1 00:00:02,240 --> 00:00:06,840 Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio. 2 00:00:09,800 --> 00:00:12,360 Speaker 1: This week on the podcast, I have a special guest. 3 00:00:12,680 --> 00:00:15,600 Speaker 1: His name is Richard Silla, and what can I tell you? 4 00:00:16,000 --> 00:00:21,760 Speaker 1: He is an historian of UH finance, a professor at 5 00:00:21,920 --> 00:00:25,320 Speaker 1: n y U Stern UH, an expert on central banks, 6 00:00:25,360 --> 00:00:30,640 Speaker 1: on interest rates, on history of markets. Really, there isn't 7 00:00:30,720 --> 00:00:35,440 Speaker 1: a broad topic about finance that he hasn't either researched 8 00:00:35,520 --> 00:00:38,800 Speaker 1: or published about. He is just simply a wealth of 9 00:00:38,880 --> 00:00:44,200 Speaker 1: knowledge and has not only written long in depth books 10 00:00:44,200 --> 00:00:48,240 Speaker 1: about broad topics, but also written in real time and 11 00:00:48,320 --> 00:00:54,040 Speaker 1: reflected that knowledge in terms of actionable UH market activity. 12 00:00:54,760 --> 00:00:58,480 Speaker 1: I found this to be not exactly a wonky conversation, 13 00:00:58,560 --> 00:01:02,560 Speaker 1: but if you're at all interest did in interest rates, finance, history, 14 00:01:03,080 --> 00:01:06,280 Speaker 1: central banks, things along those lines, I think you'll find 15 00:01:06,280 --> 00:01:10,360 Speaker 1: this to be an absolutely fascinating chat. So, with no 16 00:01:10,480 --> 00:01:18,720 Speaker 1: further ado, my conversation with Professor Richard Silla. I'm Barry Ritolts. 17 00:01:18,880 --> 00:01:22,520 Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My 18 00:01:22,600 --> 00:01:26,399 Speaker 1: special guest today is Richard Silla. He is the professor 19 00:01:26,440 --> 00:01:31,760 Speaker 1: emeritus of Economics and the former Henry Kaufman Professor of History, 20 00:01:31,760 --> 00:01:36,840 Speaker 1: of Financial Institutions and Markets at New York University's Stern 21 00:01:36,959 --> 00:01:40,800 Speaker 1: School of Business. He is the author of numerous books, 22 00:01:41,240 --> 00:01:47,680 Speaker 1: including American Capital Markets, History of Interest Rates, and most recently, 23 00:01:48,280 --> 00:01:54,120 Speaker 1: Alexander Hamilton's on Finance, Credit and Debt. Professor Silla, Welcome 24 00:01:54,160 --> 00:01:57,240 Speaker 1: to Bloomberg. Glad to be with you, Barry. So. I'm 25 00:01:57,280 --> 00:02:01,400 Speaker 1: aware of of your your career and your contributions to 26 00:02:02,120 --> 00:02:04,960 Speaker 1: the world of finance. I left out in our introduction 27 00:02:05,040 --> 00:02:09,080 Speaker 1: that you are also currently chairman of the Museum of 28 00:02:09,120 --> 00:02:13,919 Speaker 1: American Finance, which holds numerous events and has some really 29 00:02:14,440 --> 00:02:20,440 Speaker 1: tremendous um exhibits, really fascinating exhibits. But let's start by 30 00:02:20,480 --> 00:02:24,520 Speaker 1: discussing the history of markets. Why should any of us 31 00:02:24,560 --> 00:02:27,359 Speaker 1: be concerned about what took place in the past. Why 32 00:02:27,360 --> 00:02:30,600 Speaker 1: should we study market history? Well, I think one of 33 00:02:30,600 --> 00:02:33,679 Speaker 1: the main reasons for studying market history is that the 34 00:02:34,160 --> 00:02:36,440 Speaker 1: things that happened in the past tend to repeat themselves, 35 00:02:36,480 --> 00:02:40,079 Speaker 1: you know, things like financial crises. They we had one recently. 36 00:02:40,200 --> 00:02:42,240 Speaker 1: It was kind of unexpected because we hadn't had one 37 00:02:42,280 --> 00:02:44,560 Speaker 1: for a long time. But then just studying the way 38 00:02:44,639 --> 00:02:47,480 Speaker 1: the markets behaved in the past, their ups and downs, 39 00:02:47,800 --> 00:02:51,360 Speaker 1: you can learn a bit about market cycles, and you know, 40 00:02:51,360 --> 00:02:54,399 Speaker 1: I think an investor needs to know where we are 41 00:02:54,639 --> 00:02:57,800 Speaker 1: sort of in a market cycle, because that's valuable information. 42 00:02:58,200 --> 00:03:01,360 Speaker 1: So can we trade on them, nation can we actually 43 00:03:01,440 --> 00:03:05,200 Speaker 1: use in information to make risk reward decisions or does 44 00:03:05,240 --> 00:03:10,160 Speaker 1: it just provide a framework for how we're conceptualizing market 45 00:03:11,160 --> 00:03:13,640 Speaker 1: A couple of times in my career have made my 46 00:03:13,680 --> 00:03:16,120 Speaker 1: own investment decisions, and then they turned out to have 47 00:03:16,160 --> 00:03:19,880 Speaker 1: been right. Uh. Round two thousand, at the height of 48 00:03:19,919 --> 00:03:22,360 Speaker 1: the dot com bubble, I and other people like Bob 49 00:03:22,360 --> 00:03:26,000 Speaker 1: Seller thought the markets were tremendously overpriced, and I wrote 50 00:03:26,000 --> 00:03:27,760 Speaker 1: an article. I think I first gave it as a 51 00:03:27,800 --> 00:03:31,000 Speaker 1: talk at the end of nine, wrote it up in 52 00:03:31,040 --> 00:03:33,680 Speaker 1: two thousand. It was published in two thousand one, and 53 00:03:33,720 --> 00:03:38,760 Speaker 1: I said there that, uh, when whenever the markets went 54 00:03:38,840 --> 00:03:42,560 Speaker 1: up as much as they did peeking around, usually the 55 00:03:42,600 --> 00:03:45,200 Speaker 1: next decade was a bad decade. And I wrote that 56 00:03:45,240 --> 00:03:48,080 Speaker 1: in two thousand one, and I made a forecast just 57 00:03:48,120 --> 00:03:51,480 Speaker 1: by assuming returns would be real returns with zero that 58 00:03:52,200 --> 00:03:55,200 Speaker 1: you know, what would happen to returns? And it turned out, 59 00:03:55,280 --> 00:03:57,000 Speaker 1: you know, I actually drew a picture of it, and 60 00:03:57,040 --> 00:03:59,200 Speaker 1: it turned out that what actually happened from two thousand 61 00:03:59,280 --> 00:04:03,160 Speaker 1: to two thousand sort of mimbick pretty much what I did. Uh, 62 00:04:03,240 --> 00:04:06,200 Speaker 1: then in two thousand nine, Uh, we're actually probably a 63 00:04:06,240 --> 00:04:09,400 Speaker 1: year later, two thousand ten or eleven. For the same reason, 64 00:04:09,520 --> 00:04:11,920 Speaker 1: after you have this big decline of a decade or so, 65 00:04:12,240 --> 00:04:14,920 Speaker 1: market history told me that the next decade after that 66 00:04:15,040 --> 00:04:18,159 Speaker 1: is usually better. So I made a prediction that you know, 67 00:04:18,279 --> 00:04:20,880 Speaker 1: we would have a pretty good decade from two thousand 68 00:04:21,080 --> 00:04:24,800 Speaker 1: ten to two thousand twenty, and uh, that's pretty much 69 00:04:24,800 --> 00:04:27,760 Speaker 1: come to pass two. So it sounds like you're not 70 00:04:28,279 --> 00:04:31,920 Speaker 1: actively involved in I certainly won't call it day trading, 71 00:04:32,400 --> 00:04:35,760 Speaker 1: but day to day, week the week sort of noisy 72 00:04:35,839 --> 00:04:39,360 Speaker 1: market moves. You're looking at long arcs of history and 73 00:04:40,279 --> 00:04:43,919 Speaker 1: decade long periods of mean regression from when stocks are 74 00:04:43,960 --> 00:04:47,680 Speaker 1: either very pricy you're very cheap. Precisely, I would say that, 75 00:04:48,279 --> 00:04:50,880 Speaker 1: both in terms of interest rates and in terms of 76 00:04:51,000 --> 00:04:55,280 Speaker 1: stock market returns, there are kind of longer cycles, and 77 00:04:55,520 --> 00:04:58,280 Speaker 1: you know, nobody can predict exactly what's going to happen. 78 00:04:58,320 --> 00:05:01,960 Speaker 1: They aren't exactly a decade, but in my view, uh, 79 00:05:02,120 --> 00:05:04,320 Speaker 1: you could tell that stocks were a bargain around two 80 00:05:04,360 --> 00:05:06,960 Speaker 1: thousand nine, ten eleven, just as you could tell they 81 00:05:06,960 --> 00:05:12,200 Speaker 1: were not a bargain around n and so what you 82 00:05:12,240 --> 00:05:14,480 Speaker 1: want to do, since you can never predict when markets 83 00:05:14,520 --> 00:05:17,120 Speaker 1: will turn, when you think stocks are not a bargain, 84 00:05:17,440 --> 00:05:20,719 Speaker 1: you probably ought to raise some cash and be ready 85 00:05:20,760 --> 00:05:24,320 Speaker 1: for you have some cash when the markets fall. When 86 00:05:24,320 --> 00:05:26,160 Speaker 1: a Wall Street has a sale, I like to call it, 87 00:05:26,680 --> 00:05:30,839 Speaker 1: at the same time, then when everyone else is depressed 88 00:05:30,839 --> 00:05:34,520 Speaker 1: like they were in two thousand nine and ten, Uh, 89 00:05:34,560 --> 00:05:37,200 Speaker 1: that's when Wall Streets having a sale, that's a good 90 00:05:37,200 --> 00:05:39,279 Speaker 1: time to buy that. I think this is what history 91 00:05:39,320 --> 00:05:42,400 Speaker 1: shows you. Uh. Some people call this market timing, uh, 92 00:05:42,640 --> 00:05:45,000 Speaker 1: but I view it as in some sense it is 93 00:05:45,000 --> 00:05:48,200 Speaker 1: in a long term since market timing, But I think 94 00:05:48,200 --> 00:05:50,839 Speaker 1: market timers usually thinking much shorter terms, like you know, 95 00:05:50,839 --> 00:05:53,320 Speaker 1: I'm going to ride this current wave. You're raising a 96 00:05:53,400 --> 00:05:59,280 Speaker 1: fascinating issue that I'm very much enamored with. And that's 97 00:06:00,080 --> 00:06:03,839 Speaker 1: when everybody is very enthusiastic about stocks and they seem 98 00:06:03,880 --> 00:06:08,159 Speaker 1: to get pricey. It's not easy to avoid getting swept 99 00:06:08,240 --> 00:06:11,640 Speaker 1: up in that mania. And you mentioned two thousand nine 100 00:06:11,640 --> 00:06:17,520 Speaker 1: two people were extremely negative on stocks. How do you 101 00:06:17,600 --> 00:06:22,880 Speaker 1: avoid allowing the emotional state of the crowd to affect you, meaning, 102 00:06:23,240 --> 00:06:25,839 Speaker 1: how can you buy when everyone hates stocks and they're 103 00:06:25,880 --> 00:06:29,200 Speaker 1: cheap and lighten up when everybody loves stocks and they're 104 00:06:29,279 --> 00:06:32,240 Speaker 1: very expensive. Well, it requires a certain amount of discipline, 105 00:06:32,480 --> 00:06:35,840 Speaker 1: and I think that's what an investor really has to have. Discipline. 106 00:06:36,120 --> 00:06:40,160 Speaker 1: Don't be swept up by the latest manias or uh 107 00:06:40,320 --> 00:06:44,000 Speaker 1: or depressions. You know that people go from being euphoric 108 00:06:44,080 --> 00:06:48,040 Speaker 1: to being depressed, and usually when they're euphoric, that's the 109 00:06:48,120 --> 00:06:50,520 Speaker 1: time to sell. When they're depressed, it's a good time 110 00:06:50,560 --> 00:06:53,880 Speaker 1: to buy. In some sense, it's a contrarian strategy, but 111 00:06:54,000 --> 00:06:57,360 Speaker 1: I think anyone who studies long term market cycles would 112 00:06:57,360 --> 00:07:00,880 Speaker 1: say it's the right strategy to have. So after the 113 00:07:00,960 --> 00:07:05,080 Speaker 1: O nine bottom, for I remember, even in October of 114 00:07:05,160 --> 00:07:08,000 Speaker 1: two thousand nine, I think the markets had bounced like 115 00:07:08,040 --> 00:07:12,600 Speaker 1: thirty or off the lows, and we heard people saying, listen, 116 00:07:12,720 --> 00:07:16,080 Speaker 1: this is too far, too fast. Markets really need some 117 00:07:16,160 --> 00:07:19,200 Speaker 1: time to digest this. And I don't know, three or 118 00:07:19,200 --> 00:07:21,440 Speaker 1: four years later, people were still more or less saying 119 00:07:21,520 --> 00:07:24,920 Speaker 1: the same thing, This is too fast, off the lows, 120 00:07:25,000 --> 00:07:28,160 Speaker 1: this is too negative. So it's one thing when stocks 121 00:07:28,280 --> 00:07:32,360 Speaker 1: were fairly inexpensive in oh nine, how do you sequester 122 00:07:32,600 --> 00:07:35,760 Speaker 1: that sort of noise two or three years later, when 123 00:07:35,840 --> 00:07:39,640 Speaker 1: stocks weren't terribly expensive, but they also weren't terribly cheap. 124 00:07:40,320 --> 00:07:42,760 Speaker 1: I think that's where the history comes in that. I 125 00:07:42,800 --> 00:07:45,640 Speaker 1: think if you realize that markets tend to trend for 126 00:07:45,760 --> 00:07:48,080 Speaker 1: you know, ten or fifteen years in a certain direction, 127 00:07:48,520 --> 00:07:51,240 Speaker 1: and you know, you can kind of tell where you are. 128 00:07:51,280 --> 00:07:53,520 Speaker 1: I mean you I could tell in two thousand nine 129 00:07:53,520 --> 00:07:56,400 Speaker 1: and ten that the markets were at one of their 130 00:07:56,480 --> 00:07:59,400 Speaker 1: low points of all of US history for two years 131 00:07:59,440 --> 00:08:02,040 Speaker 1: of market has and so what I would say when 132 00:08:02,040 --> 00:08:04,160 Speaker 1: the markets bounced up a little bit, well, that was 133 00:08:04,200 --> 00:08:06,560 Speaker 1: an encouraging sign. I know. I give some talks to 134 00:08:06,600 --> 00:08:09,360 Speaker 1: groups around two thousand ten and eleven, and I was 135 00:08:09,400 --> 00:08:11,960 Speaker 1: pretty optimistic about the market, and people are shaking their 136 00:08:11,960 --> 00:08:13,800 Speaker 1: heads and say, you know, you, you you seem to 137 00:08:13,840 --> 00:08:17,840 Speaker 1: be much too optimistic. We're still pessimistic. So I think 138 00:08:17,840 --> 00:08:20,080 Speaker 1: it's that long term view that uh, you know, it's 139 00:08:20,120 --> 00:08:23,880 Speaker 1: not day trading. It's not even trading a little jumps 140 00:08:23,880 --> 00:08:26,360 Speaker 1: and ups and downs of the market. It's really taking 141 00:08:26,360 --> 00:08:28,560 Speaker 1: the long term view and saying, if you buy stocks 142 00:08:28,560 --> 00:08:30,720 Speaker 1: at where they were in two thousand nine, ten, eleven, 143 00:08:31,120 --> 00:08:34,160 Speaker 1: ten years later, you're likely to be pretty happy. Let's 144 00:08:34,200 --> 00:08:36,679 Speaker 1: talk a little bit about interest rates, and I have 145 00:08:36,800 --> 00:08:41,120 Speaker 1: to bring up a quote of yours that just is 146 00:08:41,320 --> 00:08:46,480 Speaker 1: so fascinating. Quote. The rates we've had in recent years, 147 00:08:46,679 --> 00:08:51,000 Speaker 1: including right now, are the lowest in history. The history 148 00:08:51,040 --> 00:08:53,960 Speaker 1: of interest rates traces back to the Code of Hammurabie, 149 00:08:54,440 --> 00:09:00,319 Speaker 1: babylon civilization, Greek and Roman civilization, the Middle Ages, the Redness, 150 00:09:00,360 --> 00:09:03,600 Speaker 1: and the early modern history right up to the present. 