Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have a special guest.
Speaker 1: His name is Richard Silla, and what can I tell you?
Speaker 1: He is an historian of UH finance, a professor at
Speaker 1: n y U Stern UH, an expert on central banks,
Speaker 1: on interest rates, on history of markets. Really, there isn't
Speaker 1: a broad topic about finance that he hasn't either researched
Speaker 1: or published about. He is just simply a wealth of
Speaker 1: knowledge and has not only written long in depth books
Speaker 1: about broad topics, but also written in real time and
Speaker 1: reflected that knowledge in terms of actionable UH market activity.
Speaker 1: I found this to be not exactly a wonky conversation,
Speaker 1: but if you're at all interest did in interest rates, finance, history,
Speaker 1: central banks, things along those lines, I think you'll find
Speaker 1: this to be an absolutely fascinating chat. So, with no
Speaker 1: further ado, my conversation with Professor Richard Silla. I'm Barry Ritolts.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
Speaker 1: special guest today is Richard Silla. He is the professor
Speaker 1: emeritus of Economics and the former Henry Kaufman Professor of History,
Speaker 1: of Financial Institutions and Markets at New York University's Stern
Speaker 1: School of Business. He is the author of numerous books,
Speaker 1: including American Capital Markets, History of Interest Rates, and most recently,
Speaker 1: Alexander Hamilton's on Finance, Credit and Debt. Professor Silla, Welcome
Speaker 1: to Bloomberg. Glad to be with you, Barry. So. I'm
Speaker 1: aware of of your your career and your contributions to
Speaker 1: the world of finance. I left out in our introduction
Speaker 1: that you are also currently chairman of the Museum of
Speaker 1: American Finance, which holds numerous events and has some really
Speaker 1: tremendous um exhibits, really fascinating exhibits. But let's start by
Speaker 1: discussing the history of markets. Why should any of us
Speaker 1: be concerned about what took place in the past. Why
Speaker 1: should we study market history? Well, I think one of
Speaker 1: the main reasons for studying market history is that the
Speaker 1: things that happened in the past tend to repeat themselves,
Speaker 1: you know, things like financial crises. They we had one recently.
Speaker 1: It was kind of unexpected because we hadn't had one
Speaker 1: for a long time. But then just studying the way
Speaker 1: the markets behaved in the past, their ups and downs,
Speaker 1: you can learn a bit about market cycles, and you know,
Speaker 1: I think an investor needs to know where we are
Speaker 1: sort of in a market cycle, because that's valuable information.
Speaker 1: So can we trade on them, nation can we actually
Speaker 1: use in information to make risk reward decisions or does
Speaker 1: it just provide a framework for how we're conceptualizing market
Speaker 1: A couple of times in my career have made my
Speaker 1: own investment decisions, and then they turned out to have
Speaker 1: been right. Uh. Round two thousand, at the height of
Speaker 1: the dot com bubble, I and other people like Bob
Speaker 1: Seller thought the markets were tremendously overpriced, and I wrote
Speaker 1: an article. I think I first gave it as a
Speaker 1: talk at the end of nine, wrote it up in
Speaker 1: two thousand. It was published in two thousand one, and
Speaker 1: I said there that, uh, when whenever the markets went
Speaker 1: up as much as they did peeking around, usually the
Speaker 1: next decade was a bad decade. And I wrote that
Speaker 1: in two thousand one, and I made a forecast just
Speaker 1: by assuming returns would be real returns with zero that
Speaker 1: you know, what would happen to returns? And it turned out,
Speaker 1: you know, I actually drew a picture of it, and
Speaker 1: it turned out that what actually happened from two thousand
Speaker 1: to two thousand sort of mimbick pretty much what I did. Uh,
Speaker 1: then in two thousand nine, Uh, we're actually probably a
Speaker 1: year later, two thousand ten or eleven. For the same reason,
Speaker 1: after you have this big decline of a decade or so,
Speaker 1: market history told me that the next decade after that
Speaker 1: is usually better. So I made a prediction that you know,
Speaker 1: we would have a pretty good decade from two thousand
Speaker 1: ten to two thousand twenty, and uh, that's pretty much
Speaker 1: come to pass two. So it sounds like you're not
Speaker 1: actively involved in I certainly won't call it day trading,
Speaker 1: but day to day, week the week sort of noisy
Speaker 1: market moves. You're looking at long arcs of history and
Speaker 1: decade long periods of mean regression from when stocks are
Speaker 1: either very pricy you're very cheap. Precisely, I would say that,
Speaker 1: both in terms of interest rates and in terms of
Speaker 1: stock market returns, there are kind of longer cycles, and
Speaker 1: you know, nobody can predict exactly what's going to happen.
Speaker 1: They aren't exactly a decade, but in my view, uh,
Speaker 1: you could tell that stocks were a bargain around two
Speaker 1: thousand nine, ten eleven, just as you could tell they
Speaker 1: were not a bargain around n and so what you
Speaker 1: want to do, since you can never predict when markets
Speaker 1: will turn, when you think stocks are not a bargain,
Speaker 1: you probably ought to raise some cash and be ready
Speaker 1: for you have some cash when the markets fall. When
Speaker 1: a Wall Street has a sale, I like to call it,
Speaker 1: at the same time, then when everyone else is depressed
Speaker 1: like they were in two thousand nine and ten, Uh,
Speaker 1: that's when Wall Streets having a sale, that's a good
Speaker 1: time to buy that. I think this is what history
Speaker 1: shows you. Uh. Some people call this market timing, uh,
Speaker 1: but I view it as in some sense it is
Speaker 1: in a long term since market timing, But I think
Speaker 1: market timers usually thinking much shorter terms, like you know,
Speaker 1: I'm going to ride this current wave. You're raising a
Speaker 1: fascinating issue that I'm very much enamored with. And that's
Speaker 1: when everybody is very enthusiastic about stocks and they seem
Speaker 1: to get pricey. It's not easy to avoid getting swept
Speaker 1: up in that mania. And you mentioned two thousand nine
Speaker 1: two people were extremely negative on stocks. How do you
Speaker 1: avoid allowing the emotional state of the crowd to affect you, meaning,
Speaker 1: how can you buy when everyone hates stocks and they're
Speaker 1: cheap and lighten up when everybody loves stocks and they're
Speaker 1: very expensive. Well, it requires a certain amount of discipline,
Speaker 1: and I think that's what an investor really has to have. Discipline.
Speaker 1: Don't be swept up by the latest manias or uh
Speaker 1: or depressions. You know that people go from being euphoric
Speaker 1: to being depressed, and usually when they're euphoric, that's the
Speaker 1: time to sell. When they're depressed, it's a good time
Speaker 1: to buy. In some sense, it's a contrarian strategy, but
Speaker 1: I think anyone who studies long term market cycles would
Speaker 1: say it's the right strategy to have. So after the
Speaker 1: O nine bottom, for I remember, even in October of
Speaker 1: two thousand nine, I think the markets had bounced like
Speaker 1: thirty or off the lows, and we heard people saying, listen,
Speaker 1: this is too far, too fast. Markets really need some
Speaker 1: time to digest this. And I don't know, three or
Speaker 1: four years later, people were still more or less saying
Speaker 1: the same thing, This is too fast, off the lows,
Speaker 1: this is too negative. So it's one thing when stocks
Speaker 1: were fairly inexpensive in oh nine, how do you sequester
Speaker 1: that sort of noise two or three years later, when
Speaker 1: stocks weren't terribly expensive, but they also weren't terribly cheap.
Speaker 1: I think that's where the history comes in that. I
Speaker 1: think if you realize that markets tend to trend for
Speaker 1: you know, ten or fifteen years in a certain direction,
Speaker 1: and you know, you can kind of tell where you are.
Speaker 1: I mean you I could tell in two thousand nine
Speaker 1: and ten that the markets were at one of their
Speaker 1: low points of all of US history for two years
Speaker 1: of market has and so what I would say when
Speaker 1: the markets bounced up a little bit, well, that was
Speaker 1: an encouraging sign. I know. I give some talks to
Speaker 1: groups around two thousand ten and eleven, and I was
Speaker 1: pretty optimistic about the market, and people are shaking their
Speaker 1: heads and say, you know, you, you you seem to
Speaker 1: be much too optimistic. We're still pessimistic. So I think
Speaker 1: it's that long term view that uh, you know, it's
Speaker 1: not day trading. It's not even trading a little jumps
Speaker 1: and ups and downs of the market. It's really taking
Speaker 1: the long term view and saying, if you buy stocks
Speaker 1: at where they were in two thousand nine, ten, eleven,
Speaker 1: ten years later, you're likely to be pretty happy. Let's
Speaker 1: talk a little bit about interest rates, and I have
Speaker 1: to bring up a quote of yours that just is
Speaker 1: so fascinating. Quote. The rates we've had in recent years,
Speaker 1: including right now, are the lowest in history. The history
Speaker 1: of interest rates traces back to the Code of Hammurabie,
Speaker 1: babylon civilization, Greek and Roman civilization, the Middle Ages, the Redness,
Speaker 1: and the early modern history right up to the present.
