1 00:00:00,320 --> 00:00:04,160 Speaker 1: Who you put your trust in matters. Investors have put 2 00:00:04,200 --> 00:00:07,640 Speaker 1: their trust in independent registered investment advisors to the tune 3 00:00:07,640 --> 00:00:12,240 Speaker 1: of four trillion dollars. Why learn more and find your 4 00:00:12,240 --> 00:00:27,240 Speaker 1: independent advisor dot com. Welcome to the Bloomberg Surveillance Podcast. 5 00:00:27,320 --> 00:00:31,320 Speaker 1: I'm Tom Keene Always with Michael McKee. Daily we bring 6 00:00:31,360 --> 00:00:35,280 Speaker 1: you insight from the best in economics, finance, investment, and 7 00:00:35,360 --> 00:00:41,519 Speaker 1: international relations. Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, 8 00:00:41,560 --> 00:00:48,080 Speaker 1: and of course, on the Bloomberg Michael McKeon Dublin and 9 00:00:48,120 --> 00:00:50,760 Speaker 1: Tom Keene in New York and with us Villain Bowder 10 00:00:50,800 --> 00:00:53,920 Speaker 1: of City Professor Bowder. I'm gonna go Matthew right now. 11 00:00:53,960 --> 00:00:57,600 Speaker 1: Mike McKee will save me here in a moment. The 12 00:00:57,720 --> 00:01:01,200 Speaker 1: definitive expert on bank fail your is a gentleman named 13 00:01:01,280 --> 00:01:05,080 Speaker 1: Jean Charles Rochet of to loose folks, I'll admit I've 14 00:01:05,120 --> 00:01:09,319 Speaker 1: read one of his phenomenal Princeton University monographs and looked 15 00:01:09,319 --> 00:01:13,000 Speaker 1: at every single equation like d x divided by x 16 00:01:13,280 --> 00:01:17,760 Speaker 1: equals mud t plus um omega DW. All you need 17 00:01:17,800 --> 00:01:20,840 Speaker 1: to know is if a bank has what Jean Charles 18 00:01:20,959 --> 00:01:27,160 Speaker 1: Rochet calls bad technology, it's irreversible. And that's the mathematics 19 00:01:27,160 --> 00:01:33,480 Speaker 1: of trust. If people perceive that an institution has failures, 20 00:01:33,560 --> 00:01:38,520 Speaker 1: they adapt and adjust. That's what Johan Charles Roche says. 21 00:01:38,560 --> 00:01:43,960 Speaker 1: How can politicians help? If Jean Charles Roche's arch theory 22 00:01:44,160 --> 00:01:47,880 Speaker 1: is given bank failure, politicians have to come to a 23 00:01:48,000 --> 00:01:54,520 Speaker 1: rescue and they don't do they? Well? Central banks come 24 00:01:54,560 --> 00:01:57,560 Speaker 1: to rescue in the case of self fulfitting for your 25 00:01:57,600 --> 00:02:00,360 Speaker 1: different too crititic crisis. To connect this lindof Law resort 26 00:02:00,440 --> 00:02:04,720 Speaker 1: market makeup love is or allowing institution that are fundamentally solvent. 27 00:02:05,040 --> 00:02:10,440 Speaker 1: But whatever doubts about um, the first in, first out 28 00:02:10,440 --> 00:02:14,080 Speaker 1: principle UM, So that that's an issue in terms of 29 00:02:14,320 --> 00:02:17,760 Speaker 1: politicians helping. Further, all they can do is have the 30 00:02:17,960 --> 00:02:25,079 Speaker 1: right regimes for recapitalizing and resolving banks in place so 31 00:02:25,120 --> 00:02:29,040 Speaker 1: that even if individual bank isn't travel, it doesn't become systemic. 32 00:02:29,280 --> 00:02:32,560 Speaker 1: You answer the central bank question, but then what does 33 00:02:32,680 --> 00:02:37,760 Speaker 1: miracle do or may do? In England? The politicians have 34 00:02:37,960 --> 00:02:44,160 Speaker 1: to adapt away from the easy badget decisions of central bankers. Right, yes, 35 00:02:44,200 --> 00:02:46,880 Speaker 1: but in a way do you think you're in place already? Right? 36 00:02:47,440 --> 00:02:50,919 Speaker 1: First of all, the banks, even the most affected banks 37 00:02:51,040 --> 00:02:56,120 Speaker 1: have regular Cuban capital, they have cocos and other convertibles. 38 00:02:56,160 --> 00:02:59,600 Speaker 1: And then under the Bank Resolution and Recovery Directive eight 39 00:03:00,040 --> 00:03:02,720 Speaker 1: of the Palace, you can be built in right for 40 00:03:02,760 --> 00:03:04,520 Speaker 1: the largest bank can play at the moment that will 41 00:03:04,560 --> 00:03:06,320 Speaker 1: be a hundred and tenty billion dollars. So that's a 42 00:03:06,880 --> 00:03:10,239 Speaker 1: that's serious money. I think the framework is there and 43 00:03:10,360 --> 00:03:14,320 Speaker 1: would be. The markets are um rightly worried about the 44 00:03:14,360 --> 00:03:18,200 Speaker 1: exposure of some investors, but it is very different from 45 00:03:18,240 --> 00:03:21,200 Speaker 1: a systemic impact. And there's a keyword, Mike, was