151 00:09:03,960 --> 00:09:06,559 Speaker 1: I can assure listeners that the rates they are experiencing 152 00:09:06,679 --> 00:09:11,280 Speaker 1: right now are the lowest in human history. That's fascinating. 153 00:09:11,480 --> 00:09:16,199 Speaker 1: Are we really at thousand year lows, two thousand year lows, 154 00:09:16,000 --> 00:09:19,079 Speaker 1: and in interest rates closer to three thousand year lows? 155 00:09:20,080 --> 00:09:23,160 Speaker 1: That is, in all of recorded history, rates never got 156 00:09:23,200 --> 00:09:24,680 Speaker 1: to be quite as low as they have been in 157 00:09:24,720 --> 00:09:27,600 Speaker 1: recent years. See if the Romans knew about quantitative easing, 158 00:09:27,640 --> 00:09:31,679 Speaker 1: they'd still be running the world. Perhaps that's possible. So 159 00:09:31,679 --> 00:09:34,959 Speaker 1: so let's discuss interest rates um and put them into 160 00:09:35,000 --> 00:09:38,720 Speaker 1: a little bit of context. First, the obvious question, why 161 00:09:38,760 --> 00:09:43,920 Speaker 1: are interest rates so far away from their traditional averages? 162 00:09:44,000 --> 00:09:47,600 Speaker 1: I it just seems like this is an unprecedented era 163 00:09:47,679 --> 00:09:50,520 Speaker 1: of low rates. Well, it is an unprecedented era. I 164 00:09:50,520 --> 00:09:52,800 Speaker 1: would say the main reason rates have been as low 165 00:09:52,840 --> 00:09:55,800 Speaker 1: as they as they've been in recent years is the 166 00:09:55,840 --> 00:09:59,480 Speaker 1: financial crisis of two thousand seven to nine, I call it. 167 00:09:59,520 --> 00:10:01,480 Speaker 1: It started it in two thousand seven and kind of 168 00:10:01,480 --> 00:10:04,760 Speaker 1: peeked out after the Lehman failure and continued into two 169 00:10:04,760 --> 00:10:07,680 Speaker 1: thousand nine. Went unemployment. We had a great recession, you know, 170 00:10:07,760 --> 00:10:11,600 Speaker 1: and intentions and unemployment. Uh. And it was the response 171 00:10:11,679 --> 00:10:16,640 Speaker 1: of the monetary authorities to that, basically to buy up 172 00:10:16,679 --> 00:10:20,320 Speaker 1: a lot of financial assets and uh, balance sheets of 173 00:10:20,480 --> 00:10:24,960 Speaker 1: central banks doubled, tripled, quadrupled. And I think it was 174 00:10:25,040 --> 00:10:29,080 Speaker 1: that these massive purchases of securities some call it quantitative 175 00:10:29,080 --> 00:10:32,720 Speaker 1: easy that basically drove interest rates to very low levels. 176 00:10:32,760 --> 00:10:35,160 Speaker 1: And the central banks did that because they wanted to 177 00:10:36,120 --> 00:10:39,200 Speaker 1: bring us back from the depths of the crisis. And 178 00:10:39,320 --> 00:10:43,840 Speaker 1: they succeeded, But they only succeeded after keeping interest rates 179 00:10:43,880 --> 00:10:46,480 Speaker 1: at very low levels for a long time, the lowest 180 00:10:46,559 --> 00:10:50,760 Speaker 1: levels in human history. If I recall, after the dot 181 00:10:50,760 --> 00:10:53,960 Speaker 1: com crash in two thousand and then the recession that 182 00:10:54,120 --> 00:10:58,640 Speaker 1: lasted from March of o one to um October of 183 00:10:58,679 --> 00:11:02,439 Speaker 1: that year, Alan Greenspan had taken rates down not quite 184 00:11:02,440 --> 00:11:05,360 Speaker 1: to zero, but they were under two percent for a 185 00:11:05,400 --> 00:11:07,800 Speaker 1: couple of years, and they were at one percent for 186 00:11:07,880 --> 00:11:11,840 Speaker 1: at least a year. How significant was that era of 187 00:11:12,200 --> 00:11:15,360 Speaker 1: interest rates to what came afterwards? Well, you know, Barry, 188 00:11:15,440 --> 00:11:19,560 Speaker 1: I wrote the last edition of the History of Interest Rates, 189 00:11:19,720 --> 00:11:23,240 Speaker 1: updating it in two thousand four and five. I think 190 00:11:23,240 --> 00:11:24,920 Speaker 1: it was published in two thousand five. And I was 191 00:11:24,960 --> 00:11:27,680 Speaker 1: working on it in two thousand four, and at that 192 00:11:27,760 --> 00:11:30,560 Speaker 1: time I thought that maybe we had reached the low 193 00:11:30,640 --> 00:11:33,640 Speaker 1: event the interest rate market. And you mentioned the recession 194 00:11:33,720 --> 00:11:36,960 Speaker 1: of two thousand one. Green Spans FED responded to that 195 00:11:37,000 --> 00:11:40,040 Speaker 1: by driving their policy rate down to as low as 196 00:11:40,080 --> 00:11:41,920 Speaker 1: one percent. I think I've been two thousand two and 197 00:11:41,920 --> 00:11:46,040 Speaker 1: two thousand, two thousand three. Uh, we had a Federal 198 00:11:46,120 --> 00:11:50,320 Speaker 1: Reserve policy rate of about one percent, and uh. Then 199 00:11:50,360 --> 00:11:54,240 Speaker 1: the FED began raising in two thousand four, the middle 200 00:11:54,280 --> 00:11:57,800 Speaker 1: of two thousand four, and I thought, well, maybe two 201 00:11:57,840 --> 00:12:00,840 Speaker 1: thousand three, I can even give you a month. The 202 00:12:00,840 --> 00:12:05,160 Speaker 1: the tenure bond got to three point three three percent 203 00:12:05,400 --> 00:12:10,080 Speaker 1: in May of two thousand three, and I was updating 204 00:12:10,080 --> 00:12:12,080 Speaker 1: the book a year later, and I said, well, you know, 205 00:12:12,280 --> 00:12:14,120 Speaker 1: rates have come up, and now the FETE is raising, 206 00:12:14,360 --> 00:12:17,240 Speaker 1: so maybe that may have two thousand three is a low. 207 00:12:17,559 --> 00:12:20,040 Speaker 1: Today we laugh when we say the tenure bond at 208 00:12:20,040 --> 00:12:22,240 Speaker 1: three point three three percent, we haven't seen that for 209 00:12:22,320 --> 00:12:25,080 Speaker 1: quite a while. Uh it's about two point eight percent 210 00:12:25,200 --> 00:12:29,160 Speaker 1: right now, and that's up from less than two percent. 211 00:12:29,640 --> 00:12:32,640 Speaker 1: Uh So I think, uh that then I thought that, well, 212 00:12:33,040 --> 00:12:35,360 Speaker 1: we turned the corner. What I couldn't foresee in two 213 00:12:35,440 --> 00:12:38,120 Speaker 1: thousand four and five, and I don't think anybody else 214 00:12:38,240 --> 00:12:40,160 Speaker 1: foresaw it either, was that we were going to have 215 00:12:40,240 --> 00:12:43,480 Speaker 1: this financial crisis starting in two thousand seven th eighty. 216 00:12:43,640 --> 00:12:45,480 Speaker 1: Maybe I should have paid more attention to what was 217 00:12:45,520 --> 00:12:49,520 Speaker 1: going on in the mortgage market, but I didn't foresee 218 00:12:49,559 --> 00:12:52,640 Speaker 1: the crisis. Lots of people saw parts of it. Very 219 00:12:52,760 --> 00:12:57,240 Speaker 1: very few people managed to see the whole overall collapse coming, 220 00:12:57,840 --> 00:13:01,960 Speaker 1: certainly not with any degree of successful time. And some 221 00:13:02,080 --> 00:13:06,240 Speaker 1: people during that era were saying, well, these low rates 222 00:13:06,280 --> 00:13:09,240 Speaker 1: are are a function of the cash glut we have. 223 00:13:09,440 --> 00:13:12,560 Speaker 1: China has a ton of cash. That's what's driving rates down. 224 00:13:12,720 --> 00:13:15,679 Speaker 1: What what's your your view on that? Well that Ben Bernankey, 225 00:13:15,720 --> 00:13:18,240 Speaker 1: I think thought that there was a glut of savings 226 00:13:18,240 --> 00:13:20,360 Speaker 1: in the world, and that was one of the reasons, 227 00:13:20,360 --> 00:13:22,720 Speaker 1: you know, this is before the financial crisis. Why we're 228 00:13:23,080 --> 00:13:25,680 Speaker 1: rates solo. Actually, when the FED was raising starting in 229 00:13:25,679 --> 00:13:28,480 Speaker 1: two thousand four, you know, from two thousand four, middle 230 00:13:28,480 --> 00:13:30,720 Speaker 1: of two thousand four up to two thousand six, the 231 00:13:30,720 --> 00:13:34,360 Speaker 1: Federal Reserve raised its policy rate twenty five basis points 232 00:13:34,360 --> 00:13:36,760 Speaker 1: at every meeting, and so we were up from one 233 00:13:36,840 --> 00:13:39,600 Speaker 1: percent where we started up to between five and six 234 00:13:39,679 --> 00:13:44,040 Speaker 1: percent a couple of years later. And uh, they were 235 00:13:44,080 --> 00:13:48,840 Speaker 1: hoping that, you know, that longer term interest rates would 236 00:13:48,960 --> 00:13:52,880 Speaker 1: would respond to that, but they were surprised when they 237 00:13:52,960 --> 00:13:55,240 Speaker 1: raised the short term rates, but the long rates didn't 238 00:13:55,240 --> 00:13:58,000 Speaker 1: really go up very much. And that's when Bernanke coined 239 00:13:58,040 --> 00:14:00,000 Speaker 1: this glut of savings in the world, that there were 240 00:14:00,120 --> 00:14:04,600 Speaker 1: just such a demand for safe government bonds that despite 241 00:14:04,640 --> 00:14:06,800 Speaker 1: the FED raising short term interest rates, the long term 242 00:14:06,880 --> 00:14:10,880 Speaker 1: rates didn't move much at all. Greenspan called it the conundrum. Conundrum. So, 243 00:14:11,000 --> 00:14:15,560 Speaker 1: I've heard the phrase recently normalizing interest rates. The FED 244 00:14:15,640 --> 00:14:19,359 Speaker 1: isn't merely raising rates, but they're getting off an emergency 245 00:14:19,400 --> 00:14:23,120 Speaker 1: footing and moving back towards normalization. What what are your 246 00:14:23,200 --> 00:14:26,000 Speaker 1: views on that? Well, I think, you know, I think 247 00:14:26,120 --> 00:14:30,000 Speaker 1: that's what they're trying to do. And from my historian's perspective, 248 00:14:30,080 --> 00:14:32,840 Speaker 1: I would sort of say that, you know, people would say, well, 249 00:14:32,840 --> 00:14:34,520 Speaker 1: what is a normal rate? How far do we have 250 00:14:34,600 --> 00:14:36,840 Speaker 1: to go to get to a normal rate? And when 251 00:14:36,880 --> 00:14:39,720 Speaker 1: I was just a kid in the nineteen fifties, the 252 00:14:39,760 --> 00:14:42,720 Speaker 1: FED was normalizing interest rates. The interest rates had become 253 00:14:42,800 --> 00:14:45,200 Speaker 1: very low in World War two, partly because the FED 254 00:14:45,280 --> 00:14:48,000 Speaker 1: was enlicited in the war effort and given the job 255 00:14:48,040 --> 00:14:50,200 Speaker 1: of pegging government bonds. It was two and a half 256 00:14:50,240 --> 00:14:53,160 Speaker 1: percent on a long term bond and three eighths of 257 00:14:53,440 --> 00:14:56,880 Speaker 1: one percent on treasury bills. And after the war, the 258 00:14:56,920 --> 00:15:00,880 Speaker 1: FED maintained those that pegging for a while because the 259 00:15:00,880 --> 00:15:03,880 Speaker 1: Secretary of the Treasury wanted to minimize the interest cost 260 00:15:03,960 --> 00:15:06,120 Speaker 1: of the national debt. But then the FED said, if 261 00:15:06,160 --> 00:15:08,320 Speaker 1: we keep doing this, we're going to cause inflation. So 262 00:15:08,360 --> 00:15:11,120 Speaker 1: in nineteen fifty one, the FED was given its freedom 263 00:15:11,160 --> 00:15:14,920 Speaker 1: to normalize basically, and over the course of the nineteen fifties, 264 00:15:15,160 --> 00:15:18,080 Speaker 1: those very low rates that came along with World War 265 00:15:18,120 --> 00:15:21,680 Speaker 1: two raised gradually rose, and by the end of the 266 00:15:21,720 --> 00:15:23,760 Speaker 1: fifties they were up where you got like four and 267 00:15:23,840 --> 00:15:26,320 Speaker 1: a quarter four and a half percent on a government bond. 268 00:15:26,360 --> 00:15:30,680 Speaker 1: Maybe the late fifties early sixties, and I would say 269 00:15:30,800 --> 00:15:33,720 Speaker 1: from a long term perspective, that's something like that, you know, 270 00:15:34,080 --> 00:15:36,680 Speaker 1: between four and five percent on a long term government 271 00:15:36,680 --> 00:15:40,480 Speaker 1: bond and maybe you know two to two to four 272 00:15:40,560 --> 00:15:43,400 Speaker 1: percent on shorter term stuff. That's sort of normal rates. 273 00:15:43,800 --> 00:15:45,680 Speaker 1: So that's what I'm thinking the FED is doing now, 274 00:15:45,720 --> 00:15:48,880 Speaker 1: you know, maybe something like the nineteen fifties, where they'll 275 00:15:48,920 --> 00:15:51,640 Speaker 1: gradually increase rates until we get to normal. And I 276 00:15:51,720 --> 00:15:53,880 Speaker 1: think normal is four to five percent on a government 277 00:15:53,920 --> 00:15:56,920 Speaker 1: bond long term and maybe two to four percent on 278 00:15:56,960 --> 00:16:00,760 Speaker 1: short term stuff. Let's talk a little bit about background. 279 00:16:01,800 --> 00:16:05,760 Speaker 1: You have some really interesting history. You studied for a 280 00:16:05,880 --> 00:16:11,040 Speaker 1: time at the Indian Statistical Institute at Calcutta. Tell us 281 00:16:11,080 --> 00:16:14,840 Speaker 1: about that, well, I was that was after my undergraduate 282 00:16:14,920 --> 00:16:17,520 Speaker 1: education at Harvard, and I was a fairly good student 283 00:16:17,640 --> 00:16:21,480 Speaker 1: at Harvard. What did you study undergrad I studied economics. 284 00:16:21,560 --> 00:16:23,760 Speaker 1: I was one of two people in Harvard's class in 285 00:16:23,840 --> 00:16:26,600 Speaker 1: nineteen sixty two who in nineteen fifty eight they wanted 286 00:16:26,640 --> 00:16:29,560 Speaker 1: to say they were going to major in economics, two 287 00:16:29,600 --> 00:16:32,360 Speaker 1: out of eleven hundred. By the time we graduated, something 288 00:16:32,400 --> 00:16:34,280 Speaker 1: like a quarter to a third of the class major 289 00:16:34,320 --> 00:16:37,160 Speaker 1: to economics. So I knew before I got to Harvard 290 00:16:37,200 --> 00:16:39,840 Speaker 1: that I wanted to study economics, but that wasn't taught 291 00:16:39,880 --> 00:16:42,760 Speaker 1: so much in high school in the nineteen fifties. And so, 292 00:16:43,280 --> 00:16:45,240 Speaker 1: uh you know, I and one other person at the 293 00:16:45,240 --> 00:16:47,960 Speaker 1: Harvard's eleven class that we want a major in economics. 294 00:16:47,960 --> 00:16:50,720 Speaker 1: And four years later, about a quarter of the class 295 00:16:50,760 --> 00:16:53,800 Speaker 1: majored in economics. So you also got a master's at 296 00:16:53,840 --> 00:16:56,400 Speaker 1: Harvard and a doctorate. That was after my tour of 297 00:16:56,480 --> 00:16:59,080 Speaker 1: duty in India. So let's let's go back to India. 