Speaker 1: I can assure listeners that the rates they are experiencing
Speaker 1: right now are the lowest in human history. That's fascinating.
Speaker 1: Are we really at thousand year lows, two thousand year lows,
Speaker 1: and in interest rates closer to three thousand year lows?
Speaker 1: That is, in all of recorded history, rates never got
Speaker 1: to be quite as low as they have been in
Speaker 1: recent years. See if the Romans knew about quantitative easing,
Speaker 1: they'd still be running the world. Perhaps that's possible. So
Speaker 1: so let's discuss interest rates um and put them into
Speaker 1: a little bit of context. First, the obvious question, why
Speaker 1: are interest rates so far away from their traditional averages?
Speaker 1: I it just seems like this is an unprecedented era
Speaker 1: of low rates. Well, it is an unprecedented era. I
Speaker 1: would say the main reason rates have been as low
Speaker 1: as they as they've been in recent years is the
Speaker 1: financial crisis of two thousand seven to nine, I call it.
Speaker 1: It started it in two thousand seven and kind of
Speaker 1: peeked out after the Lehman failure and continued into two
Speaker 1: thousand nine. Went unemployment. We had a great recession, you know,
Speaker 1: and intentions and unemployment. Uh. And it was the response
Speaker 1: of the monetary authorities to that, basically to buy up
Speaker 1: a lot of financial assets and uh, balance sheets of
Speaker 1: central banks doubled, tripled, quadrupled. And I think it was
Speaker 1: that these massive purchases of securities some call it quantitative
Speaker 1: easy that basically drove interest rates to very low levels.
Speaker 1: And the central banks did that because they wanted to
Speaker 1: bring us back from the depths of the crisis. And
Speaker 1: they succeeded, But they only succeeded after keeping interest rates
Speaker 1: at very low levels for a long time, the lowest
Speaker 1: levels in human history. If I recall, after the dot
Speaker 1: com crash in two thousand and then the recession that
Speaker 1: lasted from March of o one to um October of
Speaker 1: that year, Alan Greenspan had taken rates down not quite
Speaker 1: to zero, but they were under two percent for a
Speaker 1: couple of years, and they were at one percent for
Speaker 1: at least a year. How significant was that era of
Speaker 1: interest rates to what came afterwards? Well, you know, Barry,
Speaker 1: I wrote the last edition of the History of Interest Rates,
Speaker 1: updating it in two thousand four and five. I think
Speaker 1: it was published in two thousand five. And I was
Speaker 1: working on it in two thousand four, and at that
Speaker 1: time I thought that maybe we had reached the low
Speaker 1: event the interest rate market. And you mentioned the recession
Speaker 1: of two thousand one. Green Spans FED responded to that
Speaker 1: by driving their policy rate down to as low as
Speaker 1: one percent. I think I've been two thousand two and
Speaker 1: two thousand, two thousand three. Uh, we had a Federal
Speaker 1: Reserve policy rate of about one percent, and uh. Then
Speaker 1: the FED began raising in two thousand four, the middle
Speaker 1: of two thousand four, and I thought, well, maybe two
Speaker 1: thousand three, I can even give you a month. The
Speaker 1: the tenure bond got to three point three three percent
Speaker 1: in May of two thousand three, and I was updating
Speaker 1: the book a year later, and I said, well, you know,
Speaker 1: rates have come up, and now the FETE is raising,
Speaker 1: so maybe that may have two thousand three is a low.
Speaker 1: Today we laugh when we say the tenure bond at
Speaker 1: three point three three percent, we haven't seen that for
Speaker 1: quite a while. Uh it's about two point eight percent
Speaker 1: right now, and that's up from less than two percent.
Speaker 1: Uh So I think, uh that then I thought that, well,
Speaker 1: we turned the corner. What I couldn't foresee in two
Speaker 1: thousand four and five, and I don't think anybody else
Speaker 1: foresaw it either, was that we were going to have
Speaker 1: this financial crisis starting in two thousand seven th eighty.
Speaker 1: Maybe I should have paid more attention to what was
Speaker 1: going on in the mortgage market, but I didn't foresee
Speaker 1: the crisis. Lots of people saw parts of it. Very
Speaker 1: very few people managed to see the whole overall collapse coming,
Speaker 1: certainly not with any degree of successful time. And some
Speaker 1: people during that era were saying, well, these low rates
Speaker 1: are are a function of the cash glut we have.
Speaker 1: China has a ton of cash. That's what's driving rates down.
Speaker 1: What what's your your view on that? Well that Ben Bernankey,
Speaker 1: I think thought that there was a glut of savings
Speaker 1: in the world, and that was one of the reasons,
Speaker 1: you know, this is before the financial crisis. Why we're
Speaker 1: rates solo. Actually, when the FED was raising starting in
Speaker 1: two thousand four, you know, from two thousand four, middle
Speaker 1: of two thousand four up to two thousand six, the
Speaker 1: Federal Reserve raised its policy rate twenty five basis points
Speaker 1: at every meeting, and so we were up from one
Speaker 1: percent where we started up to between five and six
Speaker 1: percent a couple of years later. And uh, they were
Speaker 1: hoping that, you know, that longer term interest rates would
Speaker 1: would respond to that, but they were surprised when they
Speaker 1: raised the short term rates, but the long rates didn't
Speaker 1: really go up very much. And that's when Bernanke coined
Speaker 1: this glut of savings in the world, that there were
Speaker 1: just such a demand for safe government bonds that despite
Speaker 1: the FED raising short term interest rates, the long term
Speaker 1: rates didn't move much at all. Greenspan called it the conundrum. Conundrum. So,
Speaker 1: I've heard the phrase recently normalizing interest rates. The FED
Speaker 1: isn't merely raising rates, but they're getting off an emergency
Speaker 1: footing and moving back towards normalization. What what are your
Speaker 1: views on that? Well, I think, you know, I think
Speaker 1: that's what they're trying to do. And from my historian's perspective,
Speaker 1: I would sort of say that, you know, people would say, well,
Speaker 1: what is a normal rate? How far do we have
Speaker 1: to go to get to a normal rate? And when
Speaker 1: I was just a kid in the nineteen fifties, the
Speaker 1: FED was normalizing interest rates. The interest rates had become
Speaker 1: very low in World War two, partly because the FED
Speaker 1: was enlicited in the war effort and given the job
Speaker 1: of pegging government bonds. It was two and a half
Speaker 1: percent on a long term bond and three eighths of
Speaker 1: one percent on treasury bills. And after the war, the
Speaker 1: FED maintained those that pegging for a while because the
Speaker 1: Secretary of the Treasury wanted to minimize the interest cost
Speaker 1: of the national debt. But then the FED said, if
Speaker 1: we keep doing this, we're going to cause inflation. So
Speaker 1: in nineteen fifty one, the FED was given its freedom
Speaker 1: to normalize basically, and over the course of the nineteen fifties,
Speaker 1: those very low rates that came along with World War
Speaker 1: two raised gradually rose, and by the end of the
Speaker 1: fifties they were up where you got like four and
Speaker 1: a quarter four and a half percent on a government bond.
Speaker 1: Maybe the late fifties early sixties, and I would say
Speaker 1: from a long term perspective, that's something like that, you know,
Speaker 1: between four and five percent on a long term government
Speaker 1: bond and maybe you know two to two to four
Speaker 1: percent on shorter term stuff. That's sort of normal rates.
Speaker 1: So that's what I'm thinking the FED is doing now,
Speaker 1: you know, maybe something like the nineteen fifties, where they'll
Speaker 1: gradually increase rates until we get to normal. And I
Speaker 1: think normal is four to five percent on a government
Speaker 1: bond long term and maybe two to four percent on
Speaker 1: short term stuff. Let's talk a little bit about background.
Speaker 1: You have some really interesting history. You studied for a
Speaker 1: time at the Indian Statistical Institute at Calcutta. Tell us
Speaker 1: about that, well, I was that was after my undergraduate
Speaker 1: education at Harvard, and I was a fairly good student
Speaker 1: at Harvard. What did you study undergrad I studied economics.
Speaker 1: I was one of two people in Harvard's class in
Speaker 1: nineteen sixty two who in nineteen fifty eight they wanted
Speaker 1: to say they were going to major in economics, two
Speaker 1: out of eleven hundred. By the time we graduated, something
Speaker 1: like a quarter to a third of the class major
Speaker 1: to economics. So I knew before I got to Harvard
Speaker 1: that I wanted to study economics, but that wasn't taught
Speaker 1: so much in high school in the nineteen fifties. And so,
Speaker 1: uh you know, I and one other person at the
Speaker 1: Harvard's eleven class that we want a major in economics.
Speaker 1: And four years later, about a quarter of the class
Speaker 1: majored in economics. So you also got a master's at
Speaker 1: Harvard and a doctorate. That was after my tour of
Speaker 1: duty in India. So let's let's go back to India.
