WEBVTT - Piwowar Says It's Best to Keep Markets Open

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<v Speaker 1>This is Bloomberg Business Week with Carol Masser and Jason

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<v Speaker 1>Kelly on Bloomberg Radio. Michael P. Vavar He is executive

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<v Speaker 1>director of the Milkin Institute's Center for Financial mark It's

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<v Speaker 1>former SEC Commissioner. He served as a senior economist at

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<v Speaker 1>the President's Council of Economic Advisors in both the George W.

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<v Speaker 1>Bush and Barack Obama administrations, so during the financial crisis

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<v Speaker 1>and also in its immediate aftermon math. He joins us

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<v Speaker 1>on this Thursday on the phone from Washington. Michaels so

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<v Speaker 1>nice to have you here. I feel like I have

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<v Speaker 1>a million questions. UM. I think so often when we

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<v Speaker 1>talk about some of the programs that are being um

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<v Speaker 1>put together out of Congress and the President to help

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<v Speaker 1>this crisis and the stimulus programs, we make the comparison

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<v Speaker 1>to the financial crisis. Is that a fair comparison? Yeah,

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<v Speaker 1>in some ways, there's some similarities and in many ways

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<v Speaker 1>their differences. If you think back to the to the

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<v Speaker 1>global financial crisis two thousand and eight two tho nine,

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<v Speaker 1>it really started in the financial sector. What we had

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<v Speaker 1>was we had banks that were under capitalized, they had

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<v Speaker 1>too much leverage. Most of it was hidden. It was

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<v Speaker 1>off balance sheet. Remember, we had special investment vehicles sieves.

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<v Speaker 1>We had over the counter derivative that regulators had no

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<v Speaker 1>insight into what were the exposures or the counterparties. And

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<v Speaker 1>we had a crisis to begin in the financial sector,

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<v Speaker 1>and then that's filled over to the real economy, and

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<v Speaker 1>then that we had the subsequent recession, the current crisis.

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<v Speaker 1>Obviously we start with the health crisis UM in the

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<v Speaker 1>government response in many ways, particularly with UM, things like

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<v Speaker 1>you know, lockdowns and quarantines and stay at home orders

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<v Speaker 1>and closing of non essential businesses. UM. What that's doing

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<v Speaker 1>is that's creating the spill over into the real economy.

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<v Speaker 1>And by all accounts, the financial sector UM is in

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<v Speaker 1>very good shape this time. In fact, if you look

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<v Speaker 1>at what the government is doing, you know, the last time,

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<v Speaker 1>during global financial crisis, the banks were the problem. If

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<v Speaker 1>you look at many of the ways the channels through

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<v Speaker 1>which the government is trying to get money out to

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<v Speaker 1>individuals and small businesses, banks are now part of the solution.

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<v Speaker 1>So UH, in that way, it's very different. UH. Some

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<v Speaker 1>of the similarities are that when you're in it, it's

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<v Speaker 1>very scary UM, and when you're in it you see

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<v Speaker 1>big scary numbers like you know, the unemployment numbers that

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<v Speaker 1>came out today. Um. And it's also similar in the

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<v Speaker 1>fact that we're gonna get through this and it's just

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<v Speaker 1>a matter of time and on the back end of

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<v Speaker 1>this will recover and it's just a matter of of

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<v Speaker 1>of of fighting the fire with the with the right tools.

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<v Speaker 1>And so, Mike, given all of that, what's the advice

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<v Speaker 1>you would give people who are on the front lines

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<v Speaker 1>right now? And I bet you are giving them advice.

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<v Speaker 1>What are you telling them? Yeah, So there's different uh

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<v Speaker 1>folks that we're that we're talking to with the Milk

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<v Speaker 1>and Institute. We're engaging with members of the administration, with Congress,

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<v Speaker 1>with the regulators to try to be as helpful as

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<v Speaker 1>we can. UM. You know, my message to UM the

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<v Speaker 1>government officials is, UM, you know, do whatever you can

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<v Speaker 1>to keep them markets open. UM. You know, it's been

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<v Speaker 1>a lot of volatility in the markets recently, but by

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<v Speaker 1>all accounts, the financial markets have held up well. UM.