298 00:16:59,120 --> 00:17:01,640 Speaker 1: What what made you say? I know, I'll go halfway 299 00:17:01,640 --> 00:17:05,840 Speaker 1: across the world. I was lucky enough to get a 300 00:17:05,880 --> 00:17:10,400 Speaker 1: traveling fellowship or scholarship after I graduated from Harvard, where 301 00:17:10,400 --> 00:17:13,199 Speaker 1: I could go any place in the world and study 302 00:17:13,240 --> 00:17:15,600 Speaker 1: for a year. It was financing for a year. And 303 00:17:15,680 --> 00:17:17,879 Speaker 1: what I did was the chose India because it was 304 00:17:17,920 --> 00:17:20,160 Speaker 1: halfway around the world. And I had a class from 305 00:17:20,640 --> 00:17:23,800 Speaker 1: Reinhold Neiber, the famous theologian, taught a class like an 306 00:17:23,800 --> 00:17:26,520 Speaker 1: Emerging Markets when I was a senior in Harvard, and 307 00:17:26,560 --> 00:17:29,600 Speaker 1: I took the class from Reverend Reinhold Neiber and he 308 00:17:29,640 --> 00:17:33,000 Speaker 1: got me interested in India. Uh So, the combination of 309 00:17:33,000 --> 00:17:36,280 Speaker 1: being awarded this fellowship and having learned something about India 310 00:17:36,480 --> 00:17:39,919 Speaker 1: made me choose India to spend my year away. This 311 00:17:39,960 --> 00:17:43,800 Speaker 1: is xtree nineteen sixty two sixty three. That's when I 312 00:17:43,880 --> 00:17:46,920 Speaker 1: was at the Indian Statistical Institute in Calcutta. So what 313 00:17:47,040 --> 00:17:51,240 Speaker 1: was Calcutta like in the early sixties, because even today 314 00:17:51,359 --> 00:17:55,000 Speaker 1: it's a fairly is frenetic the right word, A fairly 315 00:17:55,000 --> 00:18:01,160 Speaker 1: frenetic country with enormous challenges facing it, but some tremendous 316 00:18:01,560 --> 00:18:04,000 Speaker 1: um assets as well. What was cal cuttle like in 317 00:18:04,080 --> 00:18:07,760 Speaker 1: nineteen sixty two? It was very interesting for a young man, 318 00:18:07,840 --> 00:18:09,879 Speaker 1: I thought it was. It was an eye opener in 319 00:18:09,920 --> 00:18:12,679 Speaker 1: a way. You know. They would say, and I saw this, 320 00:18:13,119 --> 00:18:15,720 Speaker 1: they would say that a hundred thousand people just slept 321 00:18:15,760 --> 00:18:18,400 Speaker 1: on the pavement every night, and that was the poor 322 00:18:18,440 --> 00:18:20,919 Speaker 1: man's air conditioning, because India can be kind of hot, 323 00:18:21,080 --> 00:18:24,119 Speaker 1: but the pavement is kind of cool, and so people would, 324 00:18:24,160 --> 00:18:26,800 Speaker 1: you know, get away from the heat by just getting 325 00:18:26,840 --> 00:18:28,840 Speaker 1: down and bedding down on the concrete because it was 326 00:18:28,880 --> 00:18:30,840 Speaker 1: a little cooler than the air around them. Literally, a 327 00:18:30,920 --> 00:18:33,520 Speaker 1: hundred thousand people on the streets and Calcutta of course 328 00:18:33,560 --> 00:18:36,960 Speaker 1: had millions of people, but you know, Basically, India is 329 00:18:37,000 --> 00:18:39,280 Speaker 1: a country that's like one third the size of the 330 00:18:39,359 --> 00:18:42,040 Speaker 1: United States, but has about four times as many people. 331 00:18:42,320 --> 00:18:44,760 Speaker 1: So that that put those two together, you've got a 332 00:18:44,760 --> 00:18:48,640 Speaker 1: country that's about twelve times the density of population that 333 00:18:48,680 --> 00:18:51,720 Speaker 1: we have in the United States. Wow. So, so you're 334 00:18:51,720 --> 00:18:56,840 Speaker 1: studying at the Indian Statistical Institute. What did you learn? Well, 335 00:18:56,880 --> 00:19:00,840 Speaker 1: I studied, uh, you know, economics and uh finance and 336 00:19:01,000 --> 00:19:04,480 Speaker 1: these people were statistical institute, So I got some econometric 337 00:19:04,560 --> 00:19:07,600 Speaker 1: training there. Uh. I don't remember the details of what 338 00:19:07,640 --> 00:19:10,480 Speaker 1: I study, but I do remember meeting a famous British 339 00:19:10,520 --> 00:19:15,000 Speaker 1: scientist named JBS Haldane who had kind of gotten fed 340 00:19:15,080 --> 00:19:18,080 Speaker 1: up with Britain and moved to India and war Indian clothes, 341 00:19:18,119 --> 00:19:20,239 Speaker 1: you know, a dote and all that. You know. He 342 00:19:20,280 --> 00:19:22,200 Speaker 1: was one of the great scientists of the first half 343 00:19:22,200 --> 00:19:24,080 Speaker 1: of the twentieth century. So I got to know him 344 00:19:24,080 --> 00:19:25,600 Speaker 1: and that was kind of a lot of fun to 345 00:19:25,640 --> 00:19:28,320 Speaker 1: get his perspectives on the world. So did you know 346 00:19:28,560 --> 00:19:30,919 Speaker 1: back then you wanted to go into academia. And to 347 00:19:31,040 --> 00:19:33,520 Speaker 1: put a little context for this, you've been at n 348 00:19:33,640 --> 00:19:38,240 Speaker 1: y U for just about thirty years. Since before that, 349 00:19:38,400 --> 00:19:42,200 Speaker 1: you you taught at a few other schools. How how 350 00:19:43,200 --> 00:19:47,560 Speaker 1: conscious so were you of the lure of academia back then, Well, 351 00:19:47,600 --> 00:19:51,240 Speaker 1: I think I was kind of Remember the late fifties 352 00:19:51,240 --> 00:19:53,280 Speaker 1: and early sixties were a great time to be in 353 00:19:53,320 --> 00:19:56,240 Speaker 1: an American university because we were worried about the Russians 354 00:19:56,240 --> 00:19:58,560 Speaker 1: and Sputnik and so the government was putting a lot 355 00:19:58,560 --> 00:20:03,880 Speaker 1: of money into financing higher education. And so any young 356 00:20:04,000 --> 00:20:06,560 Speaker 1: person in the late fifties early sixties thinking about a 357 00:20:06,640 --> 00:20:10,199 Speaker 1: career academia would look pretty good because of all this, 358 00:20:10,440 --> 00:20:14,080 Speaker 1: uh interests of the government and beefing up our intellectual 359 00:20:14,760 --> 00:20:17,560 Speaker 1: talents and so. But so I, as I mentioned, I 360 00:20:18,000 --> 00:20:20,760 Speaker 1: wanted to major in economics before I got to Harvard, 361 00:20:21,080 --> 00:20:24,800 Speaker 1: and I was My interest in economics was kindled even 362 00:20:24,840 --> 00:20:27,879 Speaker 1: more at Harvard. And after taking this year off, or 363 00:20:27,880 --> 00:20:30,040 Speaker 1: even before I went out to India, I thought, I 364 00:20:30,080 --> 00:20:31,920 Speaker 1: want to come back and get a PhD. The only 365 00:20:32,040 --> 00:20:35,800 Speaker 1: question was where, And Harvard let me in. And uh, 366 00:20:35,880 --> 00:20:38,119 Speaker 1: you know, there's always a family thing to My wife 367 00:20:38,160 --> 00:20:41,320 Speaker 1: wanted to study the She was one year after me 368 00:20:41,400 --> 00:20:43,520 Speaker 1: in college, but she wanted to go to grad school 369 00:20:43,520 --> 00:20:45,800 Speaker 1: in the history of science, and Harvard was really good 370 00:20:45,800 --> 00:20:49,280 Speaker 1: in that. So your wife is studying the history of science. 371 00:20:49,720 --> 00:20:53,159 Speaker 1: Did that influence you to move from economics to the 372 00:20:53,240 --> 00:20:56,640 Speaker 1: history of finance? Not so much. I think the how 373 00:20:56,680 --> 00:20:59,399 Speaker 1: did I go from being an economist to becoming an 374 00:20:59,400 --> 00:21:04,600 Speaker 1: economic and financial historian? And that's where a particular influential 375 00:21:04,640 --> 00:21:08,000 Speaker 1: mentor comes in. Harvard at that time had an economic 376 00:21:08,080 --> 00:21:13,080 Speaker 1: historian named Alexander Gershenkron who was a born in Russia. 377 00:21:13,240 --> 00:21:14,960 Speaker 1: But he, you know, he was like the first half 378 00:21:15,000 --> 00:21:17,480 Speaker 1: of the twentieth century. His father was a capitalist, so 379 00:21:17,520 --> 00:21:19,480 Speaker 1: he had to leave Russia when he was a teenager 380 00:21:19,520 --> 00:21:24,800 Speaker 1: in nineteen seventeen and they went to Austria, and so 381 00:21:24,880 --> 00:21:28,119 Speaker 1: he his formative views were in Austria. But then Hitler 382 00:21:28,160 --> 00:21:30,439 Speaker 1: came to power, so he had to leave Europe and 383 00:21:30,480 --> 00:21:33,960 Speaker 1: came to America. UH. People knew that he was a 384 00:21:33,960 --> 00:21:36,280 Speaker 1: great scholar, so he got a job teaching at night 385 00:21:36,320 --> 00:21:38,960 Speaker 1: at Berkeley. UH. In the daytime, he worked in the 386 00:21:38,960 --> 00:21:43,639 Speaker 1: shipyards building liberty ships. And he knew twenty different languages, 387 00:21:44,080 --> 00:21:46,880 Speaker 1: and so people got to you know, said to anybody 388 00:21:46,920 --> 00:21:49,000 Speaker 1: with that talent, we need him to come to Washington 389 00:21:49,040 --> 00:21:51,480 Speaker 1: and the war and help us translate documents. So he 390 00:21:51,520 --> 00:21:54,280 Speaker 1: went to Washington and the Washington. He met Harvard professors 391 00:21:54,280 --> 00:21:56,160 Speaker 1: who said, this guy is really smart and a good 392 00:21:56,160 --> 00:21:59,400 Speaker 1: economic historian. So pretty soon by the late nineteen forties 393 00:21:59,600 --> 00:22:02,399 Speaker 1: he come to Harvard as the professor of economic history, 394 00:22:02,720 --> 00:22:05,760 Speaker 1: and I had him. I sat in on his graduate 395 00:22:05,800 --> 00:22:08,120 Speaker 1: class as an undergrad, but then I had to take 396 00:22:08,119 --> 00:22:10,920 Speaker 1: the class as a graduate student because every Harvard PhD 397 00:22:11,000 --> 00:22:14,360 Speaker 1: had to study economic history in those days. Unfortunately that's 398 00:22:14,400 --> 00:22:17,320 Speaker 1: not true anymore. But he was such a you know, 399 00:22:17,800 --> 00:22:21,639 Speaker 1: interesting lecturer and had this wealth of knowledge. And what 400 00:22:21,720 --> 00:22:24,439 Speaker 1: he persuaded me is that you can study all the 401 00:22:24,440 --> 00:22:27,320 Speaker 1: economics you want. You can be a money in banking economists, 402 00:22:27,320 --> 00:22:30,080 Speaker 1: you can be a public finance economists. Those were the 403 00:22:30,080 --> 00:22:32,440 Speaker 1: fields I was thinking of, but you can apply them 404 00:22:32,440 --> 00:22:35,640 Speaker 1: to history. And I decided that that was really interesting, 405 00:22:35,680 --> 00:22:39,399 Speaker 1: to apply the tools of economics to understand history better. 406 00:22:39,600 --> 00:22:42,879 Speaker 1: So he's the one that made me, uh, move into 407 00:22:42,960 --> 00:22:47,800 Speaker 1: economic and financial history. Fascinating. Let's talk a little bit 408 00:22:48,000 --> 00:22:51,520 Speaker 1: about your most recent book. You've You've written a previous 409 00:22:51,560 --> 00:22:56,720 Speaker 1: book on Alexander Hamilton's, The Illustrated Alexander Hamilton's, But this 410 00:22:56,840 --> 00:23:00,200 Speaker 1: month you have a new book out called alexand Uder 411 00:23:00,280 --> 00:23:05,119 Speaker 1: Hamilton's on finance, credit and debt. What can Hamilton's teach 412 00:23:05,200 --> 00:23:10,280 Speaker 1: us today on such weighty topics as credit and debt. Well, 413 00:23:10,359 --> 00:23:14,080 Speaker 1: Hamilton's faced many of the issues we face today, you know, 414 00:23:14,280 --> 00:23:17,160 Speaker 1: a large national debt that has to be managed. In 415 00:23:17,200 --> 00:23:19,200 Speaker 1: his case, it was the debt that was left over 416 00:23:19,200 --> 00:23:23,760 Speaker 1: from the American Revolution. And uh, it'll seems strange to 417 00:23:23,840 --> 00:23:28,680 Speaker 1: Americans today, but after the American Revolution, the national government, 418 00:23:28,720 --> 00:23:32,560 Speaker 1: which was just Congress, did not have its own revenues. 419 00:23:33,000 --> 00:23:35,399 Speaker 1: It had to ask the states for revenues, sort of 420 00:23:35,440 --> 00:23:39,000 Speaker 1: like a United Fund approach to finance. Let's let's break 421 00:23:39,040 --> 00:23:41,000 Speaker 1: that down a little bit. So at the time, there's 422 00:23:41,000 --> 00:23:46,000 Speaker 1: no federal Reserve Bank, there's no power of taxation with 423 00:23:46,080 --> 00:23:49,040 Speaker 1: the federal government. So hat in hand they go to 424 00:23:49,080 --> 00:23:52,679 Speaker 1: the thirteen former colonies now states and say, hey, we 425 00:23:52,720 --> 00:23:56,399 Speaker 1: need to pay for our revolutionary war, right and the 426 00:23:56,480 --> 00:23:59,840 Speaker 1: states basically said, uh, we have our own problems. We 427 00:24:00,080 --> 00:24:02,919 Speaker 1: can't really contribute very much the federal government. So in 428 00:24:02,960 --> 00:24:05,960 Speaker 1: the seventeen eighties, after the revolution is over and Britain 429 00:24:05,960 --> 00:24:09,719 Speaker 1: has recognized America's independence, the national government did not have 430 00:24:09,840 --> 00:24:12,280 Speaker 1: the money it needed to pay the interest on its debt, 431 00:24:12,400 --> 00:24:15,679 Speaker 1: much less the principle. Basically, the United States was like 432 00:24:15,720 --> 00:24:17,960 Speaker 1: a country in default on its debts. It borrowed a 433 00:24:18,040 --> 00:24:20,239 Speaker 1: lot of money and could not pay the interest from 434 00:24:20,320 --> 00:24:23,280 Speaker 1: who who who? Obviously not Japan and China back then 435 00:24:23,320 --> 00:24:26,480 Speaker 1: who were the creditors to the US while we were 436 00:24:26,520 --> 00:24:30,760 Speaker 1: throwing Britain. The largest part of the debt was financed 437 00:24:30,760 --> 00:24:33,840 Speaker 1: by Americans. You know, the bonds were sold to lots 438 00:24:33,840 --> 00:24:36,639 Speaker 1: of merchants bought the debt, and in some cases the 439 00:24:36,680 --> 00:24:40,440 Speaker 1: debt was issued as io used to soldiers and suppliers. 