Speaker 1: What what made you say? I know, I'll go halfway
Speaker 1: across the world. I was lucky enough to get a
Speaker 1: traveling fellowship or scholarship after I graduated from Harvard, where
Speaker 1: I could go any place in the world and study
Speaker 1: for a year. It was financing for a year. And
Speaker 1: what I did was the chose India because it was
Speaker 1: halfway around the world. And I had a class from
Speaker 1: Reinhold Neiber, the famous theologian, taught a class like an
Speaker 1: Emerging Markets when I was a senior in Harvard, and
Speaker 1: I took the class from Reverend Reinhold Neiber and he
Speaker 1: got me interested in India. Uh So, the combination of
Speaker 1: being awarded this fellowship and having learned something about India
Speaker 1: made me choose India to spend my year away. This
Speaker 1: is xtree nineteen sixty two sixty three. That's when I
Speaker 1: was at the Indian Statistical Institute in Calcutta. So what
Speaker 1: was Calcutta like in the early sixties, because even today
Speaker 1: it's a fairly is frenetic the right word, A fairly
Speaker 1: frenetic country with enormous challenges facing it, but some tremendous
Speaker 1: um assets as well. What was cal cuttle like in
Speaker 1: nineteen sixty two? It was very interesting for a young man,
Speaker 1: I thought it was. It was an eye opener in
Speaker 1: a way. You know. They would say, and I saw this,
Speaker 1: they would say that a hundred thousand people just slept
Speaker 1: on the pavement every night, and that was the poor
Speaker 1: man's air conditioning, because India can be kind of hot,
Speaker 1: but the pavement is kind of cool, and so people would,
Speaker 1: you know, get away from the heat by just getting
Speaker 1: down and bedding down on the concrete because it was
Speaker 1: a little cooler than the air around them. Literally, a
Speaker 1: hundred thousand people on the streets and Calcutta of course
Speaker 1: had millions of people, but you know, Basically, India is
Speaker 1: a country that's like one third the size of the
Speaker 1: United States, but has about four times as many people.
Speaker 1: So that that put those two together, you've got a
Speaker 1: country that's about twelve times the density of population that
Speaker 1: we have in the United States. Wow. So, so you're
Speaker 1: studying at the Indian Statistical Institute. What did you learn? Well,
Speaker 1: I studied, uh, you know, economics and uh finance and
Speaker 1: these people were statistical institute, So I got some econometric
Speaker 1: training there. Uh. I don't remember the details of what
Speaker 1: I study, but I do remember meeting a famous British
Speaker 1: scientist named JBS Haldane who had kind of gotten fed
Speaker 1: up with Britain and moved to India and war Indian clothes,
Speaker 1: you know, a dote and all that. You know. He
Speaker 1: was one of the great scientists of the first half
Speaker 1: of the twentieth century. So I got to know him
Speaker 1: and that was kind of a lot of fun to
Speaker 1: get his perspectives on the world. So did you know
Speaker 1: back then you wanted to go into academia. And to
Speaker 1: put a little context for this, you've been at n
Speaker 1: y U for just about thirty years. Since before that,
Speaker 1: you you taught at a few other schools. How how
Speaker 1: conscious so were you of the lure of academia back then, Well,
Speaker 1: I think I was kind of Remember the late fifties
Speaker 1: and early sixties were a great time to be in
Speaker 1: an American university because we were worried about the Russians
Speaker 1: and Sputnik and so the government was putting a lot
Speaker 1: of money into financing higher education. And so any young
Speaker 1: person in the late fifties early sixties thinking about a
Speaker 1: career academia would look pretty good because of all this,
Speaker 1: uh interests of the government and beefing up our intellectual
Speaker 1: talents and so. But so I, as I mentioned, I
Speaker 1: wanted to major in economics before I got to Harvard,
Speaker 1: and I was My interest in economics was kindled even
Speaker 1: more at Harvard. And after taking this year off, or
Speaker 1: even before I went out to India, I thought, I
Speaker 1: want to come back and get a PhD. The only
Speaker 1: question was where, And Harvard let me in. And uh,
Speaker 1: you know, there's always a family thing to My wife
Speaker 1: wanted to study the She was one year after me
Speaker 1: in college, but she wanted to go to grad school
Speaker 1: in the history of science, and Harvard was really good
Speaker 1: in that. So your wife is studying the history of science.
Speaker 1: Did that influence you to move from economics to the
Speaker 1: history of finance? Not so much. I think the how
Speaker 1: did I go from being an economist to becoming an
Speaker 1: economic and financial historian? And that's where a particular influential
Speaker 1: mentor comes in. Harvard at that time had an economic
Speaker 1: historian named Alexander Gershenkron who was a born in Russia.
Speaker 1: But he, you know, he was like the first half
Speaker 1: of the twentieth century. His father was a capitalist, so
Speaker 1: he had to leave Russia when he was a teenager
Speaker 1: in nineteen seventeen and they went to Austria, and so
Speaker 1: he his formative views were in Austria. But then Hitler
Speaker 1: came to power, so he had to leave Europe and
Speaker 1: came to America. UH. People knew that he was a
Speaker 1: great scholar, so he got a job teaching at night
Speaker 1: at Berkeley. UH. In the daytime, he worked in the
Speaker 1: shipyards building liberty ships. And he knew twenty different languages,
Speaker 1: and so people got to you know, said to anybody
Speaker 1: with that talent, we need him to come to Washington
Speaker 1: and the war and help us translate documents. So he
Speaker 1: went to Washington and the Washington. He met Harvard professors
Speaker 1: who said, this guy is really smart and a good
Speaker 1: economic historian. So pretty soon by the late nineteen forties
Speaker 1: he come to Harvard as the professor of economic history,
Speaker 1: and I had him. I sat in on his graduate
Speaker 1: class as an undergrad, but then I had to take
Speaker 1: the class as a graduate student because every Harvard PhD
Speaker 1: had to study economic history in those days. Unfortunately that's
Speaker 1: not true anymore. But he was such a you know,
Speaker 1: interesting lecturer and had this wealth of knowledge. And what
Speaker 1: he persuaded me is that you can study all the
Speaker 1: economics you want. You can be a money in banking economists,
Speaker 1: you can be a public finance economists. Those were the
Speaker 1: fields I was thinking of, but you can apply them
Speaker 1: to history. And I decided that that was really interesting,
Speaker 1: to apply the tools of economics to understand history better.
Speaker 1: So he's the one that made me, uh, move into
Speaker 1: economic and financial history. Fascinating. Let's talk a little bit
Speaker 1: about your most recent book. You've You've written a previous
Speaker 1: book on Alexander Hamilton's, The Illustrated Alexander Hamilton's, But this
Speaker 1: month you have a new book out called alexand Uder
Speaker 1: Hamilton's on finance, credit and debt. What can Hamilton's teach
Speaker 1: us today on such weighty topics as credit and debt. Well,
Speaker 1: Hamilton's faced many of the issues we face today, you know,
Speaker 1: a large national debt that has to be managed. In
Speaker 1: his case, it was the debt that was left over
Speaker 1: from the American Revolution. And uh, it'll seems strange to
Speaker 1: Americans today, but after the American Revolution, the national government,
Speaker 1: which was just Congress, did not have its own revenues.
Speaker 1: It had to ask the states for revenues, sort of
Speaker 1: like a United Fund approach to finance. Let's let's break
Speaker 1: that down a little bit. So at the time, there's
Speaker 1: no federal Reserve Bank, there's no power of taxation with
Speaker 1: the federal government. So hat in hand they go to
Speaker 1: the thirteen former colonies now states and say, hey, we
Speaker 1: need to pay for our revolutionary war, right and the
Speaker 1: states basically said, uh, we have our own problems. We
Speaker 1: can't really contribute very much the federal government. So in
Speaker 1: the seventeen eighties, after the revolution is over and Britain
Speaker 1: has recognized America's independence, the national government did not have
Speaker 1: the money it needed to pay the interest on its debt,
Speaker 1: much less the principle. Basically, the United States was like
Speaker 1: a country in default on its debts. It borrowed a
Speaker 1: lot of money and could not pay the interest from
Speaker 1: who who who? Obviously not Japan and China back then
Speaker 1: who were the creditors to the US while we were
Speaker 1: throwing Britain. The largest part of the debt was financed
Speaker 1: by Americans. You know, the bonds were sold to lots
Speaker 1: of merchants bought the debt, and in some cases the
Speaker 1: debt was issued as io used to soldiers and suppliers.
Speaker 1: You know that that the government didn't really have the
Speaker 1: revenue well while the war was going on to pay
Speaker 1: for what it needed, and so it would take things
Speaker 1: actually confiscate goods but give people a receipt saying, you know,
Speaker 1: when when Congress gets around to it, you'll be paid this.
