflation. And if you want to do something

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<v Speaker 1>about it, then when everybody's expecting higher inflation and pushing

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<v Speaker 1>prices way up, if you don't validate that by printing money,

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<v Speaker 1>you end up getting a recession. So it makes it

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<v Speaker 1>harder and worse for everybody. And that's why most countries

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<v Speaker 1>in the world have moved to having institutions based on

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<v Speaker 1>independent central banking. And you saw a bit of market response.

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<v Speaker 1>It wasn't a dramatic market response last night, but it

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<v Speaker 1>was a revealing one. You saw short term interest rates

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<v Speaker 1>go down because people thought, gee, if it's so political,

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<v Speaker 1>the Fed's going to cut more.

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<v Speaker 3>You saw long term.

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<v Speaker 1>Interest rates go up because people thought we're headed for

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<v Speaker 1>more inflation. And you saw a dollar go down because

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<v Speaker 1>even though you could earn a higher interest rate on

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<v Speaker 1>the dollar, market judgment was that it was going to

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<v Speaker 1>be a less valuable currency over time because of all

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<v Speaker 1>the money that was going to be printed by a

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<v Speaker 1>political fed. So it was a sign that we were

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<v Speaker 1>looking more like an emerging market country.

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<v Speaker 3>And I think that's.

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<v Speaker 1>The way this is going to be read very broadly

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<v Speaker 1>over time. If we know anything, it's that these things

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<v Speaker 1>don't happen smoothly. It's like Hemingway said, go bankrupt first, slowly,

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<v Speaker 1>then quickly, and if we lose our credibility, if at

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<v Speaker 1>a certain point our credibility tips over only takes it

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<v Speaker 1>takes decades to grow a farce, but it takes only

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<v Speaker 1>an hour to burn one down. And credibility is a

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<v Speaker 1>bit like that. And we're putting ours at risk. And

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<v Speaker 1>it's made worse by the fact, by a couple of things.

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<v Speaker 1>It's made worse by the fact that the president's proposals

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<v Speaker 1>for monetary policy are outside of the reasonable range of debate.

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<v Speaker 1>You can argue as to whether we should cut rates

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<v Speaker 1>fifty basis points or one hundred basis points. There is

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<v Speaker 1>no one outside of those politically attentive to the President

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<v Speaker 1>who defends the idea that we should cut interest rates

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<v Speaker 1>to anything like the one that the President has talked about.

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<v Speaker 1>No one that's not a serious idea. And by the way,

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<v Speaker 1>I just have to say, this, is it really this

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<v Speaker 1>president who is treating saying things that don't turn out

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<v Speaker 1>to be exactly accurate on our real estate related loan

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<v Speaker 1>application as being the end of the world. That is

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<v Speaker 1>a sin of which the President has stood accused on many,

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<v Speaker 1>many occasions, has been found guilty by courts, has engaged

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<v Speaker 1>in settlements, has paid a fines. And so if somehow

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<v Speaker 1>misleading statements on loan applications are disqualifying, I think that

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<v Speaker 1>that's a brush that should paint very very broadly.

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<v Speaker 2>Secretary the current Treasury Secretary, Scott Besstt said today in

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<v Speaker 2>the President's Cabinet meeting, the Fed's independence comes from a

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<v Speaker 2>political arrangement between itself and the American public. Having the

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<v Speaker 2>public's trust, he said, is the only thing that gives

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<v Speaker 2>it credibility. Lisa Cook is going to fight this. The

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<v Speaker 2>lawsuit is coming today. How important will it be for her?

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<v Speaker 2>To win this lawsuit on a precedent setting level to

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<v Speaker 2>maintain that credibility.

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<v Speaker 1>Look, I don't think we have yet had access to

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<v Speaker 1>all the facts. I don't think the President has access

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<v Speaker 1>to all the facts. And that's why jumping to any

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<v Speaker 1>conclusion without any sort of process, without any sort of

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<v Speaker 1>fact finding, was I think completely inappropriate. So I don't

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<v Speaker 1>feel in a position to judge the results of lawsuits,

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<v Speaker 1>but I can judge the process. And I have to say,

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<v Speaker 1>I don't understand quite what Secretary Best was saying.

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<v Speaker 3>The view that previous.

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<v Speaker 1>Administrations have had is that the independence of the FED

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<v Speaker 1>is in part reflected in statute that it reports to

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<v Speaker 1>the Congress, that it is not part of the executive branch,

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<v Speaker 1>what the Supreme Court recognized when it distinguished the FED

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<v Speaker 1>from other agencies with respect to the president's ability to

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<v Speaker 1>hire and fire. So, in part it's rooted in law,

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<v Speaker 1>and in part it's rooted in a tradition. Secretary Ruben

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<v Speaker 1>and I I remember very well told President Clinton that

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<v Speaker 1>it was our advice to him that engaging in public

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<v Speaker 1>debate with the FED was a fool's game because the

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<v Speaker 1>FED wouldn't listen, and so short term interistrates wouldn't be

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<v Speaker 1>changed very much, but the markets would listen as credibility

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<v Speaker 1>was lost, and long term interstrates would rise. And that's

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<v Speaker 1>why we have an established tradition of which Secretary Best

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<v Speaker 1>has endorsed very recently, of administrations not engaging on the

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<v Speaker 1>question of monetary policy and how interest rates should be

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<v Speaker 1>set and at what level they should be set. But

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<v Speaker 1>we have an administration that is disregarding the superstructure of norms.

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<v Speaker 3>That has really been what has made.

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<v Speaker 1>Our democracy and our economy so strong for decades.

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<v Speaker 3>This is of a piece with sending.

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<v Speaker 1>The FBI to former officials homes with threatening people with

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<v Speaker 1>criminal prosecutions, and I think over time it runs very

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<v Speaker 1>very substantial risks for our national economy.

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<v Speaker 2>Secretary, I'm out of time. I just want to know,

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<v Speaker 2>to the extent that you understand it. Can J Powell

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<v Speaker 2>keep Lisa Cook employed as long as he thinks it's correct?

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<v Speaker 2>Is he the one who controls her paycheck?

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<v Speaker 3>I don't think it's I don't think so.

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<v Speaker 2>I'm not so Donald Trump can cut off her paycheck.

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<v Speaker 3>I'm not an.

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<v Speaker 1>Expert on the lead on the legalisms, but remember that

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<v Speaker 1>whereas the Deputy Secretary of State reports to the Secretary

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<v Speaker 1>of State. The governors of the Federal Reserve are not

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<v Speaker 1>subservient to the chairman and don't report to the chairman.

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<v Speaker 1>So I think this is something that will be worked

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<v Speaker 1>out in court.

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<v Speaker 2>Fascinating conversation we wanted to bring you with Larry Summers,

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<v Speaker 2>the former Treasury secretary in the Clinton administration, Bloomberg Wall

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<v Speaker 2>Street Week contributor, mister secretary, thank you as ever.