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<v Speaker 1>They're providing necessary liquidity for investors who want to sell

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<v Speaker 1>their providing opportunities for investments who uh for for people

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<v Speaker 1>who view investment opportunities. UM, they're producing prices that that

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<v Speaker 1>that give information to investors but also to policymakers to

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<v Speaker 1>think through what are the next steps in terms of UM,

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<v Speaker 1>what type of assistance they want to do? They want

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<v Speaker 1>to give targeted to specific industries or specific companies, and

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<v Speaker 1>so they're working. Is they're working well? I want to

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<v Speaker 1>ask you specifically though about the financial sector. UM. Yesterday

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<v Speaker 1>the Fed is going to it came out and said

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<v Speaker 1>it's gonna let Wall Street banks take on more leverage

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<v Speaker 1>so they can absorb UM what's really a severe lack

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<v Speaker 1>of liquidity for treasuries and a surge in customer deposits

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<v Speaker 1>because of the coronavirus pandemic. So basically they're relaxing a

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<v Speaker 1>key limit on the level of debt Wall Street contain

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<v Speaker 1>take on. Now, this fundamental leverage ratio was part of

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<v Speaker 1>the response in the two thousand Are coming out of

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<v Speaker 1>the two thousand eight crisis? Are we potentially though stepping

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<v Speaker 1>back rolling back some of those backstops that we put

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<v Speaker 1>in place after the financial crisis that could get us

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<v Speaker 1>into trouble? Mike, Um, we could end up there. But

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<v Speaker 1>the particular thing that the Fed did on Wednesday is

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<v Speaker 1>not troubling in any way. UM. The FED has a

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<v Speaker 1>sort of two sets of capital requirements. One is a

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<v Speaker 1>risk based set of capital requirements, which requires you to

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<v Speaker 1>have a hold a certain amount of capital, or the

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<v Speaker 1>opposite of that is limits the amount of leverage that

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<v Speaker 1>you can have given the risky nous of the assets

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<v Speaker 1>on the asset side of your balance sheet. So it

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<v Speaker 1>takes into account if risk your ass risk for risk

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<v Speaker 1>your assets UM, you need to fund it with more,

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<v Speaker 1>with more equity capital and less debt, less risky assets,

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<v Speaker 1>you don't have to worry about that. The key restraint

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<v Speaker 1>that they lessened on on Wednesday with something called the

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<v Speaker 1>supplemental leverage ratio, and that's the second type of backstop

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<v Speaker 1>that they have, which is the leverage ratio is just

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<v Speaker 1>a simple ratio that takes into account the amount of

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<v Speaker 1>leverage or or the converse is the amount of capital

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<v Speaker 1>that you have to have UM without taking into account

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<v Speaker 1>the riskiness of the assets. It's just a simple leverage ratio.

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<v Speaker 1>And what they did was they relaxed that a little

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<v Speaker 1>bit and moved more towards the risk based where they

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<v Speaker 1>said they're not going to count UM treasuries or assets

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<v Speaker 1>held in reserves at any of the federal reserve banks.

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<v Speaker 1>Those are completely riskless and so the fact that they

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<v Speaker 1>pulled back on those um is it does doesn't give

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<v Speaker 1>me UM any pause at all. What it what it's

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<v Speaker 1>going to do is allow the banks to increase the

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<v Speaker 1>size of their balance sheet and in effect do more

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<v Speaker 1>lending UM and not take into account they have these

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<v Speaker 1>these riskless assets. If I can squeeze in really just

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<v Speaker 1>thirty seconds, you've gotta be quick. Do you think that

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<v Speaker 1>there's any point amid the volatility that we should think

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<v Speaker 1>about shutting down the markets, and you do have to

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<v Speaker 1>be quick if you could, Yeah, sure, absolutely not. The

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<v Speaker 1>markets are functioning as they showed a few weeks ago.

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<v Speaker 1>We had some of the market circuit breakers trip UM.

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<v Speaker 1>That's a measure of the success of some of the

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<v Speaker 1>structures that are in place, not a measure of of

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<v Speaker 1>of things that we should be worrying about. UM. Of course,

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<v Speaker 1>the regulator is going to look at calibrating those to

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<v Speaker 1>make sure that we have those correctly. But in terms

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<v Speaker 1>of incorporated fundamental all abilities to market, the working perfectly. Well.