Speaker 1: So some of the debt was uh, not exactly arm's
Speaker 1: length transaction. It was, you know, the the situation of
Speaker 1: the American army was so desperate that they just sometimes
Speaker 1: just had to confiscate goods from Americans to leave a
Speaker 1: note behind those notes that were left behind. But in
Speaker 1: some cases they sold bonds to people. So the great
Speaker 1: majority of the debt was Americans were financing it themselves,
Speaker 1: but about twelve million dollars, which was about maybe a
Speaker 1: fifth of the debt, was borrowed from people overseas. French,
Speaker 1: the French government, the King of France basically lent Americans
Speaker 1: a lot. We we should remember and these some of
Speaker 1: those loans, were absolutely crucial to find getting supplies that
Speaker 1: our armies needed to win our independence. The the enemy
Speaker 1: of my enemy is my friend, essentially exactly. That's a
Speaker 1: point that Hamilton's had to teach Jefferson. Jefferson thought, because
Speaker 1: France had lent us money, they were really nice people,
Speaker 1: and since the Brits had fought against us, they were
Speaker 1: bad people. And Hamilton's had to persuade him, No, France
Speaker 1: didn't lend us money because they're nice people. It was
Speaker 1: in their interest to do it because Britain was their
Speaker 1: great rival. So in the new book on on Hamilton's,
Speaker 1: let's let's get into some more details. What what is
Speaker 1: the Hamiltonian perspective on on the ability to tax the
Speaker 1: population and the ability for a government to um developed
Speaker 1: credit and issued debt in order to fund its ongoing operations. Well,
Speaker 1: one of the key aspects of the United States Constitution,
Speaker 1: which Hamilton's was one of the spearheads for in the
Speaker 1: seventeen eighties, you know, he was a delegate to the convention,
Speaker 1: was to get the national government, the new federal government,
Speaker 1: to have its own revenue, and the constitution allowed that.
Speaker 1: And then Hamilton is appointed the first Treasury Secretary, and
Speaker 1: he wants to restore or really established the public credit
Speaker 1: of the United States. So he basically restructures the U
Speaker 1: s national debt into the modern treasury bond market with
Speaker 1: you know, three different new securities, and then he uses
Speaker 1: the revenues that are coming in, mostly from customs duty,
Speaker 1: to pay the interest on that debt, and very quickly
Speaker 1: in the early seventeen nineties, he turns the sort of
Speaker 1: junk bonds of the seventeen eighties into prime government bonds
Speaker 1: that are but purchased not only by Americans but by
Speaker 1: foreign investors as well. So Hamilton's basically established his public credit.
Speaker 1: But of course he did a lot more. He found
Speaker 1: at the first Central Bank, he defined the US dollar
Speaker 1: in terms of gold and silver. And part of his
Speaker 1: plan I think was, you know, if he creates these
Speaker 1: new securities, government bonds and stock in the bank in
Speaker 1: the United States. Uh, capital markets will be established to
Speaker 1: trade these securities. The New York Stock Exchange, we know,
Speaker 1: is established under the Buttonwood Tree in May seventeen ninety two.
Speaker 1: That's because the brokers needed a better trading system because
Speaker 1: of all the new securities that were being traded. So
Speaker 1: the securities markets are a result of Hamilton's policies and
Speaker 1: the states. You know, he establishes the Bank of the
Speaker 1: United States and says, the US government's going to earn
Speaker 1: a profit by investing in it. Uh. State governments then say, well,
Speaker 1: we can start a lot of banks too, and maybe
Speaker 1: take a position in them and earn some money. So
Speaker 1: we then have a banking system. Uh. And the Bank
Speaker 1: in the United States was a very large corporation for
Speaker 1: its time, and so that encouraged the state governments to
Speaker 1: establish more American corporations. And in my career, I've studied
Speaker 1: a lot of these things in terms of the numbers,
Speaker 1: and you you just see that, you know, the number
Speaker 1: of corporations rises rapidly in the seventeen nineties. The states
Speaker 1: are establishing more banks. Uh. This is Hamilton's basically modernized
Speaker 1: our finances. And I think the biographers of Hamilton's in
Speaker 1: general don't recognize this as perhaps as greatest achievement establishing
Speaker 1: our modern financial system. So so we have financial markets
Speaker 1: that trace back to Hamilton's um the Federal Reserve, even
Speaker 1: though the Federal Reserve we know today dates back to
Speaker 1: is that nineteen bill was past the nineteen thirteen and
Speaker 1: the banks open in late nineteen fourteen. How does the
Speaker 1: current Federal reserve um relate to what Hamilton's conception of
Speaker 1: a central bank, uh could be or should be for
Speaker 1: that matter. Well, I called the Federal Reserve with my
Speaker 1: historical perspective, the third Bank of the United States. That's
Speaker 1: because Hamilton's established the first bank of the United States
Speaker 1: in sevente and uh it lasted only for twenty years
Speaker 1: American politics got involved. Is it correct? That? And I'm
Speaker 1: vaguely remembering the research I did about a decade ago.
Speaker 1: The first two Federal reserve banks or central banks that
Speaker 1: were Federal reserve, like, they were each formed with a
Speaker 1: finite lifespan. It wasn't an in perpetuity. Is that? Is
Speaker 1: that more or less right? Yeah? That is true that
Speaker 1: they were chartered for twenty years, and in general that
Speaker 1: was true of most corporations at that time. Even the
Speaker 1: Bank of England had a limitation on its charter. It
Speaker 1: had to come in and reapply to have its charter
Speaker 1: renewed every twenty years or some twenty thirty. It differed
Speaker 1: a little bit. But the banks of the United States were,
Speaker 1: you know, in keeping with the times when con has
Speaker 1: chartered them. That banking was kind of new in the
Speaker 1: United States. They didn't know how it would work out.
Speaker 1: They just had this fellow Hamilton's saying it was going
Speaker 1: to work out well, and we really needed this. They
Speaker 1: weren't sure, so they put a twenty year limit on it,
Speaker 1: and that converted this into a political issue in eighteen eleven, uh,
Speaker 1: for variously political reasons. Basically, the bank was good economically,
Speaker 1: but it had a tough time politically. Uh. Basically, the
Speaker 1: state banking interests wanted to get rid of it, and
Speaker 1: so they were successful by just one vote, you know,
Speaker 1: the vice President the United States had to say no
Speaker 1: to break the tie, and so the first bank went
Speaker 1: out of existence. Right. This was were they were. They
Speaker 1: competing with the state banks. Is that why there was
Speaker 1: um opposition to it or was it more of a
Speaker 1: state's rights? There were there were. The Bank in the
Speaker 1: United States was much bigger than any of the state
Speaker 1: banks and had branches all over the country. One thing
Speaker 1: Hamilton's gave us right at the start was interstate banking,
Speaker 1: which we got away from later but we've brought back now.
Speaker 1: But basically, the Bank in the United States differed from
Speaker 1: the FED, and this sense it uh competed with the
Speaker 1: other banks. In other words, it was a private corporation
Speaker 1: or owned by the government by private investors. It made
Speaker 1: loans just like any other bank did, so it was
Speaker 1: a competitor. And this may have been one of the
Speaker 1: problems that the state banks were much more numerous by
Speaker 1: eighteen eleven than they were in seventeen ninety one when
Speaker 1: there were only three or four. And by eighteen eleven
Speaker 1: they said, gee, if we got rid of the Bank
Speaker 1: of the United States, we would get rid of a regulator,
Speaker 1: we would get rid of a competitor, and we would
Speaker 1: probably then have to take over the government's banking business.
Speaker 1: So it was like a win win win situation. So
Speaker 1: the Bank in the United first bank the United States disappeared,
Speaker 1: But then we got into the War of eighteen twelve,
Speaker 1: when the bank might have really helped US, and it
Speaker 1: wasn't there, and so the bank's worst enemies in eighteen eleven,
Speaker 1: by eighteen fifteen and sixteen said we really needed a
Speaker 1: central bank, so they brought in the Second Bank of
Speaker 1: the United States, but it ran into twenty years later.
Speaker 1: It ran into too problem with the President Andrew Jackson,
Speaker 1: who didn't like banks. And I think it was the
Speaker 1: same sort of politics as in eighteen eleven. Some people
Speaker 1: saw it in their interest to get rid of the
Speaker 1: second Bank in the United States. So we had two
Speaker 1: central banks early in our history, and we got rid
Speaker 1: of both of them. For seventy years, from say, eighteen
Speaker 1: thirty six to nineteen fourteen, we didn't have a central bank.
Speaker 1: But we had a big financial crisis in nineteen o seven,
Speaker 1: and it's just like the War of eighteen twelve persuaded
Speaker 1: people that central banks might be good. The financial panic
Speaker 1: of nineteen o seven, by which time the US is
Speaker 1: the biggest economy in the world, is sort of embarrassing.
Speaker 1: And one way to get away from these panics is
Speaker 1: to start a new central bank. That's how we got
Speaker 1: the Federal Reserve. So so let's let's stay with this
Speaker 1: idea of the nineteen o seven panic, if if memory serves,
Speaker 1: and again I'm going to rely on you to correct me.
