Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: As we now turn for his unique view on balance
Speaker 2: of power to Larry Summers, the former US Treasury Secretary
Speaker 2: in the Clinton administration, of course, now Bloomberg Wall Street
Speaker 2: Week contributor, Mister Secretary, Welcome back to Bloomberg TV and Radio.
Speaker 2: Will we look back on this day as the day
Speaker 2: that FED independence died?
Speaker 3: It's too early to know.
Speaker 1: And you know, we've seen a lot that has been
Speaker 1: threatening to FED independence. An unprecedented degree of rhetorical attack
Speaker 1: publicly from the President on the FED, involvement of the
Speaker 1: President in criticism of the FED over a relatively minor matter,
Speaker 1: the creation the construction of a building, announcement by the
Speaker 1: President of various kinds with respect to the composition of
Speaker 1: the Federal Reserve.
Speaker 3: So I don't think there's any.
Speaker 1: Question that we're facing the most severe challenge to FED
Speaker 1: independence in the last two generations.
Speaker 2: And I don't safe to say this is the beginning
Speaker 2: of the politicization of the FED.
Speaker 1: Well, I think that I don't know that i'd want
Speaker 1: to call it the beginning. There have been various things
Speaker 1: that have happened in the past, but I would say
Speaker 1: it's the gravest, most extensive politicization of the FED in
Speaker 1: more than fifty years. And what we know from experience
Speaker 1: around the world and from our own historical experience, for
Speaker 1: example with Richard Nixon and the then Chairman of the FED,
Speaker 1: Arthur Burns, is that when monetary policy politicized, and when
Speaker 1: it is perceived as politicized, everybody expects higher inflation. And
Speaker 1: then that expected inflation as wage earners bargain, as price
Speaker 1: setters set prices, becomes a self fulfilling prophecy, and you
Speaker 1: get higher inflation. And if you want to do something
Speaker 1: about it, then when everybody's expecting higher inflation and pushing
Speaker 1: prices way up, if you don't validate that by printing money,
Speaker 1: you end up getting a recession. So it makes it
Speaker 1: harder and worse for everybody. And that's why most countries
Speaker 1: in the world have moved to having institutions based on
Speaker 1: independent central banking. And you saw a bit of market response.
Speaker 1: It wasn't a dramatic market response last night, but it
Speaker 1: was a revealing one. You saw short term interest rates
Speaker 1: go down because people thought, gee, if it's so political,
Speaker 1: the Fed's going to cut more.
Speaker 3: You saw long term.
Speaker 1: Interest rates go up because people thought we're headed for
Speaker 1: more inflation. And you saw a dollar go down because
Speaker 1: even though you could earn a higher interest rate on
Speaker 1: the dollar, market judgment was that it was going to
Speaker 1: be a less valuable currency over time because of all
Speaker 1: the money that was going to be printed by a
Speaker 1: political fed. So it was a sign that we were
Speaker 1: looking more like an emerging market country.
Speaker 3: And I think that's.
Speaker 1: The way this is going to be read very broadly
Speaker 1: over time. If we know anything, it's that these things
Speaker 1: don't happen smoothly. It's like Hemingway said, go bankrupt first, slowly,
Speaker 1: then quickly, and if we lose our credibility, if at
Speaker 1: a certain point our credibility tips over only takes it
Speaker 1: takes decades to grow a farce, but it takes only
Speaker 1: an hour to burn one down. And credibility is a
Speaker 1: bit like that. And we're putting ours at risk. And
Speaker 1: it's made worse by the fact, by a couple of things.
Speaker 1: It's made worse by the fact that the president's proposals
Speaker 1: for monetary policy are outside of the reasonable range of debate.
Speaker 1: You can argue as to whether we should cut rates
Speaker 1: fifty basis points or one hundred basis points. There is
Speaker 1: no one outside of those politically attentive to the President
Speaker 1: who defends the idea that we should cut interest rates
Speaker 1: to anything like the one that the President has talked about.