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<v Speaker 1>Let's continue our conversation with Michael Pepavar. He is executive

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<v Speaker 1>director for the Milican Institute Center for Financial Markets, former

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<v Speaker 1>SEC chair, former staffer on the White House Economic Council,

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<v Speaker 1>joining us on the phone from Virginia. Uh So, Michael,

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<v Speaker 1>I wanna bring up a topic with you that's been

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<v Speaker 1>very friend of mine with us. Uh. We spoke earlier

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<v Speaker 1>in the week with Robert Reich. He was talking about

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<v Speaker 1>the program, the fiscal stimulus program, as it relates to

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<v Speaker 1>getting money to corporations. And this will come as no

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<v Speaker 1>surprise to you. Not a big fan of corporate bailouts,

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<v Speaker 1>Robert Reich. Uh isn't, But I do want your take

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<v Speaker 1>on what is the best way to get money pumped

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<v Speaker 1>back into this economy. Yeah, I'm not a fan of

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<v Speaker 1>corporate bailouts either. Um. As you mentioned, that was at

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<v Speaker 1>the White House during the global financial crisis, and you know, unfortunately,

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<v Speaker 1>you know, we had the bank bailout the bank UM.

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<v Speaker 1>And the reason, the main reason for that is because

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<v Speaker 1>banks did not up until Dot Frank did not have

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<v Speaker 1>a really good way to go through bankruptcy and go

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<v Speaker 1>through a restructuring Chapter eleven type bankruptcy UM and so

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<v Speaker 1>failure was not an option. So, UM it was. I

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<v Speaker 1>found it abhorrant, but we had to end up doing it.

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<v Speaker 1>I'm not a fan of corporate bailouts at all. So

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<v Speaker 1>so what's the alternative, And that's to to get checked

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<v Speaker 1>in the hands of individuals as quick as possible. And

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<v Speaker 1>so I think that has um the potential to be

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<v Speaker 1>the biggest impact UM and to have the left the

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<v Speaker 1>least amount of political blowback on the back end of

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<v Speaker 1>this is to get as many as much money and

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<v Speaker 1>checked into people who need it UM as quick as possible.

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<v Speaker 1>And so let's continue down that thread, because you know,

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<v Speaker 1>how do you best do that? Is it checks? Is

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<v Speaker 1>it unemployment insurance? I mean that seems and an extension there, Well,

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<v Speaker 1>what are the best mechanisms to to really get that

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<v Speaker 1>money and how do you essentially do it in such

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<v Speaker 1>a way that there's not a lot of red tape

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<v Speaker 1>and people actually get the money. So right now, UM,

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<v Speaker 1>the government has taken the correct approach, which is UM

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<v Speaker 1>to the answer your question, which way do you do it?

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<v Speaker 1>The answers, yes, you do all of those right now,

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<v Speaker 1>and then you adjust on the fly. Right, you worry

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<v Speaker 1>about things like UM, people going on unemployment insurance because

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<v Speaker 1>they can make more money than than you know by

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<v Speaker 1>not working than by working we can make those adjustments

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<v Speaker 1>in real time. Um. Those are second order of facts.

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<v Speaker 1>Those are second order type of of considerations. But right

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<v Speaker 1>now you want to get that money. You want to

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<v Speaker 1>do everything you can right now, um, and then dynamically

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<v Speaker 1>adjust for that. I mean, we saw the number of

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<v Speaker 1>the unemployment numbers, UM, this this morning. We're the big

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<v Speaker 1>scary number, right and it's going to continue to be bad.