Speaker 1: We had the great earthquake in San Francisco in nineteen
Speaker 1: o six, April nineteen o six. The huge amount of
Speaker 1: insurance money comes over to the US from Lloyd's of
Speaker 1: London and everywhere else in Europe that were also East
Speaker 1: Coast US too. There are a lot of big insurance
Speaker 1: companies in the East Coast US that I had to
Speaker 1: pay off for the San Francisco damage. So so all
Speaker 1: this money comes in and then the Bank of England
Speaker 1: raises rates in order to track capital back, and we're
Speaker 1: sort of unarmed. We don't have a central bank that
Speaker 1: has the ability to do that. Is that Is that
Speaker 1: a fair descriptor? I think you're showing a good knowledge
Speaker 1: of financial history, Barry. It's a little dusty, it's a
Speaker 1: little but the idea that the San Francisco earthquake of
Speaker 1: April nineteen o six might have something to do with
Speaker 1: the financial panic in nineteen o seven was, you know,
Speaker 1: a fairly recent finding of financial historians. And the mechanism
Speaker 1: was through the insurance payments, what the insurance claims for
Speaker 1: to fix up San Francisco led to a drain of
Speaker 1: gold out of England because a lot of those buildings
Speaker 1: were insured in England. It also led to a drain
Speaker 1: of gold out of the Eastern United States financial centers
Speaker 1: because they had insurance companies there too. Most of our
Speaker 1: big insurance companies were in the East coast, you know, Connecticut,
Speaker 1: in York. And this movement of gold or money to
Speaker 1: the West coast US sort of tighten financial conditions in
Speaker 1: the US money markets and also the English money market.
Speaker 1: And then the Bank of England, you know, said well,
Speaker 1: you know, the gold is leaving, so we better raise
Speaker 1: interest rates. And so that's the kind of backdrop for
Speaker 1: money is tight in nineteen o seven, and then of
Speaker 1: course there's always a trigger to a panic. There was
Speaker 1: some wild speculation going on in copper stocks, and the
Speaker 1: shadow banks at that time were called trust companies. The
Speaker 1: trust companies were involved and as shadow banks and financing
Speaker 1: some of the speculation and copper stocks. One of the
Speaker 1: copper speculators failed and that trigger to run on the
Speaker 1: trust companies. But it was the backdrop of it was
Speaker 1: financial conditions were tight anyway, and then you had a
Speaker 1: sort of bankruptcy and uh implication of trust companies as
Speaker 1: being involved, so people rushed on the trust companies and
Speaker 1: took their money out. And that's what the fining panic.
Speaker 1: Last financial panic question. Go back the decades before the
Speaker 1: formation in the Federal Reserve and the nineteen o seven panic,
Speaker 1: the half century before that, lots of panics and booms
Speaker 1: and bus It seems that the pre fed era was
Speaker 1: not exactly the most financially stable in the banking system.
Speaker 1: All right, Well, we got rid of the Second Bank
Speaker 1: in the United States and eighteen thirty six there there
Speaker 1: hadn't been many financial crises in the US before that.
Speaker 1: Then right after the Second Bank disappeared in eighteen thirty six,
Speaker 1: we had the financial panic of eighteen thirty seven. Are related,
Speaker 1: one in eighteen thirty nine, we had one in eighteen
Speaker 1: fifty seven, one in eighteen seventy three, one in eighteen
Speaker 1: eighty four, one eighteen ninety three, seven. Right. Uh. I've
Speaker 1: actually done some research on this, and what I can
Speaker 1: say is that financial panics were at least twice as
Speaker 1: frequent when we did not have a central bank as
Speaker 1: they have been when we had a central bank. Can
Speaker 1: you stick around a little bit, We'll keep the tape
Speaker 1: rolling and continue you chatting about all things uh financial panic.
Speaker 1: I love to talk about this stuff. Certainly. We have
Speaker 1: been speaking with Professor Richard Silla of n y U Stern,
Speaker 1: author of numerous books, most recently Hambleton's on Debt, credit
Speaker 1: and Finance. If you enjoy this conversation, be sure and
Speaker 1: stick around for the podcast extras. Will we keep the
Speaker 1: tape rolling and continue discussing all things uh panic worthy?
Speaker 1: Be sure and check out my daily column. You can
Speaker 1: find that on Bloomberg View dot com. Follow me on
Speaker 1: Twitter at rich Halts. We love your comments, feedback and
Speaker 1: suggestions right to us at m IB podcast at Bloomberg
Speaker 1: dot net. I'm Barry Rihults. If you're listening to Masters
Speaker 1: in Business from Bloomberg Radio, welcome to the podcast. Professor.
Speaker 1: Thank you so much for doing this. I'm fascinated by
Speaker 1: the subjects you cover, and I'm just totally enamored in
Speaker 1: financial history. And you know, it couldn't be more true.
Speaker 1: Those who don't learn from history are um doomed to
Speaker 1: repeat its mistakes. Uh. There's a great New Yorker cartoon
Speaker 1: about well. But those of us who do learn from history,
Speaker 1: we just get to be frustrated by everybody else who
Speaker 1: doesn't and and it's really true. Before we get to
Speaker 1: some of our favorite questions, I just have to ask
Speaker 1: you a few more things about UM market history and
Speaker 1: central banks and interest rates, because they are so fascinating. Oh,
Speaker 1: there was a lot of criticism of the Federal Reserve
Speaker 1: following the financial crisis UM, some of which might have
Speaker 1: been deserved, some of which might have been a little
Speaker 1: over overwrought. We heard we heard complaints about here comes
Speaker 1: yper inflation, here comes the collapse of the dollar, none
Speaker 1: of which proved true in the decade that followed the crisis.
Speaker 1: What are we to make about the changing role of
Speaker 1: the central bank? Do they have too much power? Have
Speaker 1: they broadened their mandate too much? Or are they more
Speaker 1: or less doing what they're supposed to be doing well.
Speaker 1: I think they have a considerable amount of power. And
Speaker 1: you know, central banking history, the checkered history of central
Speaker 1: banking in the U S shows that people get suspicious
Speaker 1: of concentrated financial power. So the Fed has to tend
Speaker 1: its political fences. But I think that they especially now
Speaker 1: that we're in a fiat currency world. We're not the
Speaker 1: money isn't backed by gold and silver anymore. Uh. That
Speaker 1: increases the power of the central banks because they can
Speaker 1: create money with the stroke of a pen. And they
Speaker 1: decided to fight the financial crisis by creating a lot
Speaker 1: of new money, or maybe we should say a lot
Speaker 1: of new bank research, because you know, when you create
Speaker 1: a lot of money, people are going to think inflation
Speaker 1: is right around the corner. But in fact, what happened
Speaker 1: the Federal Reserve created a lot of what we call
Speaker 1: high powered money or base money. Uh. But the banks
Speaker 1: didn't magnify that into a rapid growth of the money stock.
Speaker 1: They held the uh, the new money, the new the
Speaker 1: new base money basically as excess reserves. And so excess
Speaker 1: reserves went from bank reserves went from very low levels
Speaker 1: in the two thousand seven to extremely high levels in
Speaker 1: two thousand and twelve thirteen fourteen, And we didn't see
Speaker 1: that really circulate through the velocity. Money didn't take up.
Speaker 1: It kind of sat there. More or less, we would
Speaker 1: have had the inflations on people forecast. Had the banks,
Speaker 1: you know, used the new base money the Federal Reserve
Speaker 1: gave them, they could have made a lot more loans,
Speaker 1: but they didn't do it. They held these reserves, and
Speaker 1: the FED was paying interest on them, so it was
Speaker 1: a kind of safe thing, risk free return. And uh
Speaker 1: so I think that this Why did the banks do
Speaker 1: that well? I think the nineteen thirties the same thing
Speaker 1: happened in the nineteen thirties that a lot of new
Speaker 1: base money was created in the nineteen thirties, but the
Speaker 1: banks were sort of shell shocked from the experience of three,
Speaker 1: so they held a lot of excess reserves for a
Speaker 1: whole decade after the banking crisis of nine. Doesn't doesn't
Speaker 1: the pendulum always swing from They were way too loose
Speaker 1: in the early two thousand's, meaning the banks they would
Speaker 1: give here, can you fog amer a grade? Here's a
Speaker 1: mortgage too. After the crisis, you have a good credit score,
Speaker 1: you have a decent income, you have good work history,
Speaker 1: and they still made people jump through all sorts of
Speaker 1: hoops to take to get credit sure. I had a
Speaker 1: personal experience of that. I bought a condo on Roosevelt
Speaker 1: Island here in New York in two thousand seven, and
Speaker 1: it was really easy in two thousand seven to get
Speaker 1: the financing for me to buy my condo on Roosevelt Island.
Speaker 1: In two thousand nine or ten when I refinanced, I
Speaker 1: had to jump through all kinds of hoops to just
Speaker 1: get it refinanced, even though I had a good history
Speaker 1: of paying my mortgage payments by that time. So you're right,
Speaker 1: I mean two thousand and six and seven, it was
Speaker 1: very easy to get him argags along. Two thousand nine ten,
Speaker 1: it was much more difficult to refinance the same loan.
Speaker 1: I had the exact same experience. We did a REFI
Speaker 1: I want to say, it was oh five, and I'll
Speaker 1: never forget this guy pulling into the driveway, flinging open
Speaker 1: the door, running into the house. My wife and I
Speaker 1: were sitting at the dining room table, sign signed initial
Speaker 1: initial here's a check for thirty thou hours. I apologize,
Speaker 1: I have a closing down the street, and he disappeared.