440 00:24:41,080 --> 00:24:43,040 Speaker 1: You know that that the government didn't really have the 441 00:24:43,080 --> 00:24:45,480 Speaker 1: revenue well while the war was going on to pay 442 00:24:45,520 --> 00:24:48,639 Speaker 1: for what it needed, and so it would take things 443 00:24:48,720 --> 00:24:52,240 Speaker 1: actually confiscate goods but give people a receipt saying, you know, 444 00:24:52,240 --> 00:24:54,960 Speaker 1: when when Congress gets around to it, you'll be paid this. 445 00:24:55,080 --> 00:24:58,040 Speaker 1: So some of the debt was uh, not exactly arm's 446 00:24:58,119 --> 00:25:02,800 Speaker 1: length transaction. It was, you know, the the situation of 447 00:25:02,840 --> 00:25:05,320 Speaker 1: the American army was so desperate that they just sometimes 448 00:25:05,359 --> 00:25:08,320 Speaker 1: just had to confiscate goods from Americans to leave a 449 00:25:08,400 --> 00:25:12,080 Speaker 1: note behind those notes that were left behind. But in 450 00:25:12,119 --> 00:25:14,840 Speaker 1: some cases they sold bonds to people. So the great 451 00:25:14,880 --> 00:25:18,280 Speaker 1: majority of the debt was Americans were financing it themselves, 452 00:25:18,359 --> 00:25:23,520 Speaker 1: but about twelve million dollars, which was about maybe a 453 00:25:23,560 --> 00:25:27,119 Speaker 1: fifth of the debt, was borrowed from people overseas. French, 454 00:25:27,800 --> 00:25:30,760 Speaker 1: the French government, the King of France basically lent Americans 455 00:25:30,760 --> 00:25:33,040 Speaker 1: a lot. We we should remember and these some of 456 00:25:33,080 --> 00:25:36,960 Speaker 1: those loans, were absolutely crucial to find getting supplies that 457 00:25:37,000 --> 00:25:40,520 Speaker 1: our armies needed to win our independence. The the enemy 458 00:25:40,560 --> 00:25:43,760 Speaker 1: of my enemy is my friend, essentially exactly. That's a 459 00:25:43,800 --> 00:25:47,080 Speaker 1: point that Hamilton's had to teach Jefferson. Jefferson thought, because 460 00:25:47,119 --> 00:25:49,720 Speaker 1: France had lent us money, they were really nice people, 461 00:25:49,800 --> 00:25:51,760 Speaker 1: and since the Brits had fought against us, they were 462 00:25:51,760 --> 00:25:55,520 Speaker 1: bad people. And Hamilton's had to persuade him, No, France 463 00:25:55,560 --> 00:25:58,720 Speaker 1: didn't lend us money because they're nice people. It was 464 00:25:58,760 --> 00:26:00,879 Speaker 1: in their interest to do it because Britain was their 465 00:26:00,920 --> 00:26:06,080 Speaker 1: great rival. So in the new book on on Hamilton's, 466 00:26:06,160 --> 00:26:09,399 Speaker 1: let's let's get into some more details. What what is 467 00:26:09,440 --> 00:26:14,480 Speaker 1: the Hamiltonian perspective on on the ability to tax the 468 00:26:14,520 --> 00:26:19,760 Speaker 1: population and the ability for a government to um developed 469 00:26:19,800 --> 00:26:24,040 Speaker 1: credit and issued debt in order to fund its ongoing operations. Well, 470 00:26:24,040 --> 00:26:27,400 Speaker 1: one of the key aspects of the United States Constitution, 471 00:26:27,440 --> 00:26:30,080 Speaker 1: which Hamilton's was one of the spearheads for in the 472 00:26:30,119 --> 00:26:33,639 Speaker 1: seventeen eighties, you know, he was a delegate to the convention, 473 00:26:34,000 --> 00:26:37,080 Speaker 1: was to get the national government, the new federal government, 474 00:26:37,080 --> 00:26:39,760 Speaker 1: to have its own revenue, and the constitution allowed that. 475 00:26:40,280 --> 00:26:44,000 Speaker 1: And then Hamilton is appointed the first Treasury Secretary, and 476 00:26:44,080 --> 00:26:47,920 Speaker 1: he wants to restore or really established the public credit 477 00:26:47,920 --> 00:26:51,359 Speaker 1: of the United States. So he basically restructures the U 478 00:26:51,440 --> 00:26:54,199 Speaker 1: s national debt into the modern treasury bond market with 479 00:26:54,320 --> 00:26:57,280 Speaker 1: you know, three different new securities, and then he uses 480 00:26:57,320 --> 00:26:59,960 Speaker 1: the revenues that are coming in, mostly from customs duty, 481 00:27:00,359 --> 00:27:03,080 Speaker 1: to pay the interest on that debt, and very quickly 482 00:27:03,080 --> 00:27:05,560 Speaker 1: in the early seventeen nineties, he turns the sort of 483 00:27:05,640 --> 00:27:09,399 Speaker 1: junk bonds of the seventeen eighties into prime government bonds 484 00:27:09,600 --> 00:27:12,240 Speaker 1: that are but purchased not only by Americans but by 485 00:27:12,359 --> 00:27:16,679 Speaker 1: foreign investors as well. So Hamilton's basically established his public credit. 486 00:27:16,920 --> 00:27:18,440 Speaker 1: But of course he did a lot more. He found 487 00:27:18,440 --> 00:27:21,520 Speaker 1: at the first Central Bank, he defined the US dollar 488 00:27:21,600 --> 00:27:24,440 Speaker 1: in terms of gold and silver. And part of his 489 00:27:24,520 --> 00:27:27,280 Speaker 1: plan I think was, you know, if he creates these 490 00:27:27,280 --> 00:27:30,040 Speaker 1: new securities, government bonds and stock in the bank in 491 00:27:30,080 --> 00:27:33,240 Speaker 1: the United States. Uh, capital markets will be established to 492 00:27:33,280 --> 00:27:36,480 Speaker 1: trade these securities. The New York Stock Exchange, we know, 493 00:27:36,720 --> 00:27:40,000 Speaker 1: is established under the Buttonwood Tree in May seventeen ninety two. 494 00:27:40,359 --> 00:27:43,200 Speaker 1: That's because the brokers needed a better trading system because 495 00:27:43,240 --> 00:27:45,920 Speaker 1: of all the new securities that were being traded. So 496 00:27:45,960 --> 00:27:49,800 Speaker 1: the securities markets are a result of Hamilton's policies and 497 00:27:50,080 --> 00:27:52,080 Speaker 1: the states. You know, he establishes the Bank of the 498 00:27:52,200 --> 00:27:54,360 Speaker 1: United States and says, the US government's going to earn 499 00:27:54,359 --> 00:27:57,600 Speaker 1: a profit by investing in it. Uh. State governments then say, well, 500 00:27:57,640 --> 00:27:59,720 Speaker 1: we can start a lot of banks too, and maybe 501 00:27:59,720 --> 00:28:01,840 Speaker 1: take a position in them and earn some money. So 502 00:28:01,880 --> 00:28:05,359 Speaker 1: we then have a banking system. Uh. And the Bank 503 00:28:05,400 --> 00:28:07,760 Speaker 1: in the United States was a very large corporation for 504 00:28:07,800 --> 00:28:10,879 Speaker 1: its time, and so that encouraged the state governments to 505 00:28:11,880 --> 00:28:15,399 Speaker 1: establish more American corporations. And in my career, I've studied 506 00:28:15,440 --> 00:28:17,640 Speaker 1: a lot of these things in terms of the numbers, 507 00:28:17,720 --> 00:28:20,560 Speaker 1: and you you just see that, you know, the number 508 00:28:20,560 --> 00:28:23,960 Speaker 1: of corporations rises rapidly in the seventeen nineties. The states 509 00:28:24,000 --> 00:28:28,600 Speaker 1: are establishing more banks. Uh. This is Hamilton's basically modernized 510 00:28:28,640 --> 00:28:32,040 Speaker 1: our finances. And I think the biographers of Hamilton's in 511 00:28:32,080 --> 00:28:36,040 Speaker 1: general don't recognize this as perhaps as greatest achievement establishing 512 00:28:36,080 --> 00:28:39,920 Speaker 1: our modern financial system. So so we have financial markets 513 00:28:40,000 --> 00:28:44,520 Speaker 1: that trace back to Hamilton's um the Federal Reserve, even 514 00:28:44,520 --> 00:28:48,920 Speaker 1: though the Federal Reserve we know today dates back to 515 00:28:49,120 --> 00:28:52,640 Speaker 1: is that nineteen bill was past the nineteen thirteen and 516 00:28:52,720 --> 00:28:56,320 Speaker 1: the banks open in late nineteen fourteen. How does the 517 00:28:56,400 --> 00:29:01,920 Speaker 1: current Federal reserve um relate to what Hamilton's conception of 518 00:29:02,160 --> 00:29:05,320 Speaker 1: a central bank, uh could be or should be for 519 00:29:05,360 --> 00:29:08,400 Speaker 1: that matter. Well, I called the Federal Reserve with my 520 00:29:08,520 --> 00:29:11,800 Speaker 1: historical perspective, the third Bank of the United States. That's 521 00:29:11,840 --> 00:29:15,040 Speaker 1: because Hamilton's established the first bank of the United States 522 00:29:15,040 --> 00:29:19,440 Speaker 1: in sevente and uh it lasted only for twenty years 523 00:29:19,480 --> 00:29:23,120 Speaker 1: American politics got involved. Is it correct? That? And I'm 524 00:29:23,520 --> 00:29:26,880 Speaker 1: vaguely remembering the research I did about a decade ago. 525 00:29:27,320 --> 00:29:32,160 Speaker 1: The first two Federal reserve banks or central banks that 526 00:29:32,240 --> 00:29:35,480 Speaker 1: were Federal reserve, like, they were each formed with a 527 00:29:35,560 --> 00:29:38,800 Speaker 1: finite lifespan. It wasn't an in perpetuity. Is that? Is 528 00:29:38,840 --> 00:29:40,520 Speaker 1: that more or less right? Yeah? That is true that 529 00:29:40,600 --> 00:29:43,560 Speaker 1: they were chartered for twenty years, and in general that 530 00:29:43,760 --> 00:29:46,080 Speaker 1: was true of most corporations at that time. Even the 531 00:29:46,080 --> 00:29:48,440 Speaker 1: Bank of England had a limitation on its charter. It 532 00:29:48,480 --> 00:29:50,760 Speaker 1: had to come in and reapply to have its charter 533 00:29:50,840 --> 00:29:55,000 Speaker 1: renewed every twenty years or some twenty thirty. It differed 534 00:29:55,040 --> 00:29:57,560 Speaker 1: a little bit. But the banks of the United States were, 535 00:29:57,640 --> 00:30:00,160 Speaker 1: you know, in keeping with the times when con has 536 00:30:00,240 --> 00:30:02,440 Speaker 1: chartered them. That banking was kind of new in the 537 00:30:02,520 --> 00:30:04,360 Speaker 1: United States. They didn't know how it would work out. 538 00:30:04,400 --> 00:30:06,280 Speaker 1: They just had this fellow Hamilton's saying it was going 539 00:30:06,320 --> 00:30:08,400 Speaker 1: to work out well, and we really needed this. They 540 00:30:08,400 --> 00:30:10,760 Speaker 1: weren't sure, so they put a twenty year limit on it, 541 00:30:11,120 --> 00:30:16,800 Speaker 1: and that converted this into a political issue in eighteen eleven, uh, 542 00:30:16,960 --> 00:30:20,560 Speaker 1: for variously political reasons. Basically, the bank was good economically, 543 00:30:20,640 --> 00:30:24,640 Speaker 1: but it had a tough time politically. Uh. Basically, the 544 00:30:24,680 --> 00:30:27,160 Speaker 1: state banking interests wanted to get rid of it, and 545 00:30:27,240 --> 00:30:29,560 Speaker 1: so they were successful by just one vote, you know, 546 00:30:29,600 --> 00:30:32,400 Speaker 1: the vice President the United States had to say no 547 00:30:33,000 --> 00:30:35,760 Speaker 1: to break the tie, and so the first bank went 548 00:30:35,760 --> 00:30:38,600 Speaker 1: out of existence. Right. This was were they were. They 549 00:30:38,640 --> 00:30:40,960 Speaker 1: competing with the state banks. Is that why there was 550 00:30:41,240 --> 00:30:43,800 Speaker 1: um opposition to it or was it more of a 551 00:30:43,880 --> 00:30:46,800 Speaker 1: state's rights? There were there were. The Bank in the 552 00:30:46,840 --> 00:30:48,880 Speaker 1: United States was much bigger than any of the state 553 00:30:48,920 --> 00:30:51,320 Speaker 1: banks and had branches all over the country. One thing 554 00:30:51,320 --> 00:30:54,000 Speaker 1: Hamilton's gave us right at the start was interstate banking, 555 00:30:54,040 --> 00:30:56,440 Speaker 1: which we got away from later but we've brought back now. 556 00:30:56,800 --> 00:30:59,280 Speaker 1: But basically, the Bank in the United States differed from 557 00:30:59,320 --> 00:31:03,840 Speaker 1: the FED, and this sense it uh competed with the 558 00:31:04,040 --> 00:31:06,760 Speaker 1: other banks. In other words, it was a private corporation 559 00:31:06,880 --> 00:31:10,640 Speaker 1: or owned by the government by private investors. It made 560 00:31:10,760 --> 00:31:13,120 Speaker 1: loans just like any other bank did, so it was 561 00:31:13,160 --> 00:31:15,000 Speaker 1: a competitor. And this may have been one of the 562 00:31:15,000 --> 00:31:19,640 Speaker 1: problems that the state banks were much more numerous by 563 00:31:19,680 --> 00:31:22,239 Speaker 1: eighteen eleven than they were in seventeen ninety one when 564 00:31:22,240 --> 00:31:25,000 Speaker 1: there were only three or four. And by eighteen eleven 565 00:31:25,080 --> 00:31:26,680 Speaker 1: they said, gee, if we got rid of the Bank 566 00:31:26,680 --> 00:31:29,200 Speaker 1: of the United States, we would get rid of a regulator, 567 00:31:29,480 --> 00:31:31,560 Speaker 1: we would get rid of a competitor, and we would 568 00:31:31,560 --> 00:31:34,280 Speaker 1: probably then have to take over the government's banking business. 569 00:31:34,440 --> 00:31:36,920 Speaker 1: So it was like a win win win situation. So 570 00:31:37,080 --> 00:31:40,240 Speaker 1: the Bank in the United first bank the United States disappeared, 571 00:31:40,520 --> 00:31:42,520 Speaker 1: But then we got into the War of eighteen twelve, 572 00:31:42,880 --> 00:31:45,360 Speaker 1: when the bank might have really helped US, and it 573 00:31:45,480 --> 00:31:49,160 Speaker 1: wasn't there, and so the bank's worst enemies in eighteen eleven, 574 00:31:49,200 --> 00:31:52,320 Speaker 1: by eighteen fifteen and sixteen said we really needed a 575 00:31:52,400 --> 00:31:54,800 Speaker 1: central bank, so they brought in the Second Bank of 576 00:31:54,880 --> 00:31:58,280 Speaker 1: the United States, but it ran into twenty years later. 577 00:31:58,600 --> 00:32:02,160 Speaker 1: It ran into too problem with the President Andrew Jackson, 578 00:32:02,160 --> 00:32:04,520 Speaker 1: who didn't like banks. And I think it was the 579 00:32:04,560 --> 00:32:07,520 Speaker 1: same sort of politics as in eighteen eleven. Some people 580 00:32:07,560 --> 00:32:09,120 Speaker 1: saw it in their interest to get rid of the 581 00:32:09,160 --> 00:32:11,240 Speaker 1: second Bank in the United States. So we had two 582 00:32:11,240 --> 00:32:14,400 Speaker 1: central banks early in our history, and we got rid 583 00:32:14,400 --> 00:32:16,920 Speaker 1: of both of them. For seventy years, from say, eighteen 584 00:32:16,960 --> 00:32:20,720 Speaker 1: thirty six to nineteen fourteen, we didn't have a central bank. 585 00:32:21,200 --> 00:32:23,760 Speaker 1: But we had a big financial crisis in nineteen o seven, 586 00:32:23,960 --> 00:32:26,120 Speaker 1: and it's just like the War of eighteen twelve persuaded 587 00:32:26,120 --> 00:32:29,560 Speaker 1: people that central banks might be good. The financial panic 588 00:32:29,600 --> 00:32:31,800 Speaker 1: of nineteen o seven, by which time the US is 589 00:32:31,840 --> 00:32:34,240 Speaker 1: the biggest economy in the world, is sort of embarrassing. 