Speaker 1: No one that's not a serious idea. And by the way,
Speaker 1: I just have to say, this, is it really this
Speaker 1: president who is treating saying things that don't turn out
Speaker 1: to be exactly accurate on our real estate related loan
Speaker 1: application as being the end of the world. That is
Speaker 1: a sin of which the President has stood accused on many,
Speaker 1: many occasions, has been found guilty by courts, has engaged
Speaker 1: in settlements, has paid a fines. And so if somehow
Speaker 1: misleading statements on loan applications are disqualifying, I think that
Speaker 1: that's a brush that should paint very very broadly.
Speaker 2: Secretary the current Treasury Secretary, Scott Besstt said today in
Speaker 2: the President's Cabinet meeting, the Fed's independence comes from a
Speaker 2: political arrangement between itself and the American public. Having the
Speaker 2: public's trust, he said, is the only thing that gives
Speaker 2: it credibility. Lisa Cook is going to fight this. The
Speaker 2: lawsuit is coming today. How important will it be for her?
Speaker 2: To win this lawsuit on a precedent setting level to
Speaker 2: maintain that credibility.
Speaker 1: Look, I don't think we have yet had access to
Speaker 1: all the facts. I don't think the President has access
Speaker 1: to all the facts. And that's why jumping to any
Speaker 1: conclusion without any sort of process, without any sort of
Speaker 1: fact finding, was I think completely inappropriate. So I don't
Speaker 1: feel in a position to judge the results of lawsuits,
Speaker 1: but I can judge the process. And I have to say,
Speaker 1: I don't understand quite what Secretary Best was saying.
Speaker 3: The view that previous.
Speaker 1: Administrations have had is that the independence of the FED
Speaker 1: is in part reflected in statute that it reports to
Speaker 1: the Congress, that it is not part of the executive branch,
Speaker 1: what the Supreme Court recognized when it distinguished the FED
Speaker 1: from other agencies with respect to the president's ability to
Speaker 1: hire and fire. So, in part it's rooted in law,
Speaker 1: and in part it's rooted in a tradition. Secretary Ruben
Speaker 1: and I I remember very well told President Clinton that
Speaker 1: it was our advice to him that engaging in public
Speaker 1: debate with the FED was a fool's game because the
Speaker 1: FED wouldn't listen, and so short term interistrates wouldn't be
Speaker 1: changed very much, but the markets would listen as credibility
Speaker 1: was lost, and long term interstrates would rise. And that's
Speaker 1: why we have an established tradition of which Secretary Best
Speaker 1: has endorsed very recently, of administrations not engaging on the
Speaker 1: question of monetary policy and how interest rates should be
Speaker 1: set and at what level they should be set. But
Speaker 1: we have an administration that is disregarding the superstructure of norms.
Speaker 3: That has really been what has made.
Speaker 1: Our democracy and our economy so strong for decades.
Speaker 3: This is of a piece with sending.
Speaker 1: The FBI to former officials homes with threatening people with
Speaker 1: criminal prosecutions, and I think over time it runs very
Speaker 1: very substantial risks for our national economy.
Speaker 2: Secretary, I'm out of time. I just want to know,
Speaker 2: to the extent that you understand it. Can J Powell
Speaker 2: keep Lisa Cook employed as long as he thinks it's correct?
Speaker 2: Is he the one who controls her paycheck?
Speaker 3: I don't think it's I don't think so.
Speaker 2: I'm not so Donald Trump can cut off her paycheck.
Speaker 3: I'm not an.
Speaker 1: Expert on the lead on the legalisms, but remember that
Speaker 1: whereas the Deputy Secretary of State reports to the Secretary
Speaker 1: of State. The governors of the Federal Reserve are not
Speaker 1: subservient to the chairman and don't report to the chairman.
Speaker 1: So I think this is something that will be worked
Speaker 1: out in court.
Speaker 2: Fascinating conversation we wanted to bring you with Larry Summers,
Speaker 2: the former Treasury secretary in the Clinton administration, Bloomberg Wall
Speaker 2: Street Week contributor, mister secretary, thank you as ever.