Speaker 1: If he was in the house for five minutes, and
Speaker 1: I want to say, it was like a three thousand
Speaker 1: all mortgage. If it was he was there for five minutes,
Speaker 1: it was a long time. And I very vividly recall
Speaker 1: turned to my wife and saying, this can't be good.
Speaker 1: This was just a crazy It was like a giant
Speaker 1: red flag. We buy a house in could not have
Speaker 1: been further opposite from that experience where every month, as
Speaker 1: we're waiting to the closing, the bank is saying, what's
Speaker 1: this deposit. You've asked me this every month for six months.
Speaker 1: That's my direct deposit from the from work. It shows up,
Speaker 1: here's the bank, it comes from. Here it is we
Speaker 1: We've discussed this every single month. It would ask I
Speaker 1: assume you had similar craziness when you bought the condo.
Speaker 1: After the Yes, you had to send in tax records,
Speaker 1: you had to send in new paycheck stubbs, you know,
Speaker 1: the one you sent three months earlier. Was that's right?
Speaker 1: And I think they had a checklist of things they
Speaker 1: had to do after the crisis, and it just meant
Speaker 1: that it was much harder to get a loan. Uh.
Speaker 1: And of course the opposite side of that was when
Speaker 1: the Federal Reserve was giving the banks a lot of liquidity,
Speaker 1: the banks weren't making those loans, making it harder to
Speaker 1: get those loans, so they they access liquidity just stayed
Speaker 1: on the balance sheets of the banks as access reserves,
Speaker 1: and we didn't have the inflation some people forecast. So
Speaker 1: what about the modern era of central bank transparency? Are
Speaker 1: I remember When I started as a trader a hundred
Speaker 1: years ago, you would find out what the central bank
Speaker 1: had done because interest rates would tick up or down
Speaker 1: and people would say, oh, the central bank must be
Speaker 1: buying or selling paper, and that was um what affected it.
Speaker 1: You had interpret what actually took place in the market
Speaker 1: via price action. Today, it seems every single step is
Speaker 1: telegraphed long in advance. Is that transparency a good thing
Speaker 1: or a bad thing? Um? I think it's probably a
Speaker 1: good thing because the markets sort of get an advanced
Speaker 1: warning of what the FED is likely to do. And
Speaker 1: I think that that then you have more time. You know,
Speaker 1: you're not shocked when the Federal Reserve raises its policy
Speaker 1: rate and when you didn't expect it. So now they
Speaker 1: telegraph that they're probably going to have some rate increases,
Speaker 1: and I think then the markets are just more easily.
Speaker 1: So I think the transparency is probably a good thing.
Speaker 1: Does the FED lose the ability or or lose the
Speaker 1: capability to shock markets or surprise markets, which is also
Speaker 1: a tool in their uh in their toolbox. Well, they
Speaker 1: I think they can still shock markets. They have the
Speaker 1: power to do that, like if they have an increase
Speaker 1: in rates or reduction in rates when it wasn't expected that.
Speaker 1: That's the whole thing that what what are people expecting? Uh?
Speaker 1: You know, for example, expectations really matter. I think when uh,
Speaker 1: we're actually right around the tenth anniversary of bear Stearns failure, Uh,
Speaker 1: the government, the February Reserve came in, made a deal
Speaker 1: to transfer a lot of the assets to JP Morgan Chase,
Speaker 1: and I think then people said, well, okay, the FED
Speaker 1: is going to do that for bear Sterns. We don't
Speaker 1: have to worry about other banks like Lehman, because Lehman
Speaker 1: was bigger than bear Sterns. So the markets expected that
Speaker 1: if Lehman got into trouble, the same thing would happen.
Speaker 1: The reason the crisis became so bad in two thousand
Speaker 1: eight after the Lehman failure is that the markets didn't
Speaker 1: expect it. So that was a big shock. So I
Speaker 1: think that the FED can still, you know, have an
Speaker 1: ability to change its rates or do something when the
Speaker 1: markets weren't expecting it, and then you would have this.
Speaker 1: But I think the Fed, you know, you might have
Speaker 1: an adverse reaction, but I think the Fed sort of things,
Speaker 1: we really don't want to do that unless it's you know,
Speaker 1: absolutely necessary, let's telegraph what we're thinking. I've always wondered
Speaker 1: what the thinking was like with the FED taking a
Speaker 1: pass on Lehman Brothers and not rescuing them. And three
Speaker 1: things come up all the time, or at least when
Speaker 1: you look at the details. You have the moral hazard argument, Well,
Speaker 1: if we rescue them, then bear Stearns is still a
Speaker 1: one off rescue Lehman. Hey, aren't we telegraphing to everybody
Speaker 1: else that if you run into trouble, we'll rescue you. Also. Uh.
Speaker 1: The second issue is um their books were just a
Speaker 1: mess between REPO one oh five and everything else, and
Speaker 1: they were really it was really hard to figure out
Speaker 1: what Lehman was genuinely worse. But the thing I always
Speaker 1: fantasize about I wish I would have been a fly
Speaker 1: on the wall during that meeting. And a lot of
Speaker 1: people are unaware of this. Buffett Warren Buffett at Berkshire
Speaker 1: Hathaway offered five billion dollars fairly early in the process
Speaker 1: to Dick Fuld Lehman Brothers, and Fold thought Buffett was
Speaker 1: trying to steal Lehman and rejected him. Buffett got a
Speaker 1: much better deal, paying for a chunk of Goldman Sachs
Speaker 1: at much more distressed prices. But I always imagined that
Speaker 1: conversation amongst the Federal Reserve. Wait, he turned down Warren Buffett,
Speaker 1: and now he's hat in hands is coming to us. Yeah, No,
Speaker 1: we're gonna we're gonna pass on this. You guys are
Speaker 1: gonna have to, uh, you're gonna have to hit the
Speaker 1: sidewalk on your own and just just leave us out
Speaker 1: of it. That that was how I always imagined that.
Speaker 1: I think that's a fair statement that I think. You know,
Speaker 1: of course, the authorities, Hank Paulson, who was the set
Speaker 1: Treasury Secretary and Ben Bernankey was the head of the
Speaker 1: FETE at that time, claimed they didn't really have the
Speaker 1: authority to uh bail out Lehman, and yet they saved
Speaker 1: a I G. Which isn't even a bank. It's interess, right.
Speaker 1: I think they did have the authority, but uh, for
Speaker 1: some reason they thought they didn't. Uh. But the moral
Speaker 1: hazard problem was there, and I think Hank Paulson actually
Speaker 1: made the decision not to help Lehman because it would
Speaker 1: send the proper moral hazard lesson. It turned out that
Speaker 1: he was probably wrong. That you know that triggered this
Speaker 1: tremendous crisis, and the FED had to mop up afterwards. Uh,
Speaker 1: and the Treasury did too. UM. But yeah, I think
Speaker 1: that you know, you can there's moral hazard, and you know,
Speaker 1: if you really worried about moral hazard, you might shut
Speaker 1: down the insurance industry. The question that I always debate
Speaker 1: people with people about is UM was Lehman Brothers the
Speaker 1: trigger for the crisis or were they merely the first
Speaker 1: um mobile home in the park that the tornado happened
Speaker 1: to take. They were certainly much bigger than bear Stunes
Speaker 1: they were, and I think you mentioned that their balance
Speaker 1: sheet was hard to figure out. I remember on the
Speaker 1: Friday before Lehman shutdown. On Monday, Lehman announced that there
Speaker 1: was no problem and that it you know, it had
Speaker 1: twenty or twenty billion of you know, capital after it
Speaker 1: paid its liabilities. But that was only because they overvalued
Speaker 1: some of the securities they had, and that was the
Speaker 1: real problem. David Ironhorn of Hedge fun Guy in New
Speaker 1: York had predicted all year long that Lehman was in
Speaker 1: bad shape, and it turned out he was right. Yeah.
Speaker 1: He he had done a deep dive into the books
Speaker 1: and said they've wildly overstated their value and Barclay's, if
Speaker 1: memory serves, Barclay Capital went in, looked at the books,
Speaker 1: said we we can't do this now because we can't
Speaker 1: figure out with you liabilities are. We're happy to buy
Speaker 1: you out of bankruptcy after you file so we have
Speaker 1: no liability. And ultimately that's what they ended up doing. Yeah,
Speaker 1: and you mentioned dick Fold too, who was a stern
Speaker 1: school graduate. I believe dick Fold he had a lot
Speaker 1: of his ego tied up and Lehman dollars and there
Speaker 1: was a deal that was on the you know, rumored
Speaker 1: that some Korean investors were gonna take over Lehman before
Speaker 1: the failure, and apparently they asked for, you know, conditions
Speaker 1: that dick Fold didn't want to accept because it would
Speaker 1: wouldn't have left him running the company. And so he
Speaker 1: his own ego got involved there. And that's that's kind
Speaker 1: of what happens in the books you've written on Alexander Hamilton's.
Speaker 1: One of one of Hamilton's beliefs about currency and having
Speaker 1: a central bank was that currency should be backed by
Speaker 1: gold or silver. That ended forty years ago when Nixon
Speaker 1: took the US off of the gold standard. What was
Speaker 1: Hamilton's justification for that belief system and how do you
Speaker 1: think he would look at the current state of the economy. Well,
Speaker 1: I think Hamilton's was a student of economic and financial history.