590 00:32:34,520 --> 00:32:37,440 Speaker 1: And one way to get away from these panics is 591 00:32:37,480 --> 00:32:39,480 Speaker 1: to start a new central bank. That's how we got 592 00:32:39,480 --> 00:32:43,120 Speaker 1: the Federal Reserve. So so let's let's stay with this 593 00:32:43,200 --> 00:32:46,800 Speaker 1: idea of the nineteen o seven panic, if if memory serves, 594 00:32:46,840 --> 00:32:49,560 Speaker 1: and again I'm going to rely on you to correct me. 595 00:32:50,280 --> 00:32:53,960 Speaker 1: We had the great earthquake in San Francisco in nineteen 596 00:32:53,960 --> 00:32:56,680 Speaker 1: o six, April nineteen o six. The huge amount of 597 00:32:56,720 --> 00:33:00,600 Speaker 1: insurance money comes over to the US from Lloyd's of 598 00:33:00,600 --> 00:33:03,760 Speaker 1: London and everywhere else in Europe that were also East 599 00:33:03,760 --> 00:33:05,600 Speaker 1: Coast US too. There are a lot of big insurance 600 00:33:05,600 --> 00:33:07,280 Speaker 1: companies in the East Coast US that I had to 601 00:33:07,280 --> 00:33:10,400 Speaker 1: pay off for the San Francisco damage. So so all 602 00:33:10,440 --> 00:33:12,640 Speaker 1: this money comes in and then the Bank of England 603 00:33:12,920 --> 00:33:16,360 Speaker 1: raises rates in order to track capital back, and we're 604 00:33:16,440 --> 00:33:19,720 Speaker 1: sort of unarmed. We don't have a central bank that 605 00:33:19,760 --> 00:33:21,640 Speaker 1: has the ability to do that. Is that Is that 606 00:33:21,680 --> 00:33:25,880 Speaker 1: a fair descriptor? I think you're showing a good knowledge 607 00:33:25,880 --> 00:33:29,360 Speaker 1: of financial history, Barry. It's a little dusty, it's a 608 00:33:29,360 --> 00:33:32,680 Speaker 1: little but the idea that the San Francisco earthquake of 609 00:33:32,720 --> 00:33:34,760 Speaker 1: April nineteen o six might have something to do with 610 00:33:34,800 --> 00:33:37,480 Speaker 1: the financial panic in nineteen o seven was, you know, 611 00:33:38,040 --> 00:33:42,400 Speaker 1: a fairly recent finding of financial historians. And the mechanism 612 00:33:42,600 --> 00:33:46,800 Speaker 1: was through the insurance payments, what the insurance claims for 613 00:33:46,920 --> 00:33:49,680 Speaker 1: to fix up San Francisco led to a drain of 614 00:33:49,720 --> 00:33:51,840 Speaker 1: gold out of England because a lot of those buildings 615 00:33:51,880 --> 00:33:54,000 Speaker 1: were insured in England. It also led to a drain 616 00:33:54,040 --> 00:33:57,400 Speaker 1: of gold out of the Eastern United States financial centers 617 00:33:57,840 --> 00:34:00,280 Speaker 1: because they had insurance companies there too. Most of our 618 00:34:00,280 --> 00:34:02,760 Speaker 1: big insurance companies were in the East coast, you know, Connecticut, 619 00:34:02,800 --> 00:34:06,920 Speaker 1: in York. And this movement of gold or money to 620 00:34:07,000 --> 00:34:11,239 Speaker 1: the West coast US sort of tighten financial conditions in 621 00:34:11,600 --> 00:34:14,640 Speaker 1: the US money markets and also the English money market. 622 00:34:14,719 --> 00:34:17,160 Speaker 1: And then the Bank of England, you know, said well, 623 00:34:17,200 --> 00:34:19,600 Speaker 1: you know, the gold is leaving, so we better raise 624 00:34:19,680 --> 00:34:22,879 Speaker 1: interest rates. And so that's the kind of backdrop for 625 00:34:23,239 --> 00:34:26,080 Speaker 1: money is tight in nineteen o seven, and then of 626 00:34:26,120 --> 00:34:28,040 Speaker 1: course there's always a trigger to a panic. There was 627 00:34:28,080 --> 00:34:32,040 Speaker 1: some wild speculation going on in copper stocks, and the 628 00:34:32,120 --> 00:34:34,960 Speaker 1: shadow banks at that time were called trust companies. The 629 00:34:35,080 --> 00:34:38,600 Speaker 1: trust companies were involved and as shadow banks and financing 630 00:34:38,640 --> 00:34:40,880 Speaker 1: some of the speculation and copper stocks. One of the 631 00:34:40,880 --> 00:34:43,880 Speaker 1: copper speculators failed and that trigger to run on the 632 00:34:43,920 --> 00:34:46,560 Speaker 1: trust companies. But it was the backdrop of it was 633 00:34:46,640 --> 00:34:49,320 Speaker 1: financial conditions were tight anyway, and then you had a 634 00:34:49,400 --> 00:34:54,839 Speaker 1: sort of bankruptcy and uh implication of trust companies as 635 00:34:54,880 --> 00:34:57,600 Speaker 1: being involved, so people rushed on the trust companies and 636 00:34:57,719 --> 00:35:00,720 Speaker 1: took their money out. And that's what the fining panic. 637 00:35:00,880 --> 00:35:06,000 Speaker 1: Last financial panic question. Go back the decades before the 638 00:35:06,040 --> 00:35:09,840 Speaker 1: formation in the Federal Reserve and the nineteen o seven panic, 639 00:35:10,440 --> 00:35:13,920 Speaker 1: the half century before that, lots of panics and booms 640 00:35:13,920 --> 00:35:17,759 Speaker 1: and bus It seems that the pre fed era was 641 00:35:17,800 --> 00:35:21,560 Speaker 1: not exactly the most financially stable in the banking system. 642 00:35:21,600 --> 00:35:23,600 Speaker 1: All right, Well, we got rid of the Second Bank 643 00:35:23,640 --> 00:35:25,759 Speaker 1: in the United States and eighteen thirty six there there 644 00:35:25,800 --> 00:35:28,600 Speaker 1: hadn't been many financial crises in the US before that. 645 00:35:29,040 --> 00:35:33,359 Speaker 1: Then right after the Second Bank disappeared in eighteen thirty six, 646 00:35:33,360 --> 00:35:36,200 Speaker 1: we had the financial panic of eighteen thirty seven. Are related, 647 00:35:36,200 --> 00:35:38,800 Speaker 1: one in eighteen thirty nine, we had one in eighteen 648 00:35:38,800 --> 00:35:41,480 Speaker 1: fifty seven, one in eighteen seventy three, one in eighteen 649 00:35:41,560 --> 00:35:46,359 Speaker 1: eighty four, one eighteen ninety three, seven. Right. Uh. I've 650 00:35:46,360 --> 00:35:48,319 Speaker 1: actually done some research on this, and what I can 651 00:35:48,360 --> 00:35:52,000 Speaker 1: say is that financial panics were at least twice as 652 00:35:52,040 --> 00:35:54,680 Speaker 1: frequent when we did not have a central bank as 653 00:35:54,760 --> 00:35:57,160 Speaker 1: they have been when we had a central bank. Can 654 00:35:57,200 --> 00:35:58,959 Speaker 1: you stick around a little bit, We'll keep the tape 655 00:35:59,040 --> 00:36:02,680 Speaker 1: rolling and continue you chatting about all things uh financial panic. 656 00:36:02,800 --> 00:36:05,400 Speaker 1: I love to talk about this stuff. Certainly. We have 657 00:36:05,520 --> 00:36:09,280 Speaker 1: been speaking with Professor Richard Silla of n y U Stern, 658 00:36:09,800 --> 00:36:15,760 Speaker 1: author of numerous books, most recently Hambleton's on Debt, credit 659 00:36:16,080 --> 00:36:19,239 Speaker 1: and Finance. If you enjoy this conversation, be sure and 660 00:36:19,320 --> 00:36:21,400 Speaker 1: stick around for the podcast extras. Will we keep the 661 00:36:21,440 --> 00:36:26,040 Speaker 1: tape rolling and continue discussing all things uh panic worthy? 662 00:36:26,600 --> 00:36:28,839 Speaker 1: Be sure and check out my daily column. You can 663 00:36:28,880 --> 00:36:31,880 Speaker 1: find that on Bloomberg View dot com. Follow me on 664 00:36:31,920 --> 00:36:35,279 Speaker 1: Twitter at rich Halts. We love your comments, feedback and 665 00:36:35,400 --> 00:36:39,799 Speaker 1: suggestions right to us at m IB podcast at Bloomberg 666 00:36:39,880 --> 00:36:43,120 Speaker 1: dot net. I'm Barry Rihults. If you're listening to Masters 667 00:36:43,120 --> 00:36:59,840 Speaker 1: in Business from Bloomberg Radio, welcome to the podcast. Professor. 668 00:37:00,000 --> 00:37:02,719 Speaker 1: Thank you so much for doing this. I'm fascinated by 669 00:37:02,719 --> 00:37:06,880 Speaker 1: the subjects you cover, and I'm just totally enamored in 670 00:37:06,960 --> 00:37:11,279 Speaker 1: financial history. And you know, it couldn't be more true. 671 00:37:11,320 --> 00:37:15,799 Speaker 1: Those who don't learn from history are um doomed to 672 00:37:15,880 --> 00:37:20,560 Speaker 1: repeat its mistakes. Uh. There's a great New Yorker cartoon 673 00:37:20,800 --> 00:37:24,320 Speaker 1: about well. But those of us who do learn from history, 674 00:37:24,520 --> 00:37:26,799 Speaker 1: we just get to be frustrated by everybody else who 675 00:37:26,880 --> 00:37:30,239 Speaker 1: doesn't and and it's really true. Before we get to 676 00:37:30,280 --> 00:37:32,839 Speaker 1: some of our favorite questions, I just have to ask 677 00:37:32,920 --> 00:37:38,279 Speaker 1: you a few more things about UM market history and 678 00:37:38,480 --> 00:37:44,320 Speaker 1: central banks and interest rates, because they are so fascinating. Oh, 679 00:37:44,640 --> 00:37:47,800 Speaker 1: there was a lot of criticism of the Federal Reserve 680 00:37:47,880 --> 00:37:51,799 Speaker 1: following the financial crisis UM, some of which might have 681 00:37:51,920 --> 00:37:55,080 Speaker 1: been deserved, some of which might have been a little 682 00:37:55,200 --> 00:37:59,839 Speaker 1: over overwrought. We heard we heard complaints about here comes 683 00:38:00,040 --> 00:38:03,399 Speaker 1: yper inflation, here comes the collapse of the dollar, none 684 00:38:03,400 --> 00:38:06,200 Speaker 1: of which proved true in the decade that followed the crisis. 685 00:38:07,120 --> 00:38:09,799 Speaker 1: What are we to make about the changing role of 686 00:38:09,840 --> 00:38:12,960 Speaker 1: the central bank? Do they have too much power? Have 687 00:38:13,120 --> 00:38:16,719 Speaker 1: they broadened their mandate too much? Or are they more 688 00:38:16,760 --> 00:38:19,399 Speaker 1: or less doing what they're supposed to be doing well. 689 00:38:19,440 --> 00:38:22,040 Speaker 1: I think they have a considerable amount of power. And 690 00:38:22,280 --> 00:38:25,000 Speaker 1: you know, central banking history, the checkered history of central 691 00:38:25,000 --> 00:38:27,560 Speaker 1: banking in the U S shows that people get suspicious 692 00:38:27,560 --> 00:38:32,040 Speaker 1: of concentrated financial power. So the Fed has to tend 693 00:38:32,160 --> 00:38:37,359 Speaker 1: its political fences. But I think that they especially now 694 00:38:37,400 --> 00:38:39,400 Speaker 1: that we're in a fiat currency world. We're not the 695 00:38:39,440 --> 00:38:42,719 Speaker 1: money isn't backed by gold and silver anymore. Uh. That 696 00:38:42,840 --> 00:38:45,480 Speaker 1: increases the power of the central banks because they can 697 00:38:45,520 --> 00:38:48,120 Speaker 1: create money with the stroke of a pen. And they 698 00:38:48,160 --> 00:38:51,680 Speaker 1: decided to fight the financial crisis by creating a lot 699 00:38:51,760 --> 00:38:53,600 Speaker 1: of new money, or maybe we should say a lot 700 00:38:53,600 --> 00:38:56,759 Speaker 1: of new bank research, because you know, when you create 701 00:38:56,800 --> 00:38:58,680 Speaker 1: a lot of money, people are going to think inflation 702 00:38:58,800 --> 00:39:01,160 Speaker 1: is right around the corner. But in fact, what happened 703 00:39:01,160 --> 00:39:04,279 Speaker 1: the Federal Reserve created a lot of what we call 704 00:39:04,360 --> 00:39:07,760 Speaker 1: high powered money or base money. Uh. But the banks 705 00:39:07,800 --> 00:39:11,520 Speaker 1: didn't magnify that into a rapid growth of the money stock. 706 00:39:11,560 --> 00:39:14,600 Speaker 1: They held the uh, the new money, the new the 707 00:39:14,640 --> 00:39:19,400 Speaker 1: new base money basically as excess reserves. And so excess 708 00:39:19,440 --> 00:39:22,960 Speaker 1: reserves went from bank reserves went from very low levels 709 00:39:22,960 --> 00:39:26,120 Speaker 1: in the two thousand seven to extremely high levels in 710 00:39:26,320 --> 00:39:28,879 Speaker 1: two thousand and twelve thirteen fourteen, And we didn't see 711 00:39:28,920 --> 00:39:32,960 Speaker 1: that really circulate through the velocity. Money didn't take up. 712 00:39:34,280 --> 00:39:36,839 Speaker 1: It kind of sat there. More or less, we would 713 00:39:36,880 --> 00:39:39,560 Speaker 1: have had the inflations on people forecast. Had the banks, 714 00:39:39,719 --> 00:39:42,240 Speaker 1: you know, used the new base money the Federal Reserve 715 00:39:42,280 --> 00:39:45,080 Speaker 1: gave them, they could have made a lot more loans, 716 00:39:45,360 --> 00:39:47,600 Speaker 1: but they didn't do it. They held these reserves, and 717 00:39:47,600 --> 00:39:49,400 Speaker 1: the FED was paying interest on them, so it was 718 00:39:49,440 --> 00:39:54,160 Speaker 1: a kind of safe thing, risk free return. And uh 719 00:39:54,160 --> 00:39:57,279 Speaker 1: so I think that this Why did the banks do 720 00:39:57,320 --> 00:39:59,440 Speaker 1: that well? I think the nineteen thirties the same thing 721 00:39:59,440 --> 00:40:01,919 Speaker 1: happened in the nineteen thirties that a lot of new 722 00:40:01,960 --> 00:40:04,440 Speaker 1: base money was created in the nineteen thirties, but the 723 00:40:04,440 --> 00:40:08,320 Speaker 1: banks were sort of shell shocked from the experience of three, 724 00:40:08,360 --> 00:40:10,520 Speaker 1: so they held a lot of excess reserves for a 725 00:40:10,520 --> 00:40:15,040 Speaker 1: whole decade after the banking crisis of nine. Doesn't doesn't 726 00:40:15,040 --> 00:40:18,000 Speaker 1: the pendulum always swing from They were way too loose 727 00:40:18,000 --> 00:40:20,600 Speaker 1: in the early two thousand's, meaning the banks they would 728 00:40:20,600 --> 00:40:22,480 Speaker 1: give here, can you fog amer a grade? Here's a 729 00:40:22,520 --> 00:40:28,080 Speaker 1: mortgage too. After the crisis, you have a good credit score, 730 00:40:28,120 --> 00:40:30,440 Speaker 1: you have a decent income, you have good work history, 731 00:40:30,840 --> 00:40:33,080 Speaker 1: and they still made people jump through all sorts of 732 00:40:33,080 --> 00:40:35,360 Speaker 1: hoops to take to get credit sure. I had a 733 00:40:35,360 --> 00:40:38,120 Speaker 1: personal experience of that. I bought a condo on Roosevelt 734 00:40:38,120 --> 00:40:40,200 Speaker 1: Island here in New York in two thousand seven, and 735 00:40:40,280 --> 00:40:42,600 Speaker 1: it was really easy in two thousand seven to get 736 00:40:42,640 --> 00:40:45,360 Speaker 1: the financing for me to buy my condo on Roosevelt Island. 737 00:40:45,640 --> 00:40:48,360 Speaker 1: In two thousand nine or ten when I refinanced, I 738 00:40:48,360 --> 00:40:50,400 Speaker 1: had to jump through all kinds of hoops to just 739 00:40:50,440 --> 00:40:53,400 Speaker 1: get it refinanced, even though I had a good history 740 00:40:53,440 --> 00:40:57,279 Speaker 1: of paying my mortgage payments by that time. So you're right, 741 00:40:57,320 --> 00:40:59,160 Speaker 1: I mean two thousand and six and seven, it was 742 00:40:59,239 --> 00:41:01,680 Speaker 1: very easy to get him argags along. Two thousand nine ten, 743 00:41:02,000 --> 00:41:04,680 Speaker 1: it was much more difficult to refinance the same loan. 744 00:41:04,920 --> 00:41:07,480 Speaker 1: I had the exact same experience. We did a REFI 745 00:41:07,760 --> 00:41:10,080 Speaker 1: I want to say, it was oh five, and I'll 746 00:41:10,120 --> 00:41:12,919 Speaker 1: never forget this guy pulling into the driveway, flinging open 747 00:41:12,960 --> 00:41:15,520 Speaker 1: the door, running into the house. My wife and I 748 00:41:15,520 --> 00:41:18,440 Speaker 1: were sitting at the dining room table, sign signed initial 749 00:41:18,480 --> 00:41:22,319 Speaker 1: initial here's a check for thirty thou hours. I apologize, 750 00:41:22,360 --> 00:41:24,200 Speaker 1: I have a closing down the street, and he disappeared. 