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<v Speaker 1>So okay, naive question of the day, perhaps of the year,

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<v Speaker 1>perhaps of the decade. So why does it keep happening

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<v Speaker 1>that we get corporate ball outs? I mean, um, Bob Rice,

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<v Speaker 1>of course, you know, talks about how it's the companies

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<v Speaker 1>that have the d pockets that do the lobbying to

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<v Speaker 1>make sure that they're heard in Washington. Is it just

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<v Speaker 1>is it just that? And what a shame? And how

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<v Speaker 1>do we change the system. Well, if you look at

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<v Speaker 1>this time, what what Congress and the administration are trying

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<v Speaker 1>to do is avoid that happening and and and try

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<v Speaker 1>to get as much assistance to not only individuals but

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<v Speaker 1>small businesses, main street businesses. Right, you have the the

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<v Speaker 1>paycheck program, the paycheck Protection program that the SBA and

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<v Speaker 1>Tragedy are trying to do for small businesses. The FED

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<v Speaker 1>has announced that they're going to stand up a new facility.

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<v Speaker 1>You know, they've basically rea stood up some of their

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<v Speaker 1>old facilities that they rolled out during the financial crisis,

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<v Speaker 1>and the announced they're going to do another one specifically

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<v Speaker 1>for main street businesses. So my hope is that we

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<v Speaker 1>don't end up with UM. You know, the biggest corporations

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<v Speaker 1>get the biggest bailoff because they have they spend the

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<v Speaker 1>most amount of lobbying money. But there is still five

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<v Speaker 1>billion that's going to hard hit industries, and that includes

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<v Speaker 1>you know, whether it's the airlines and so on and

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<v Speaker 1>so forth. Do you think something like that is the

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<v Speaker 1>right thing to do to help out UM. I mean,

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<v Speaker 1>it's it remains to be seen. We have to I mean,

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<v Speaker 1>we have to use that money judiciously to try to

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<v Speaker 1>figure things out. I mean, obviously what we care most

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<v Speaker 1>about is UM the employees who work for those companies, right,

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<v Speaker 1>So we can talk all the numbers we want UM,

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<v Speaker 1>but it really comes down to individuals. And so what

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<v Speaker 1>you want to do is put the employees first, UM

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<v Speaker 1>and think about them, and then at the back of

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<v Speaker 1>the line you want to make considerations of creditors and

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<v Speaker 1>and shareholders, right, because the last thing we want to

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<v Speaker 1>do is bail out shareholders. And what we saw in

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<v Speaker 1>the last crisis is that also creditors sending to get

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<v Speaker 1>bail out sailed out too. So UM, you know, we

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<v Speaker 1>want to make sure that we're taking into account UM

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<v Speaker 1>the employees first. All right, I'm gonna master you with

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<v Speaker 1>a thirty second question here, Michael, to round it out. UH,

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<v Speaker 1>next set of stimulus. What's the single most important thing

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<v Speaker 1>we need to do. UM, There's there's a couple of

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<v Speaker 1>things out there. I would say the number one is

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<v Speaker 1>UM to look at state and local government right now.

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<v Speaker 1>They're going to be hit very hard. They were hit

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<v Speaker 1>very hard during the global financial prices. They were sort

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<v Speaker 1>of like the second wave of things that came in,

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<v Speaker 1>and I expect that they're going to be a they

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<v Speaker 1>a lot of them haven't recovered since the global financial prices,

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<v Speaker 1>and so they're in they're in bad shape right now.

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<v Speaker 1>So I think getting UM money to those so they

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<v Speaker 1>can we can pay our you know, our firefighters and

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<v Speaker 1>our our police officers and our teachers and the like

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<v Speaker 1>is important. All Right, We're gonna leave it there. We

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<v Speaker 1>hope you will come back and spend some time with

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<v Speaker 1>this such great conversation, we really appreciate it. Michael Pivovar

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<v Speaker 1>is executive director for the Milk And Institute Center for

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<v Speaker 1>Financial Markets. Agree. We know, well, there's some smart folks

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<v Speaker 1>who work in that group. For sure, love the milk

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<v Speaker 1>And Institute, and I love what he had to say

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<v Speaker 1>about states. Joe Wisenthal of Bloomberg wrote about that you

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<v Speaker 1>sometimes need to think about the state does emerging economies

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<v Speaker 1>that they all, you know, have different things they benefit

0:11:59.720 --> 0:12:01.800
<v Speaker 1>from or lose from, and so we need to kind

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<v Speaker 1>of think about that and in providing assistance for them.

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<v Speaker 1>So really smart point.