Speaker 1: That when you read his writings, which I do quite
Speaker 1: a lot, you see that he knew a lot of
Speaker 1: financial history when he was operating, and so one of
Speaker 1: the things he knew was that England had a strong
Speaker 1: currency anchored in gold, the Dutch Republic had a strong
Speaker 1: currency anchored in silver, and uh. So you know, Hamilton's
Speaker 1: called gold and silver the monies of the world. And
Speaker 1: I think he wanted the US, which didn't have its
Speaker 1: own currency unit um uh, to be like the other
Speaker 1: countries of the world, and therefore we that would ease
Speaker 1: international trade and eliminate a lot of currency risk and
Speaker 1: things like that. So in his time, he was trying
Speaker 1: to bring the US up to the standard of that time.
Speaker 1: What do you think he would look at carn currencies
Speaker 1: that aren't necessarily backed by by hard medals like that, Well,
Speaker 1: he would he would be skeptical of it in the
Speaker 1: sense that you know, he wrote that it's very easy
Speaker 1: to stamp numbers on paper and call it money. It's
Speaker 1: easy to see the stamping of paper. He said, it
Speaker 1: is very easy, and it offers a temptation to governments.
Speaker 1: Uh he didn't. You know the banks of the United
Speaker 1: States were private corporations for the most part, because Hamilton's
Speaker 1: worried that if Congress controlled the Central Bank, it would
Speaker 1: just be printing money for Congress. That would never Yeah,
Speaker 1: but I think what Hamilton's probably, even though his policies
Speaker 1: led to it, Hamilton's couldn't possibly have foreseen the tremendous
Speaker 1: economic growth of the last two less centuries. And when
Speaker 1: he digested the growth of the last two centuries, he
Speaker 1: might say, you know, really, gold and silver are fairly
Speaker 1: expensive ways to back money. Uh, you know, you work
Speaker 1: very hard to dig the gold and silver on the ground,
Speaker 1: refined it into bars and bury the guard bars back
Speaker 1: in the ground. And Lord Keynes made fun of that.
Speaker 1: And I think Hamilton's would be a little more modern
Speaker 1: and say, if you can control what the central bank
Speaker 1: is going to do, it's a lot cheaper not to
Speaker 1: base your money on gold and silver. Makes sense. Let's
Speaker 1: jump to our favorite podcast questions. These are are the
Speaker 1: questions we ask all of our guests. Um you're a
Speaker 1: fairly well known person. Tell us something that most people
Speaker 1: don't know about your background. What most people don't know
Speaker 1: about my background? Well, I think I had one great
Speaker 1: financial triumph around nine that most people don't know about.
Speaker 1: And here's the situation. I'm in North Carolina at the time,
Speaker 1: and my wife take me off to our church. Uh.
Speaker 1: So I'm attending this church and the church decides around
Speaker 1: ninety one to sell the parsonage and just pay a
Speaker 1: rent supplement to the minister. Uh. That gave him a
Speaker 1: bunch of capital to invest. And since I'm an economist
Speaker 1: from MC State going to church with my wife, they
Speaker 1: asked me, what should you buy? You know what? What
Speaker 1: how should they invest that money? So in nineteen eighty one, Uh,
Speaker 1: this is a church. I advised them to put all
Speaker 1: the money into long term US government bonds, which were
Speaker 1: then yielding about fourteen or fifteen percent interest. And so
Speaker 1: they did that, and not only did they for fifteen
Speaker 1: or twenty years after that get this fifteen percent return
Speaker 1: on their money, but during the nineteen eighties, interest rates
Speaker 1: came down and the bonds about doubled in value. So
Speaker 1: they were getting a tremendous return on this investment. They
Speaker 1: thought I was a genius, even though uh it was
Speaker 1: just an I was lucky with the timing. But here's
Speaker 1: what people don't know. They were so happy about what
Speaker 1: I had done and thought I was a genius that
Speaker 1: they made me the chairman of the board of trustees
Speaker 1: of the church. And so most people don't know that
Speaker 1: one of my greatest triumphs in life was being the
Speaker 1: chairman of the board of trustees of a church of
Speaker 1: which I was not a member. That's very, very funny.
Speaker 1: Tell us about some of your early mentors. You mentioned
Speaker 1: one at Harvard. Who who were the people who affected
Speaker 1: your view of economics? Well, I got interested in economics
Speaker 1: and high school and economics was not a subject in
Speaker 1: the late nineteen fifties that was typically taught in high school.
Speaker 1: So I have to give a shout out to my
Speaker 1: high school economics teacher. His name was Ralph Schmidt. I
Speaker 1: used to keep up with him, but I haven't been
Speaker 1: in touch with him in recent years, and I'm not
Speaker 1: even sure he's still alive. I hope. So Ralph Schmidt
Speaker 1: was taught a really college like course in economics while
Speaker 1: I was a senior in high school, and that just
Speaker 1: got me. We read things like Robert Heilbrouner's Worldly Philosopherers
Speaker 1: and but a real good economic textbook as well. And
Speaker 1: I knew all about Paul Samuelson and Milton Friedman and
Speaker 1: people like that while I was in high school. So
Speaker 1: there was that high school teacher that kindled my interest
Speaker 1: in economics. And it's never left, you know, now it's
Speaker 1: sixty seventy years later. I'm still interested in it. Then
Speaker 1: and I mentioned, uh, well, I should talk about college
Speaker 1: because Gershon Crime, my PhD advisor, h came later, but
Speaker 1: in while I was in college that Harvard had a
Speaker 1: couple of professors named Otto Eckstein and Seymour Harris. Otto
Speaker 1: Eckstein later on founded Data Resources, you know, which became
Speaker 1: a big data firm. Uh. And he was a young,
Speaker 1: very bright economist, and I knew all the things going
Speaker 1: on in Washington. He was a public finance economist, so
Speaker 1: I liked him. And Seymour Harris was an old Harvard professor,
Speaker 1: been there many years, and he was my senior thesis advisor,
Speaker 1: and he took a liking to me, and I took
Speaker 1: a liking to him. He was a very prolific writer,
Speaker 1: not that wasn't so much original, but he wrote a
Speaker 1: lot of stuff about policy. And so those two professors,
Speaker 1: you know, we're not only mentors but sort of friends.
Speaker 1: And then Gershon Kron was my mentor as a grad student,
Speaker 1: but he was also a friend. You know, he lived
Speaker 1: near where I lived in the summer when he was
Speaker 1: wife was gone. We'd invite him over for dinner and
Speaker 1: all that. So he was a friend of the family.
Speaker 1: Uh And they you know, those four bral Schmidt in
Speaker 1: high school, Otto Eckstein and Seymour, Harrison College, and then
Speaker 1: Gershon Kron and grad school. I think those were my
Speaker 1: mentors that mattered to me in my life. So holding
Speaker 1: them mentors aside, what what investors affected the way you
Speaker 1: look at the world of markets and investing. Well, in
Speaker 1: the nineteen fifties, when I was still in high school,
Speaker 1: I read something like it might have been the third
Speaker 1: edition of Benjamin Graham's The Intelligent Investor, and I learned
Speaker 1: a lot from that because there was a lot of
Speaker 1: wisdom in Benjamin Graham's work. My friend Jason Saga's, you know,
Speaker 1: half a century later, has brought out a new edition
Speaker 1: of it. Uh So that's a book that influenced me
Speaker 1: when I was young about value investing and uh, you know,
Speaker 1: just a lot of wisdom that Ben Graham had, so
Speaker 1: that influenced me a lot. Uh. And uh. Then you know,
Speaker 1: some some books sort of combined economic history, financial history
Speaker 1: with investment advice. Um. And one of those that I remember,
Speaker 1: a book from the late nineteen fifties was Bray Hammond.