751 00:41:24,560 --> 00:41:27,279 Speaker 1: If he was in the house for five minutes, and 752 00:41:27,320 --> 00:41:29,319 Speaker 1: I want to say, it was like a three thousand 753 00:41:29,400 --> 00:41:32,600 Speaker 1: all mortgage. If it was he was there for five minutes, 754 00:41:32,600 --> 00:41:35,120 Speaker 1: it was a long time. And I very vividly recall 755 00:41:35,520 --> 00:41:38,239 Speaker 1: turned to my wife and saying, this can't be good. 756 00:41:38,360 --> 00:41:41,600 Speaker 1: This was just a crazy It was like a giant 757 00:41:41,680 --> 00:41:45,520 Speaker 1: red flag. We buy a house in could not have 758 00:41:45,560 --> 00:41:50,520 Speaker 1: been further opposite from that experience where every month, as 759 00:41:50,560 --> 00:41:53,680 Speaker 1: we're waiting to the closing, the bank is saying, what's 760 00:41:53,719 --> 00:41:57,200 Speaker 1: this deposit. You've asked me this every month for six months. 761 00:41:57,239 --> 00:42:00,839 Speaker 1: That's my direct deposit from the from work. It shows up, 762 00:42:01,200 --> 00:42:03,239 Speaker 1: here's the bank, it comes from. Here it is we 763 00:42:03,239 --> 00:42:06,560 Speaker 1: We've discussed this every single month. It would ask I 764 00:42:06,600 --> 00:42:09,480 Speaker 1: assume you had similar craziness when you bought the condo. 765 00:42:09,520 --> 00:42:11,960 Speaker 1: After the Yes, you had to send in tax records, 766 00:42:12,000 --> 00:42:14,200 Speaker 1: you had to send in new paycheck stubbs, you know, 767 00:42:14,560 --> 00:42:18,000 Speaker 1: the one you sent three months earlier. Was that's right? 768 00:42:18,239 --> 00:42:20,239 Speaker 1: And I think they had a checklist of things they 769 00:42:20,280 --> 00:42:22,680 Speaker 1: had to do after the crisis, and it just meant 770 00:42:22,719 --> 00:42:25,200 Speaker 1: that it was much harder to get a loan. Uh. 771 00:42:25,239 --> 00:42:27,160 Speaker 1: And of course the opposite side of that was when 772 00:42:27,160 --> 00:42:29,600 Speaker 1: the Federal Reserve was giving the banks a lot of liquidity, 773 00:42:29,640 --> 00:42:32,680 Speaker 1: the banks weren't making those loans, making it harder to 774 00:42:32,719 --> 00:42:35,880 Speaker 1: get those loans, so they they access liquidity just stayed 775 00:42:35,920 --> 00:42:38,440 Speaker 1: on the balance sheets of the banks as access reserves, 776 00:42:38,640 --> 00:42:41,560 Speaker 1: and we didn't have the inflation some people forecast. So 777 00:42:41,600 --> 00:42:45,960 Speaker 1: what about the modern era of central bank transparency? Are 778 00:42:46,400 --> 00:42:49,240 Speaker 1: I remember When I started as a trader a hundred 779 00:42:49,320 --> 00:42:52,399 Speaker 1: years ago, you would find out what the central bank 780 00:42:52,440 --> 00:42:56,680 Speaker 1: had done because interest rates would tick up or down 781 00:42:56,719 --> 00:42:59,239 Speaker 1: and people would say, oh, the central bank must be 782 00:42:59,239 --> 00:43:03,840 Speaker 1: buying or selling paper, and that was um what affected it. 783 00:43:03,880 --> 00:43:06,840 Speaker 1: You had interpret what actually took place in the market 784 00:43:07,000 --> 00:43:10,799 Speaker 1: via price action. Today, it seems every single step is 785 00:43:10,840 --> 00:43:14,520 Speaker 1: telegraphed long in advance. Is that transparency a good thing 786 00:43:14,600 --> 00:43:17,319 Speaker 1: or a bad thing? Um? I think it's probably a 787 00:43:17,360 --> 00:43:22,120 Speaker 1: good thing because the markets sort of get an advanced 788 00:43:22,760 --> 00:43:25,600 Speaker 1: warning of what the FED is likely to do. And 789 00:43:25,680 --> 00:43:28,000 Speaker 1: I think that that then you have more time. You know, 790 00:43:28,040 --> 00:43:31,400 Speaker 1: you're not shocked when the Federal Reserve raises its policy 791 00:43:31,520 --> 00:43:34,920 Speaker 1: rate and when you didn't expect it. So now they 792 00:43:34,960 --> 00:43:38,080 Speaker 1: telegraph that they're probably going to have some rate increases, 793 00:43:38,440 --> 00:43:40,760 Speaker 1: and I think then the markets are just more easily. 794 00:43:41,120 --> 00:43:43,440 Speaker 1: So I think the transparency is probably a good thing. 795 00:43:44,040 --> 00:43:47,560 Speaker 1: Does the FED lose the ability or or lose the 796 00:43:47,600 --> 00:43:51,920 Speaker 1: capability to shock markets or surprise markets, which is also 797 00:43:51,960 --> 00:43:55,960 Speaker 1: a tool in their uh in their toolbox. Well, they 798 00:43:56,000 --> 00:43:58,520 Speaker 1: I think they can still shock markets. They have the 799 00:43:58,560 --> 00:44:01,520 Speaker 1: power to do that, like if they have an increase 800 00:44:01,560 --> 00:44:04,520 Speaker 1: in rates or reduction in rates when it wasn't expected that. 801 00:44:04,520 --> 00:44:09,320 Speaker 1: That's the whole thing that what what are people expecting? Uh? 802 00:44:09,400 --> 00:44:13,040 Speaker 1: You know, for example, expectations really matter. I think when uh, 803 00:44:13,360 --> 00:44:17,359 Speaker 1: we're actually right around the tenth anniversary of bear Stearns failure, Uh, 804 00:44:17,560 --> 00:44:20,120 Speaker 1: the government, the February Reserve came in, made a deal 805 00:44:20,200 --> 00:44:23,000 Speaker 1: to transfer a lot of the assets to JP Morgan Chase, 806 00:44:23,600 --> 00:44:26,759 Speaker 1: and I think then people said, well, okay, the FED 807 00:44:26,840 --> 00:44:28,480 Speaker 1: is going to do that for bear Sterns. We don't 808 00:44:28,520 --> 00:44:30,880 Speaker 1: have to worry about other banks like Lehman, because Lehman 809 00:44:31,000 --> 00:44:33,680 Speaker 1: was bigger than bear Sterns. So the markets expected that 810 00:44:33,719 --> 00:44:36,040 Speaker 1: if Lehman got into trouble, the same thing would happen. 811 00:44:36,480 --> 00:44:39,480 Speaker 1: The reason the crisis became so bad in two thousand 812 00:44:39,600 --> 00:44:42,680 Speaker 1: eight after the Lehman failure is that the markets didn't 813 00:44:42,680 --> 00:44:44,719 Speaker 1: expect it. So that was a big shock. So I 814 00:44:45,040 --> 00:44:48,000 Speaker 1: think that the FED can still, you know, have an 815 00:44:48,040 --> 00:44:51,600 Speaker 1: ability to change its rates or do something when the 816 00:44:51,600 --> 00:44:53,960 Speaker 1: markets weren't expecting it, and then you would have this. 817 00:44:54,080 --> 00:44:56,239 Speaker 1: But I think the Fed, you know, you might have 818 00:44:56,280 --> 00:44:59,080 Speaker 1: an adverse reaction, but I think the Fed sort of things, 819 00:44:59,120 --> 00:45:02,200 Speaker 1: we really don't want to do that unless it's you know, 820 00:45:02,239 --> 00:45:07,200 Speaker 1: absolutely necessary, let's telegraph what we're thinking. I've always wondered 821 00:45:07,280 --> 00:45:10,080 Speaker 1: what the thinking was like with the FED taking a 822 00:45:10,160 --> 00:45:14,160 Speaker 1: pass on Lehman Brothers and not rescuing them. And three 823 00:45:14,200 --> 00:45:16,960 Speaker 1: things come up all the time, or at least when 824 00:45:17,000 --> 00:45:20,680 Speaker 1: you look at the details. You have the moral hazard argument, Well, 825 00:45:20,719 --> 00:45:24,080 Speaker 1: if we rescue them, then bear Stearns is still a 826 00:45:24,120 --> 00:45:28,560 Speaker 1: one off rescue Lehman. Hey, aren't we telegraphing to everybody 827 00:45:28,600 --> 00:45:32,839 Speaker 1: else that if you run into trouble, we'll rescue you. Also. Uh. 828 00:45:32,880 --> 00:45:36,279 Speaker 1: The second issue is um their books were just a 829 00:45:36,320 --> 00:45:38,839 Speaker 1: mess between REPO one oh five and everything else, and 830 00:45:39,120 --> 00:45:41,520 Speaker 1: they were really it was really hard to figure out 831 00:45:41,560 --> 00:45:45,280 Speaker 1: what Lehman was genuinely worse. But the thing I always 832 00:45:45,360 --> 00:45:48,120 Speaker 1: fantasize about I wish I would have been a fly 833 00:45:48,440 --> 00:45:50,680 Speaker 1: on the wall during that meeting. And a lot of 834 00:45:50,680 --> 00:45:53,960 Speaker 1: people are unaware of this. Buffett Warren Buffett at Berkshire 835 00:45:54,000 --> 00:45:58,600 Speaker 1: Hathaway offered five billion dollars fairly early in the process 836 00:45:59,080 --> 00:46:02,560 Speaker 1: to Dick Fuld Lehman Brothers, and Fold thought Buffett was 837 00:46:02,640 --> 00:46:07,080 Speaker 1: trying to steal Lehman and rejected him. Buffett got a 838 00:46:07,200 --> 00:46:12,120 Speaker 1: much better deal, paying for a chunk of Goldman Sachs 839 00:46:12,280 --> 00:46:16,600 Speaker 1: at much more distressed prices. But I always imagined that 840 00:46:16,680 --> 00:46:21,719 Speaker 1: conversation amongst the Federal Reserve. Wait, he turned down Warren Buffett, 841 00:46:22,000 --> 00:46:24,920 Speaker 1: and now he's hat in hands is coming to us. Yeah, No, 842 00:46:25,040 --> 00:46:27,160 Speaker 1: we're gonna we're gonna pass on this. You guys are 843 00:46:27,160 --> 00:46:29,239 Speaker 1: gonna have to, uh, you're gonna have to hit the 844 00:46:29,280 --> 00:46:31,560 Speaker 1: sidewalk on your own and just just leave us out 845 00:46:31,600 --> 00:46:33,759 Speaker 1: of it. That that was how I always imagined that. 846 00:46:34,520 --> 00:46:38,600 Speaker 1: I think that's a fair statement that I think. You know, 847 00:46:38,680 --> 00:46:41,839 Speaker 1: of course, the authorities, Hank Paulson, who was the set 848 00:46:41,840 --> 00:46:44,279 Speaker 1: Treasury Secretary and Ben Bernankey was the head of the 849 00:46:44,280 --> 00:46:46,799 Speaker 1: FETE at that time, claimed they didn't really have the 850 00:46:46,800 --> 00:46:52,000 Speaker 1: authority to uh bail out Lehman, and yet they saved 851 00:46:52,000 --> 00:46:54,960 Speaker 1: a I G. Which isn't even a bank. It's interess, right. 852 00:46:55,400 --> 00:46:58,120 Speaker 1: I think they did have the authority, but uh, for 853 00:46:58,160 --> 00:47:01,319 Speaker 1: some reason they thought they didn't. Uh. But the moral 854 00:47:01,400 --> 00:47:04,200 Speaker 1: hazard problem was there, and I think Hank Paulson actually 855 00:47:04,239 --> 00:47:07,479 Speaker 1: made the decision not to help Lehman because it would 856 00:47:07,480 --> 00:47:11,120 Speaker 1: send the proper moral hazard lesson. It turned out that 857 00:47:11,160 --> 00:47:13,680 Speaker 1: he was probably wrong. That you know that triggered this 858 00:47:13,880 --> 00:47:18,840 Speaker 1: tremendous crisis, and the FED had to mop up afterwards. Uh, 859 00:47:18,880 --> 00:47:21,719 Speaker 1: and the Treasury did too. UM. But yeah, I think 860 00:47:21,760 --> 00:47:23,960 Speaker 1: that you know, you can there's moral hazard, and you know, 861 00:47:24,000 --> 00:47:26,120 Speaker 1: if you really worried about moral hazard, you might shut 862 00:47:26,120 --> 00:47:30,400 Speaker 1: down the insurance industry. The question that I always debate 863 00:47:30,440 --> 00:47:34,160 Speaker 1: people with people about is UM was Lehman Brothers the 864 00:47:34,200 --> 00:47:36,960 Speaker 1: trigger for the crisis or were they merely the first 865 00:47:37,719 --> 00:47:41,480 Speaker 1: um mobile home in the park that the tornado happened 866 00:47:41,560 --> 00:47:44,440 Speaker 1: to take. They were certainly much bigger than bear Stunes 867 00:47:44,719 --> 00:47:47,640 Speaker 1: they were, and I think you mentioned that their balance 868 00:47:47,680 --> 00:47:49,319 Speaker 1: sheet was hard to figure out. I remember on the 869 00:47:49,360 --> 00:47:53,120 Speaker 1: Friday before Lehman shutdown. On Monday, Lehman announced that there 870 00:47:53,200 --> 00:47:55,839 Speaker 1: was no problem and that it you know, it had 871 00:47:56,160 --> 00:47:59,600 Speaker 1: twenty or twenty billion of you know, capital after it 872 00:47:59,600 --> 00:48:03,759 Speaker 1: paid its liabilities. But that was only because they overvalued 873 00:48:03,800 --> 00:48:05,640 Speaker 1: some of the securities they had, and that was the 874 00:48:05,680 --> 00:48:08,560 Speaker 1: real problem. David Ironhorn of Hedge fun Guy in New 875 00:48:08,600 --> 00:48:11,440 Speaker 1: York had predicted all year long that Lehman was in 876 00:48:11,520 --> 00:48:13,960 Speaker 1: bad shape, and it turned out he was right. Yeah. 877 00:48:14,000 --> 00:48:15,800 Speaker 1: He he had done a deep dive into the books 878 00:48:15,840 --> 00:48:19,839 Speaker 1: and said they've wildly overstated their value and Barclay's, if 879 00:48:19,880 --> 00:48:22,880 Speaker 1: memory serves, Barclay Capital went in, looked at the books, 880 00:48:22,880 --> 00:48:26,399 Speaker 1: said we we can't do this now because we can't 881 00:48:26,440 --> 00:48:29,839 Speaker 1: figure out with you liabilities are. We're happy to buy 882 00:48:29,880 --> 00:48:32,680 Speaker 1: you out of bankruptcy after you file so we have 883 00:48:32,719 --> 00:48:35,759 Speaker 1: no liability. And ultimately that's what they ended up doing. Yeah, 884 00:48:35,800 --> 00:48:38,200 Speaker 1: and you mentioned dick Fold too, who was a stern 885 00:48:38,320 --> 00:48:41,759 Speaker 1: school graduate. I believe dick Fold he had a lot 886 00:48:41,760 --> 00:48:44,000 Speaker 1: of his ego tied up and Lehman dollars and there 887 00:48:44,040 --> 00:48:46,320 Speaker 1: was a deal that was on the you know, rumored 888 00:48:46,360 --> 00:48:50,480 Speaker 1: that some Korean investors were gonna take over Lehman before 889 00:48:50,520 --> 00:48:54,520 Speaker 1: the failure, and apparently they asked for, you know, conditions 890 00:48:54,560 --> 00:48:56,800 Speaker 1: that dick Fold didn't want to accept because it would 891 00:48:56,800 --> 00:48:59,680 Speaker 1: wouldn't have left him running the company. And so he 892 00:49:00,040 --> 00:49:02,560 Speaker 1: his own ego got involved there. And that's that's kind 893 00:49:02,560 --> 00:49:06,600 Speaker 1: of what happens in the books you've written on Alexander Hamilton's. 894 00:49:06,760 --> 00:49:13,000 Speaker 1: One of one of Hamilton's beliefs about currency and having 895 00:49:13,040 --> 00:49:17,000 Speaker 1: a central bank was that currency should be backed by 896 00:49:17,080 --> 00:49:21,280 Speaker 1: gold or silver. That ended forty years ago when Nixon 897 00:49:21,320 --> 00:49:25,360 Speaker 1: took the US off of the gold standard. What was 898 00:49:25,440 --> 00:49:29,880 Speaker 1: Hamilton's justification for that belief system and how do you 899 00:49:29,920 --> 00:49:34,160 Speaker 1: think he would look at the current state of the economy. Well, 900 00:49:34,200 --> 00:49:38,800 Speaker 1: I think Hamilton's was a student of economic and financial history. 901 00:49:38,880 --> 00:49:41,839 Speaker 1: That when you read his writings, which I do quite 902 00:49:41,840 --> 00:49:43,920 Speaker 1: a lot, you see that he knew a lot of 903 00:49:43,960 --> 00:49:47,040 Speaker 1: financial history when he was operating, and so one of 904 00:49:47,040 --> 00:49:49,200 Speaker 1: the things he knew was that England had a strong 905 00:49:49,239 --> 00:49:52,360 Speaker 1: currency anchored in gold, the Dutch Republic had a strong 906 00:49:52,400 --> 00:49:57,600 Speaker 1: currency anchored in silver, and uh. So you know, Hamilton's 907 00:49:57,640 --> 00:50:00,479 Speaker 1: called gold and silver the monies of the world. And 908 00:50:00,520 --> 00:50:03,080 Speaker 1: I think he wanted the US, which didn't have its 909 00:50:03,080 --> 00:50:06,200 Speaker 1: own currency unit um uh, to be like the other 910 00:50:06,360 --> 00:50:09,239 Speaker 1: countries of the world, and therefore we that would ease 911 00:50:09,280 --> 00:50:12,200 Speaker 1: international trade and eliminate a lot of currency risk and 912 00:50:12,280 --> 00:50:15,160 Speaker 1: things like that. So in his time, he was trying 913 00:50:15,200 --> 00:50:17,640 Speaker 1: to bring the US up to the standard of that time. 914 00:50:17,840 --> 00:50:20,319 Speaker 1: What do you think he would look at carn currencies 915 00:50:20,360 --> 00:50:24,520 Speaker 1: that aren't necessarily backed by by hard medals like that, Well, 916 00:50:24,560 --> 00:50:27,080 Speaker 1: he would he would be skeptical of it in the 917 00:50:27,120 --> 00:50:30,360 Speaker 1: sense that you know, he wrote that it's very easy 918 00:50:30,400 --> 00:50:33,399 Speaker 1: to stamp numbers on paper and call it money. It's 919 00:50:33,440 --> 00:50:35,719 Speaker 1: easy to see the stamping of paper. He said, it 920 00:50:35,760 --> 00:50:38,440 Speaker 1: is very easy, and it offers a temptation to governments. 921 00:50:38,800 --> 00:50:41,040 Speaker 1: Uh he didn't. You know the banks of the United 922 00:50:41,080 --> 00:50:44,760 Speaker 1: States were private corporations for the most part, because Hamilton's 923 00:50:44,800 --> 00:50:47,799 Speaker 1: worried that if Congress controlled the Central Bank, it would 924 00:50:47,840 --> 00:50:51,600 Speaker 1: just be printing money for Congress. That would never Yeah, 925 00:50:51,600 --> 00:50:54,920 Speaker 1: but I think what Hamilton's probably, even though his policies 926 00:50:54,960 --> 00:50:58,280 Speaker 1: led to it, Hamilton's couldn't possibly have foreseen the tremendous 927 00:50:58,320 --> 00:51:02,120 Speaker 1: economic growth of the last two less centuries. And when 928 00:51:02,120 --> 00:51:06,400 Speaker 1: he digested the growth of the last two centuries, he 929 00:51:06,480 --> 00:51:09,200 Speaker 1: might say, you know, really, gold and silver are fairly 930 00:51:09,239 --> 00:51:12,520 Speaker 1: expensive ways to back money. Uh, you know, you work 931 00:51:12,640 --> 00:51:14,640 Speaker 1: very hard to dig the gold and silver on the ground, 932 00:51:14,719 --> 00:51:17,000 Speaker 1: refined it into bars and bury the guard bars back 933 00:51:17,000 --> 00:51:19,600 Speaker 1: in the ground. And Lord Keynes made fun of that. 934 00:51:19,880 --> 00:51:22,040 Speaker 1: And I think Hamilton's would be a little more modern 935 00:51:22,080 --> 00:51:25,080 Speaker 1: and say, if you can control what the central bank 936 00:51:25,200 --> 00:51:27,880 Speaker 1: is going to do, it's a lot cheaper not to 937 00:51:27,880 --> 00:51:30,919 Speaker 1: base your money on gold and silver. Makes sense. Let's 938 00:51:31,000 --> 00:51:34,080 Speaker 1: jump to our favorite podcast questions. These are are the 939 00:51:34,160 --> 00:51:37,920 Speaker 1: questions we ask all of our guests. Um you're a 940 00:51:37,920 --> 00:51:41,240 Speaker 1: fairly well known person. Tell us something that most people 941 00:51:41,400 --> 00:51:45,359 Speaker 1: don't know about your background. What most people don't know 942 00:51:45,400 --> 00:51:48,840 Speaker 1: about my background? Well, I think I had one great 943 00:51:48,880 --> 00:51:55,000 Speaker 1: financial triumph around nine that most people don't know about. 944 00:51:55,120 --> 00:51:59,080 Speaker 1: And here's the situation. I'm in North Carolina at the time, 945 00:51:59,160 --> 00:52:01,879 Speaker 1: and my wife take me off to our church. Uh. 946 00:52:02,120 --> 00:52:06,400 Speaker 1: So I'm attending this church and the church decides around 947 00:52:06,480 --> 00:52:11,600 Speaker 1: ninety one to sell the parsonage and just pay a 948 00:52:11,640 --> 00:52:15,120 Speaker 1: rent supplement to the minister. Uh. That gave him a 949 00:52:15,200 --> 00:52:18,320 Speaker 1: bunch of capital to invest. And since I'm an economist 950 00:52:18,320 --> 00:52:20,759 Speaker 1: from MC State going to church with my wife, they 951 00:52:20,800 --> 00:52:22,960 Speaker 1: asked me, what should you buy? You know what? What 952 00:52:23,000 --> 00:52:26,319 Speaker 1: how should they invest that money? So in nineteen eighty one, Uh, 953 00:52:26,360 --> 00:52:29,480 Speaker 1: this is a church. I advised them to put all 954 00:52:29,520 --> 00:52:33,000 Speaker 1: the money into long term US government bonds, which were 955 00:52:33,000 --> 00:52:36,919 Speaker 1: then yielding about fourteen or fifteen percent interest. And so 956 00:52:36,960 --> 00:52:41,600 Speaker 1: they did that, and not only did they for fifteen 957 00:52:41,640 --> 00:52:44,840 Speaker 1: or twenty years after that get this fifteen percent return 958 00:52:44,880 --> 00:52:47,640 Speaker 1: on their money, but during the nineteen eighties, interest rates 959 00:52:47,680 --> 00:52:49,840 Speaker 1: came down and the bonds about doubled in value. So 960 00:52:49,840 --> 00:52:53,200 Speaker 1: they were getting a tremendous return on this investment. They 961 00:52:53,200 --> 00:52:55,960 Speaker 1: thought I was a genius, even though uh it was 962 00:52:56,000 --> 00:52:59,359 Speaker 1: just an I was lucky with the timing. But here's 963 00:52:59,400 --> 00:53:02,200 Speaker 1: what people don't know. They were so happy about what 964 00:53:02,239 --> 00:53:04,239 Speaker 1: I had done and thought I was a genius that 965 00:53:04,280 --> 00:53:06,759 Speaker 1: they made me the chairman of the board of trustees 966 00:53:06,800 --> 00:53:09,600 Speaker 1: of the church. And so most people don't know that 967 00:53:09,600 --> 00:53:11,960 Speaker 1: one of my greatest triumphs in life was being the 968 00:53:12,040 --> 00:53:14,480 Speaker 1: chairman of the board of trustees of a church of 969 00:53:14,520 --> 00:53:17,440 Speaker 1: which I was not a member. That's very, very funny. 970 00:53:17,640 --> 00:53:20,160 Speaker 1: Tell us about some of your early mentors. You mentioned 971 00:53:20,160 --> 00:53:23,719 Speaker 1: one at Harvard. Who who were the people who affected 972 00:53:23,760 --> 00:53:28,560 Speaker 1: your view of economics? Well, I got interested in economics 973 00:53:28,560 --> 00:53:31,040 Speaker 1: and high school and economics was not a subject in 974 00:53:31,080 --> 00:53:33,880 Speaker 1: the late nineteen fifties that was typically taught in high school. 975 00:53:34,160 --> 00:53:36,200 Speaker 1: So I have to give a shout out to my 976 00:53:36,360 --> 00:53:39,920 Speaker 1: high school economics teacher. His name was Ralph Schmidt. I 977 00:53:40,040 --> 00:53:41,839 Speaker 1: used to keep up with him, but I haven't been 978 00:53:41,920 --> 00:53:44,759 Speaker 1: in touch with him in recent years, and I'm not 979 00:53:44,800 --> 00:53:47,960 Speaker 1: even sure he's still alive. I hope. So Ralph Schmidt 980 00:53:48,239 --> 00:53:51,919 Speaker 1: was taught a really college like course in economics while 981 00:53:51,960 --> 00:53:54,560 Speaker 1: I was a senior in high school, and that just 982 00:53:54,600 --> 00:53:58,080 Speaker 1: got me. We read things like Robert Heilbrouner's Worldly Philosopherers 983 00:53:58,160 --> 00:54:01,120 Speaker 1: and but a real good economic textbook as well. And 984 00:54:01,400 --> 00:54:04,080 Speaker 1: I knew all about Paul Samuelson and Milton Friedman and 985 00:54:04,120 --> 00:54:06,359 Speaker 1: people like that while I was in high school. So 986 00:54:06,440 --> 00:54:08,840 Speaker 1: there was that high school teacher that kindled my interest 987 00:54:08,880 --> 00:54:11,680 Speaker 1: in economics. And it's never left, you know, now it's 988 00:54:11,680 --> 00:54:15,359 Speaker 1: sixty seventy years later. I'm still interested in it. Then 989 00:54:15,360 --> 00:54:18,360 Speaker 1: and I mentioned, uh, well, I should talk about college 990 00:54:18,360 --> 00:54:22,799 Speaker 1: because Gershon Crime, my PhD advisor, h came later, but 991 00:54:22,920 --> 00:54:25,759 Speaker 1: in while I was in college that Harvard had a 992 00:54:25,760 --> 00:54:29,200 Speaker 1: couple of professors named Otto Eckstein and Seymour Harris. Otto 993 00:54:29,239 --> 00:54:32,960 Speaker 1: Eckstein later on founded Data Resources, you know, which became 994 00:54:33,200 --> 00:54:38,160 Speaker 1: a big data firm. Uh. And he was a young, 995 00:54:38,320 --> 00:54:41,439 Speaker 1: very bright economist, and I knew all the things going 996 00:54:41,440 --> 00:54:44,160 Speaker 1: on in Washington. He was a public finance economist, so 997 00:54:44,200 --> 00:54:47,759 Speaker 1: I liked him. And Seymour Harris was an old Harvard professor, 998 00:54:47,960 --> 00:54:51,880 Speaker 1: been there many years, and he was my senior thesis advisor, 999 00:54:52,280 --> 00:54:54,000 Speaker 1: and he took a liking to me, and I took 1000 00:54:54,040 --> 00:54:56,000 Speaker 1: a liking to him. He was a very prolific writer, 1001 00:54:56,239 --> 00:54:58,279 Speaker 1: not that wasn't so much original, but he wrote a 1002 00:54:58,280 --> 00:55:01,719 Speaker 1: lot of stuff about policy. And so those two professors, 1003 00:55:02,280 --> 00:55:05,240 Speaker 1: you know, we're not only mentors but sort of friends. 1004 00:55:05,920 --> 00:55:08,520 Speaker 1: And then Gershon Kron was my mentor as a grad student, 1005 00:55:08,560 --> 00:55:10,560 Speaker 1: but he was also a friend. You know, he lived 1006 00:55:10,560 --> 00:55:12,719 Speaker 1: near where I lived in the summer when he was 1007 00:55:13,080 --> 00:55:15,200 Speaker 1: wife was gone. We'd invite him over for dinner and 1008 00:55:15,200 --> 00:55:17,000 Speaker 1: all that. So he was a friend of the family. 1009 00:55:17,480 --> 00:55:20,160 Speaker 1: Uh And they you know, those four bral Schmidt in 1010 00:55:20,239 --> 00:55:23,920 Speaker 1: high school, Otto Eckstein and Seymour, Harrison College, and then 1011 00:55:24,000 --> 00:55:26,839 Speaker 1: Gershon Kron and grad school. I think those were my 1012 00:55:26,880 --> 00:55:30,840 Speaker 1: mentors that mattered to me in my life. So holding 1013 00:55:30,880 --> 00:55:34,480 Speaker 1: them mentors aside, what what investors affected the way you 1014 00:55:34,520 --> 00:55:37,480 Speaker 1: look at the world of markets and investing. Well, in 1015 00:55:37,520 --> 00:55:39,520 Speaker 1: the nineteen fifties, when I was still in high school, 1016 00:55:39,560 --> 00:55:41,319 Speaker 1: I read something like it might have been the third 1017 00:55:41,440 --> 00:55:46,319 Speaker 1: edition of Benjamin Graham's The Intelligent Investor, and I learned 1018 00:55:46,360 --> 00:55:48,239 Speaker 1: a lot from that because there was a lot of 1019 00:55:48,239 --> 00:55:51,600 Speaker 1: wisdom in Benjamin Graham's work. My friend Jason Saga's, you know, 1020 00:55:51,680 --> 00:55:53,880 Speaker 1: half a century later, has brought out a new edition 1021 00:55:53,880 --> 00:55:56,640 Speaker 1: of it. Uh So that's a book that influenced me 1022 00:55:56,680 --> 00:56:00,680 Speaker 1: when I was young about value investing and uh, you know, 1023 00:56:01,200 --> 00:56:03,719 Speaker 1: just a lot of wisdom that Ben Graham had, so 1024 00:56:03,800 --> 00:56:08,319 Speaker 1: that influenced me a lot. Uh. And uh. Then you know, 1025 00:56:08,880 --> 00:56:13,200 Speaker 1: some some books sort of combined economic history, financial history 1026 00:56:13,239 --> 00:56:17,520 Speaker 1: with investment advice. Um. And one of those that I remember, 1027 00:56:17,560 --> 00:56:20,080 Speaker 1: a book from the late nineteen fifties was Bray Hammond. 