Speaker 1: He was the secretary of the Federal Reserve Board. Bray
Speaker 1: Hammond wrote a book called Banks and Politics in America
Speaker 1: from the Revolution to the Civil War. And it's just
Speaker 1: a wonderful book. It's well worth reading half a century
Speaker 1: later because it captures the spirit of America. You know,
Speaker 1: the country was built by steam and credit, you know,
Speaker 1: and fraudsters were there and all that. You know, he'd
Speaker 1: go into financial frauds, how they took place, and at
Speaker 1: the end of it he would say, thus did America
Speaker 1: grow great? You know it was sarcastic, but you know,
Speaker 1: you by studying history you could sort of spot things
Speaker 1: in finance that to avoid and to latch onto. Any
Speaker 1: other books you want to mention, this is always everybody's
Speaker 1: favorite question. Uh. Well, when I was in grad school,
Speaker 1: my first year of grad school was nineteen sixty three,
Speaker 1: and one of the great books that of economic history
Speaker 1: that came out in was Milton Friedman and Anna Schwartz,
Speaker 1: A Monetary History of the United States. At that time,
Speaker 1: especially at Harvard, not at Chicago, obviously most people were Keynesians,
Speaker 1: and Milton Friedman made this powerful historical Uh. I wouldn't
Speaker 1: say it's an attack on Keynesianism, but there was something
Speaker 1: that the Keynesians hadn't paid much attention to, namely monetarism,
Speaker 1: and Milton Friedman's books sort of showed that there was
Speaker 1: a lot to monetarism, and so then people began to
Speaker 1: rethink Keynesianism, and later on economists of course came up
Speaker 1: with rational expectations and other things. Uh. But I think
Speaker 1: Friedman and Schwartz The Monetary History of the United States
Speaker 1: was one of those books. I happened to be lucky
Speaker 1: enough to read it when I was twenty three years old,
Speaker 1: and it influenced my career a great deal because it's
Speaker 1: really such a wonderful book. Any of the books you
Speaker 1: want to mention before we move on, well, I should
Speaker 1: mention that I happen to own the twenty seven volumes
Speaker 1: of the papers of Alexander Hamilton's and the five volumes
Speaker 1: of the Law Practice of Alexander Hamilton's And I go
Speaker 1: in to read those a lot, because that that's just
Speaker 1: fascinating to take up about ten feet on my bookshelves
Speaker 1: volume and this is interesting for a man who only
Speaker 1: lived forty seven years. Wow, that's impressive. Um. So, we
Speaker 1: we've been talking about central banks, we've been talking about
Speaker 1: interest rates. What do you see as the next shift
Speaker 1: that's going to take place in either how the central
Speaker 1: bank conducts itself or interest rate policies. Well, I my
Speaker 1: historical perspective makes me think that the Federal Reserve now
Speaker 1: is kind of in the situation of the Federal Reserve
Speaker 1: around the early nineteen fifties. It had kept interest rates
Speaker 1: very low for a long time. It realized that those
Speaker 1: rates were probably too low, they weren't normal, So they
Speaker 1: want to normalize. And I think that the uh, the
Speaker 1: goal of the Federal Reserve over the next few years
Speaker 1: will be to gradually increase our interest rates back to
Speaker 1: more of a normal level. Now, there could be some
Speaker 1: problems with this that I foresee. Number One, the fiscal policy.
Speaker 1: Fiscal policy was basically non existence during and after the crisis.
Speaker 1: Obama had a little bit of stimulus, not enough in
Speaker 1: two thousand nine, but since then the gridlock in Washington
Speaker 1: prevented any sort of fiscal policy designed to help the
Speaker 1: economy until the most recent tax reforms that the President
Speaker 1: Trump is changing that. So we gotta We got a
Speaker 1: tax cut in UH late two thousand seventeen, and then
Speaker 1: there's a deal between the Republicans and the Democrats where
Speaker 1: each one gets a little more spending that came up
Speaker 1: just in January two thou eighteen, and then Trump is
Speaker 1: talking about an infrastructure program. So what I see right now,
Speaker 1: and it bothers me a little bit, is that the
Speaker 1: sort of fiscal stimulus we should have had in two
Speaker 1: thousand eight nine ten is taking place when the unemployment
Speaker 1: was you know, in two thousand nine it was ten percent.
Speaker 1: Now it's four point one percent, basically full employment or
Speaker 1: close to it, And we're getting the fiscal stimulus we
Speaker 1: should have had when unemployment was ten percent when we're
Speaker 1: sort of fully employed. So what the Federal Reserve may
Speaker 1: have trouble containing inflationary pressures, and it may have to
Speaker 1: raise interest rates faster than UH it did in the
Speaker 1: nineteen fifties when they could just move up gradually over
Speaker 1: a decade, and I think that bode zeal for you know,
Speaker 1: probably overvalued stock markets and things like that. So I'm
Speaker 1: a little bit wary, wary about the outlook for the
Speaker 1: next year or two. Tell us about a time you
Speaker 1: failed and what you learned from the experience. The time
Speaker 1: I failed, and what I learned from the experience, well,
Speaker 1: I think in the History of interest Rates, I did
Speaker 1: make a bad forecast and in the last edition of it,
Speaker 1: which was the two thousand five edition, in two thousand four,
Speaker 1: I thought we'd hit the low and interest rates and
Speaker 1: may have two thousand three, Uh mentioned that earlier. That's
Speaker 1: pre crisis thinking, yes, right, and you know those those
Speaker 1: rates in two thousand two and three and early two
Speaker 1: thousand four were really the lowest ones on record up
Speaker 1: to that time. And so we turned up and you know,
Speaker 1: after a year and a half of rates moving up,
Speaker 1: I said, Okay, probably we've hit the low in two
Speaker 1: thousand three, uh, And you'll you'll read that in the
Speaker 1: last edition of the book, and so um, I think
Speaker 1: that was an obvious mistake. And what I learned from
Speaker 1: that is that forecasting is uh is a tough business.
Speaker 1: You know. I became an economic historian because it's a
Speaker 1: lot easier to forecast the past. We know what happened,
Speaker 1: we don't know exactly how it happened. But when you're there,
Speaker 1: people want to know right now what's going to happen
Speaker 1: in the next month or year. Uh. That's very tough
Speaker 1: to forecast. And so I couldn't see in two thousand
Speaker 1: four and five that we would have this great financial
Speaker 1: crisis starting in two thousand seven. So if a millennial
Speaker 1: or a college student came up to you and said
Speaker 1: they were thinking about going into either economics or financial history,
Speaker 1: what sort of advice might you give them? Well, I
Speaker 1: would say that it's a very rewarding thing to study. Uh.
Speaker 1: I somehow think that economic and financial history, if you
Speaker 1: can make contributions there, they kind of last longer. In
Speaker 1: straight economics, you're often trying to tweak the last paper
Speaker 1: you saw in the journal, put another tweak on it,
Speaker 1: and then get a journal article which shows that you're
Speaker 1: on the cutting edge. Uh. But then somebody else tweaks you,
Speaker 1: and pretty soon your article isn't that important. If you
Speaker 1: write a really good book in economic history, like Milton
Speaker 1: Friedman and Anna Schwartz did in their Monetary History, or
Speaker 1: Bray Hammond did in his Banks and Politics book. Those
Speaker 1: books last a long time and you can read him
Speaker 1: half a century later. So I would say that going
Speaker 1: into economic and financial history may give you more long
Speaker 1: term rewards than just being an ordinary garden variety economist. Uh.
Speaker 1: So that's what I would advise scholars. But of course,
Speaker 1: you know there's you know, there's other advice I'd give
Speaker 1: that you know, read Bend Graham's book If You're a million, uh,
Speaker 1: the new edition of it, and then mostly, you know, save,
Speaker 1: save money and invest it. The power of compound interest
Speaker 1: is so great, but we don't realize it because it
Speaker 1: happened slowly. So for any millennial, not just one who
Speaker 1: might want to be a professor, I would say, you
Speaker 1: may not have a lot of money, but make sure to,
Speaker 1: you know, save ten percent of it, like John D.
Speaker 1: Rockefeller did. And our final question, what is it that
Speaker 1: you know about investing today that you wish you knew
Speaker 1: fifty years ago when you were starting out of out
Speaker 1: of grad school. Well, I wish I had known fifty
Speaker 1: years ago. Uh. What what these long term market cycles
Speaker 1: were like both in interest rates and stock returns. Now,
Speaker 1: we didn't have a lot of the data, and I
Speaker 1: myself have worked on creating some of these data. But
Speaker 1: I think that if I had known fifty years ago
Speaker 1: how stock markets bounce up and down, they really magnify
Speaker 1: the ups and downs of the economy by quite a bit.
Speaker 1: We can call it pe ratios increasing and decreasing. Uh.
Speaker 1: If I had known that fifty years ago, that there
Speaker 1: were these long cycles that have been going on for
Speaker 1: two hundred years, I probably would have paid more attention
Speaker 1: to where we were in the market cycles then. And
Speaker 1: the same thing with interest rates. If I knew that
Speaker 1: there were like twenty thirty year movements of interest rates,
Speaker 1: I would try to see where we were in that
Speaker 1: cycle and then not make the mistake of, you know,
Speaker 1: investing all a lot of money and interest rates when
Speaker 1: they're very low, because when they go up, you lose
Speaker 1: capital basically. Uh. We have been speaking with Professor Richard
Speaker 1: Silla of n y U Stern School of Business, author
Speaker 1: of numerous books, most recently Alexander Hamilton's on Finance, credit
Speaker 1: and debt. Thank you so much for doing this. This
Speaker 1: has been absolutely fascinating. If you enjoy this conversation, be
Speaker 1: sure and look up an Intra down an Inch on
Speaker 1: Apple iTunes and you can see any of the other,
Speaker 1: let's call it hundred and nineties such conversations we've had previously.
Speaker 1: We love your comments, feedback and suggestions right to us
Speaker 1: at m IB podcast at Bloomberg dot net. I would
Speaker 1: be remiss if I did not thank my crack staff
Speaker 1: that helps to put together this podcast each week. Mendina
Speaker 1: Parwana is our audio engineer, slash producer, Taylor Riggs is
Speaker 1: our booker producer, and Michael bat Nick is our head
Speaker 1: of research. I'm Barry Results. You've been listening to Masters
Speaker 1: in Business on Bloomberg Radio