1028 00:56:20,160 --> 00:56:22,279 Speaker 1: He was the secretary of the Federal Reserve Board. Bray 1029 00:56:22,320 --> 00:56:25,080 Speaker 1: Hammond wrote a book called Banks and Politics in America 1030 00:56:25,480 --> 00:56:28,719 Speaker 1: from the Revolution to the Civil War. And it's just 1031 00:56:28,800 --> 00:56:31,440 Speaker 1: a wonderful book. It's well worth reading half a century 1032 00:56:31,520 --> 00:56:34,799 Speaker 1: later because it captures the spirit of America. You know, 1033 00:56:34,840 --> 00:56:37,080 Speaker 1: the country was built by steam and credit, you know, 1034 00:56:37,120 --> 00:56:40,440 Speaker 1: and fraudsters were there and all that. You know, he'd 1035 00:56:40,520 --> 00:56:44,080 Speaker 1: go into financial frauds, how they took place, and at 1036 00:56:44,120 --> 00:56:45,880 Speaker 1: the end of it he would say, thus did America 1037 00:56:46,000 --> 00:56:49,520 Speaker 1: grow great? You know it was sarcastic, but you know, 1038 00:56:49,560 --> 00:56:52,880 Speaker 1: you by studying history you could sort of spot things 1039 00:56:52,880 --> 00:56:56,640 Speaker 1: in finance that to avoid and to latch onto. Any 1040 00:56:56,640 --> 00:56:59,040 Speaker 1: other books you want to mention, this is always everybody's 1041 00:56:59,080 --> 00:57:02,600 Speaker 1: favorite question. Uh. Well, when I was in grad school, 1042 00:57:02,680 --> 00:57:05,000 Speaker 1: my first year of grad school was nineteen sixty three, 1043 00:57:05,000 --> 00:57:07,800 Speaker 1: and one of the great books that of economic history 1044 00:57:07,800 --> 00:57:10,240 Speaker 1: that came out in was Milton Friedman and Anna Schwartz, 1045 00:57:10,280 --> 00:57:13,239 Speaker 1: A Monetary History of the United States. At that time, 1046 00:57:13,360 --> 00:57:17,880 Speaker 1: especially at Harvard, not at Chicago, obviously most people were Keynesians, 1047 00:57:18,200 --> 00:57:24,480 Speaker 1: and Milton Friedman made this powerful historical Uh. I wouldn't 1048 00:57:24,480 --> 00:57:27,080 Speaker 1: say it's an attack on Keynesianism, but there was something 1049 00:57:27,120 --> 00:57:30,680 Speaker 1: that the Keynesians hadn't paid much attention to, namely monetarism, 1050 00:57:30,960 --> 00:57:33,280 Speaker 1: and Milton Friedman's books sort of showed that there was 1051 00:57:33,320 --> 00:57:36,440 Speaker 1: a lot to monetarism, and so then people began to 1052 00:57:36,520 --> 00:57:40,280 Speaker 1: rethink Keynesianism, and later on economists of course came up 1053 00:57:40,320 --> 00:57:44,000 Speaker 1: with rational expectations and other things. Uh. But I think 1054 00:57:44,040 --> 00:57:46,800 Speaker 1: Friedman and Schwartz The Monetary History of the United States 1055 00:57:47,120 --> 00:57:48,919 Speaker 1: was one of those books. I happened to be lucky 1056 00:57:49,000 --> 00:57:51,040 Speaker 1: enough to read it when I was twenty three years old, 1057 00:57:51,320 --> 00:57:53,960 Speaker 1: and it influenced my career a great deal because it's 1058 00:57:53,960 --> 00:57:56,640 Speaker 1: really such a wonderful book. Any of the books you 1059 00:57:56,640 --> 00:57:58,720 Speaker 1: want to mention before we move on, well, I should 1060 00:57:58,800 --> 00:58:02,320 Speaker 1: mention that I happen to own the twenty seven volumes 1061 00:58:02,320 --> 00:58:06,080 Speaker 1: of the papers of Alexander Hamilton's and the five volumes 1062 00:58:06,120 --> 00:58:10,120 Speaker 1: of the Law Practice of Alexander Hamilton's And I go 1063 00:58:10,240 --> 00:58:12,520 Speaker 1: in to read those a lot, because that that's just 1064 00:58:12,600 --> 00:58:14,960 Speaker 1: fascinating to take up about ten feet on my bookshelves 1065 00:58:15,800 --> 00:58:17,880 Speaker 1: volume and this is interesting for a man who only 1066 00:58:17,920 --> 00:58:22,800 Speaker 1: lived forty seven years. Wow, that's impressive. Um. So, we 1067 00:58:22,920 --> 00:58:25,240 Speaker 1: we've been talking about central banks, we've been talking about 1068 00:58:25,280 --> 00:58:28,760 Speaker 1: interest rates. What do you see as the next shift 1069 00:58:29,360 --> 00:58:33,120 Speaker 1: that's going to take place in either how the central 1070 00:58:33,160 --> 00:58:37,720 Speaker 1: bank conducts itself or interest rate policies. Well, I my 1071 00:58:37,880 --> 00:58:41,000 Speaker 1: historical perspective makes me think that the Federal Reserve now 1072 00:58:41,200 --> 00:58:43,560 Speaker 1: is kind of in the situation of the Federal Reserve 1073 00:58:43,680 --> 00:58:47,919 Speaker 1: around the early nineteen fifties. It had kept interest rates 1074 00:58:48,000 --> 00:58:50,480 Speaker 1: very low for a long time. It realized that those 1075 00:58:50,560 --> 00:58:53,320 Speaker 1: rates were probably too low, they weren't normal, So they 1076 00:58:53,360 --> 00:58:57,120 Speaker 1: want to normalize. And I think that the uh, the 1077 00:58:57,200 --> 00:59:00,360 Speaker 1: goal of the Federal Reserve over the next few years 1078 00:59:00,680 --> 00:59:04,280 Speaker 1: will be to gradually increase our interest rates back to 1079 00:59:04,400 --> 00:59:07,640 Speaker 1: more of a normal level. Now, there could be some 1080 00:59:07,680 --> 00:59:11,840 Speaker 1: problems with this that I foresee. Number One, the fiscal policy. 1081 00:59:12,040 --> 00:59:16,400 Speaker 1: Fiscal policy was basically non existence during and after the crisis. 1082 00:59:16,400 --> 00:59:19,120 Speaker 1: Obama had a little bit of stimulus, not enough in 1083 00:59:19,160 --> 00:59:22,200 Speaker 1: two thousand nine, but since then the gridlock in Washington 1084 00:59:22,320 --> 00:59:25,600 Speaker 1: prevented any sort of fiscal policy designed to help the 1085 00:59:25,600 --> 00:59:29,840 Speaker 1: economy until the most recent tax reforms that the President 1086 00:59:29,840 --> 00:59:31,880 Speaker 1: Trump is changing that. So we gotta We got a 1087 00:59:31,920 --> 00:59:37,680 Speaker 1: tax cut in UH late two thousand seventeen, and then 1088 00:59:37,760 --> 00:59:41,240 Speaker 1: there's a deal between the Republicans and the Democrats where 1089 00:59:41,280 --> 00:59:43,920 Speaker 1: each one gets a little more spending that came up 1090 00:59:43,920 --> 00:59:46,800 Speaker 1: just in January two thou eighteen, and then Trump is 1091 00:59:46,840 --> 00:59:50,280 Speaker 1: talking about an infrastructure program. So what I see right now, 1092 00:59:50,320 --> 00:59:52,280 Speaker 1: and it bothers me a little bit, is that the 1093 00:59:52,320 --> 00:59:55,040 Speaker 1: sort of fiscal stimulus we should have had in two 1094 00:59:55,040 --> 00:59:58,840 Speaker 1: thousand eight nine ten is taking place when the unemployment 1095 00:59:58,880 --> 01:00:01,000 Speaker 1: was you know, in two thousand nine it was ten percent. 1096 01:00:01,360 --> 01:00:05,120 Speaker 1: Now it's four point one percent, basically full employment or 1097 01:00:05,200 --> 01:00:08,240 Speaker 1: close to it, And we're getting the fiscal stimulus we 1098 01:00:08,240 --> 01:00:10,640 Speaker 1: should have had when unemployment was ten percent when we're 1099 01:00:10,640 --> 01:00:13,680 Speaker 1: sort of fully employed. So what the Federal Reserve may 1100 01:00:13,720 --> 01:00:18,480 Speaker 1: have trouble containing inflationary pressures, and it may have to 1101 01:00:18,600 --> 01:00:22,920 Speaker 1: raise interest rates faster than UH it did in the 1102 01:00:22,960 --> 01:00:25,560 Speaker 1: nineteen fifties when they could just move up gradually over 1103 01:00:25,600 --> 01:00:28,320 Speaker 1: a decade, and I think that bode zeal for you know, 1104 01:00:28,480 --> 01:00:31,520 Speaker 1: probably overvalued stock markets and things like that. So I'm 1105 01:00:31,520 --> 01:00:33,560 Speaker 1: a little bit wary, wary about the outlook for the 1106 01:00:33,560 --> 01:00:35,960 Speaker 1: next year or two. Tell us about a time you 1107 01:00:36,080 --> 01:00:39,200 Speaker 1: failed and what you learned from the experience. The time 1108 01:00:39,280 --> 01:00:42,080 Speaker 1: I failed, and what I learned from the experience, well, 1109 01:00:42,200 --> 01:00:46,080 Speaker 1: I think in the History of interest Rates, I did 1110 01:00:46,560 --> 01:00:49,880 Speaker 1: make a bad forecast and in the last edition of it, 1111 01:00:49,920 --> 01:00:53,080 Speaker 1: which was the two thousand five edition, in two thousand four, 1112 01:00:53,160 --> 01:00:55,720 Speaker 1: I thought we'd hit the low and interest rates and 1113 01:00:56,440 --> 01:00:59,560 Speaker 1: may have two thousand three, Uh mentioned that earlier. That's 1114 01:00:59,600 --> 01:01:03,800 Speaker 1: pre crisis thinking, yes, right, and you know those those 1115 01:01:03,920 --> 01:01:06,800 Speaker 1: rates in two thousand two and three and early two 1116 01:01:06,840 --> 01:01:09,840 Speaker 1: thousand four were really the lowest ones on record up 1117 01:01:09,840 --> 01:01:12,640 Speaker 1: to that time. And so we turned up and you know, 1118 01:01:12,720 --> 01:01:14,520 Speaker 1: after a year and a half of rates moving up, 1119 01:01:14,560 --> 01:01:16,640 Speaker 1: I said, Okay, probably we've hit the low in two 1120 01:01:16,680 --> 01:01:19,800 Speaker 1: thousand three, uh, And you'll you'll read that in the 1121 01:01:19,880 --> 01:01:23,360 Speaker 1: last edition of the book, and so um, I think 1122 01:01:23,400 --> 01:01:25,520 Speaker 1: that was an obvious mistake. And what I learned from 1123 01:01:25,560 --> 01:01:29,760 Speaker 1: that is that forecasting is uh is a tough business. 1124 01:01:29,760 --> 01:01:32,520 Speaker 1: You know. I became an economic historian because it's a 1125 01:01:32,520 --> 01:01:35,520 Speaker 1: lot easier to forecast the past. We know what happened, 1126 01:01:35,640 --> 01:01:38,240 Speaker 1: we don't know exactly how it happened. But when you're there, 1127 01:01:38,640 --> 01:01:41,000 Speaker 1: people want to know right now what's going to happen 1128 01:01:41,040 --> 01:01:43,720 Speaker 1: in the next month or year. Uh. That's very tough 1129 01:01:43,760 --> 01:01:46,160 Speaker 1: to forecast. And so I couldn't see in two thousand 1130 01:01:46,200 --> 01:01:48,760 Speaker 1: four and five that we would have this great financial 1131 01:01:48,800 --> 01:01:52,160 Speaker 1: crisis starting in two thousand seven. So if a millennial 1132 01:01:52,280 --> 01:01:54,080 Speaker 1: or a college student came up to you and said 1133 01:01:54,120 --> 01:02:00,280 Speaker 1: they were thinking about going into either economics or financial history, 1134 01:02:00,680 --> 01:02:03,320 Speaker 1: what sort of advice might you give them? Well, I 1135 01:02:03,360 --> 01:02:07,960 Speaker 1: would say that it's a very rewarding thing to study. Uh. 1136 01:02:08,000 --> 01:02:10,760 Speaker 1: I somehow think that economic and financial history, if you 1137 01:02:10,760 --> 01:02:13,680 Speaker 1: can make contributions there, they kind of last longer. In 1138 01:02:14,160 --> 01:02:18,160 Speaker 1: straight economics, you're often trying to tweak the last paper 1139 01:02:18,200 --> 01:02:20,240 Speaker 1: you saw in the journal, put another tweak on it, 1140 01:02:20,480 --> 01:02:22,640 Speaker 1: and then get a journal article which shows that you're 1141 01:02:22,680 --> 01:02:26,080 Speaker 1: on the cutting edge. Uh. But then somebody else tweaks you, 1142 01:02:26,160 --> 01:02:28,400 Speaker 1: and pretty soon your article isn't that important. If you 1143 01:02:28,440 --> 01:02:30,880 Speaker 1: write a really good book in economic history, like Milton 1144 01:02:30,960 --> 01:02:34,000 Speaker 1: Friedman and Anna Schwartz did in their Monetary History, or 1145 01:02:34,040 --> 01:02:37,160 Speaker 1: Bray Hammond did in his Banks and Politics book. Those 1146 01:02:37,200 --> 01:02:39,840 Speaker 1: books last a long time and you can read him 1147 01:02:39,840 --> 01:02:42,880 Speaker 1: half a century later. So I would say that going 1148 01:02:42,920 --> 01:02:46,280 Speaker 1: into economic and financial history may give you more long 1149 01:02:46,440 --> 01:02:51,880 Speaker 1: term rewards than just being an ordinary garden variety economist. Uh. 1150 01:02:51,920 --> 01:02:54,919 Speaker 1: So that's what I would advise scholars. But of course, 1151 01:02:55,000 --> 01:02:57,520 Speaker 1: you know there's you know, there's other advice I'd give 1152 01:02:57,600 --> 01:03:00,640 Speaker 1: that you know, read Bend Graham's book If You're a million, uh, 1153 01:03:01,040 --> 01:03:05,040 Speaker 1: the new edition of it, and then mostly, you know, save, 1154 01:03:05,600 --> 01:03:09,440 Speaker 1: save money and invest it. The power of compound interest 1155 01:03:09,560 --> 01:03:13,040 Speaker 1: is so great, but we don't realize it because it 1156 01:03:13,080 --> 01:03:16,800 Speaker 1: happened slowly. So for any millennial, not just one who 1157 01:03:16,880 --> 01:03:18,880 Speaker 1: might want to be a professor, I would say, you 1158 01:03:18,960 --> 01:03:21,000 Speaker 1: may not have a lot of money, but make sure to, 1159 01:03:21,200 --> 01:03:23,240 Speaker 1: you know, save ten percent of it, like John D. 1160 01:03:23,400 --> 01:03:27,200 Speaker 1: Rockefeller did. And our final question, what is it that 1161 01:03:27,240 --> 01:03:30,160 Speaker 1: you know about investing today that you wish you knew 1162 01:03:30,320 --> 01:03:33,400 Speaker 1: fifty years ago when you were starting out of out 1163 01:03:33,400 --> 01:03:36,920 Speaker 1: of grad school. Well, I wish I had known fifty 1164 01:03:37,000 --> 01:03:41,480 Speaker 1: years ago. Uh. What what these long term market cycles 1165 01:03:41,520 --> 01:03:44,880 Speaker 1: were like both in interest rates and stock returns. Now, 1166 01:03:44,920 --> 01:03:46,480 Speaker 1: we didn't have a lot of the data, and I 1167 01:03:46,600 --> 01:03:49,320 Speaker 1: myself have worked on creating some of these data. But 1168 01:03:49,400 --> 01:03:52,560 Speaker 1: I think that if I had known fifty years ago 1169 01:03:53,200 --> 01:03:57,000 Speaker 1: how stock markets bounce up and down, they really magnify 1170 01:03:57,360 --> 01:03:59,720 Speaker 1: the ups and downs of the economy by quite a bit. 1171 01:04:00,200 --> 01:04:04,040 Speaker 1: We can call it pe ratios increasing and decreasing. Uh. 1172 01:04:04,080 --> 01:04:06,160 Speaker 1: If I had known that fifty years ago, that there 1173 01:04:06,200 --> 01:04:08,000 Speaker 1: were these long cycles that have been going on for 1174 01:04:08,040 --> 01:04:10,560 Speaker 1: two hundred years, I probably would have paid more attention 1175 01:04:10,640 --> 01:04:13,280 Speaker 1: to where we were in the market cycles then. And 1176 01:04:13,360 --> 01:04:15,560 Speaker 1: the same thing with interest rates. If I knew that 1177 01:04:15,600 --> 01:04:18,720 Speaker 1: there were like twenty thirty year movements of interest rates, 1178 01:04:18,920 --> 01:04:20,640 Speaker 1: I would try to see where we were in that 1179 01:04:20,720 --> 01:04:24,160 Speaker 1: cycle and then not make the mistake of, you know, 1180 01:04:24,280 --> 01:04:26,919 Speaker 1: investing all a lot of money and interest rates when 1181 01:04:26,960 --> 01:04:30,160 Speaker 1: they're very low, because when they go up, you lose 1182 01:04:30,200 --> 01:04:34,680 Speaker 1: capital basically. Uh. We have been speaking with Professor Richard 1183 01:04:34,720 --> 01:04:38,160 Speaker 1: Silla of n y U Stern School of Business, author 1184 01:04:38,240 --> 01:04:43,600 Speaker 1: of numerous books, most recently Alexander Hamilton's on Finance, credit 1185 01:04:43,640 --> 01:04:45,240 Speaker 1: and debt. Thank you so much for doing this. This 1186 01:04:45,320 --> 01:04:50,040 Speaker 1: has been absolutely fascinating. If you enjoy this conversation, be 1187 01:04:50,120 --> 01:04:52,200 Speaker 1: sure and look up an Intra down an Inch on 1188 01:04:52,240 --> 01:04:54,800 Speaker 1: Apple iTunes and you can see any of the other, 1189 01:04:55,320 --> 01:04:59,440 Speaker 1: let's call it hundred and nineties such conversations we've had previously. 1190 01:05:00,200 --> 01:05:03,840 Speaker 1: We love your comments, feedback and suggestions right to us 1191 01:05:03,880 --> 01:05:07,640 Speaker 1: at m IB podcast at Bloomberg dot net. I would 1192 01:05:07,680 --> 01:05:10,000 Speaker 1: be remiss if I did not thank my crack staff 1193 01:05:10,080 --> 01:05:14,800 Speaker 1: that helps to put together this podcast each week. Mendina 1194 01:05:14,880 --> 01:05:19,080 Speaker 1: Parwana is our audio engineer, slash producer, Taylor Riggs is 1195 01:05:19,080 --> 01:05:21,880 Speaker 1: our booker producer, and Michael bat Nick is our head 1196 01:05:21,880 --> 01:05:25,880 Speaker 1: of research. I'm Barry Results. You've been listening to Masters 1197 01:05:25,880 --> 01:05:27,880 Speaker 1: in Business on Bloomberg Radio