that 46 00:03:21,400 --> 00:03:23,960 Speaker 1: enough math for your d X divided by x equels 47 00:03:24,320 --> 00:03:28,080 Speaker 1: mud t plus omega DW. I was following it with 48 00:03:28,200 --> 00:03:31,360 Speaker 1: great interests. You um, and you know we have the 49 00:03:31,360 --> 00:03:34,079 Speaker 1: whole world riveted by that math that you did. But 50 00:03:34,200 --> 00:03:36,160 Speaker 1: the whole world is kind of riveted at the moment 51 00:03:36,240 --> 00:03:39,560 Speaker 1: villain by what's going on in the German banks. But 52 00:03:39,640 --> 00:03:43,040 Speaker 1: this just follows questions about the Italian banks, which followed 53 00:03:43,120 --> 00:03:45,800 Speaker 1: questions about the Spanish banks, which followed questions about the 54 00:03:45,840 --> 00:03:49,240 Speaker 1: Irish banks. So when does Europe get its act together 55 00:03:49,360 --> 00:03:53,640 Speaker 1: and put this behind them? Well not yet. In fact, 56 00:03:53,720 --> 00:03:57,760 Speaker 1: there is a pressure at the highest level in Europe 57 00:03:57,760 --> 00:04:00,960 Speaker 1: at the moment to go easy on by in capital standards. 58 00:04:00,960 --> 00:04:03,920 Speaker 1: There's a dispute transplant dispute between the Americans who want 59 00:04:04,000 --> 00:04:10,040 Speaker 1: more capital and UH spokesman for the European Commission and 60 00:04:10,120 --> 00:04:13,200 Speaker 1: artists who want to ease off. And I think that's 61 00:04:13,520 --> 00:04:16,919 Speaker 1: the wrong move. I think you have to be radical. 62 00:04:17,040 --> 00:04:20,880 Speaker 1: Capital standards have to be tightened, and especially there has 63 00:04:20,960 --> 00:04:26,520 Speaker 1: to be a crackdown on the extremely subjective and manipulable 64 00:04:26,640 --> 00:04:30,680 Speaker 1: risk waiting that allows UH some banks to get away 65 00:04:30,720 --> 00:04:34,120 Speaker 1: with mother Well what are they waiting for? I mean 66 00:04:34,160 --> 00:04:36,359 Speaker 1: when you look at what happened in the United States, 67 00:04:36,440 --> 00:04:41,359 Speaker 1: putting the bank problems behind them and the US not 68 00:04:41,440 --> 00:04:43,960 Speaker 1: growing fast, but you know the best horse in the 69 00:04:43,960 --> 00:04:47,240 Speaker 1: glue factory right now. Even Ireland where I am today, 70 00:04:47,520 --> 00:04:50,919 Speaker 1: they bit the bullet, took took their pain with the 71 00:04:50,960 --> 00:04:54,080 Speaker 1: banks and now growing among the fastest in the European Union. 72 00:04:54,680 --> 00:04:57,919 Speaker 1: Why doesn't that sink in the island? Island is the 73 00:04:57,960 --> 00:05:00,760 Speaker 1: only country that did it sort of a well not 74 00:05:00,839 --> 00:05:02,400 Speaker 1: quite a tone to court. It was at gunpoint, but 75 00:05:02,480 --> 00:05:04,839 Speaker 1: it did it themselves. The only other counties that have 76 00:05:04,920 --> 00:05:08,279 Speaker 1: restructured their banks to any significant extent have been under 77 00:05:08,800 --> 00:05:15,960 Speaker 1: programs Greece, Portugal, Spain, and unless there is a gun 78 00:05:16,400 --> 00:05:20,960 Speaker 1: at ahead of the national authorities, they won't voluntarily do it. Fortunately, 79 00:05:21,040 --> 00:05:25,880 Speaker 1: now bank regulations supervision has moved to the European level, 80 00:05:26,160 --> 00:05:29,159 Speaker 1: so I have some hope that, however slow, at least 81 00:05:29,240 --> 00:05:31,280 Speaker 1: we progress in the right direction, that we will get 82 00:05:32,080 --> 00:05:36,400 Speaker 1: greater recognition of low sitrative thus far been swept under 83 00:05:36,400 --> 00:05:42,400 Speaker 1: the carpet and insistent on more exigent capital standards because 84 00:05:42,440 --> 00:05:45,280 Speaker 1: we're not there yet. There's too many banks as well. Consolidation, 85 00:05:45,360 --> 00:05:49,680 Speaker 1: especially across border consolidation is essential in Europe. I presume 86 00:05:49,800 --> 00:05:53,400 Speaker 1: that all of this get caught up in European politics too, 87 00:05:53,400 --> 00:05:57,040 Speaker 1: with the elections in Germany and France next year. In Austria, 88 00:05:57,480 --> 00:05:59,800 Speaker 1: UH there are very few politicians who want to go 89 00:05:59,839 --> 00:06:01,640 Speaker 1: out on a limb at this point now, but they 90 00:06:01,640 --> 00:06:04,440 Speaker 1: don't have to write. All that has to be done, 91 00:06:04,480 --> 00:06:09,120 Speaker 1: even in the worst conceivable case is the application of 92 00:06:09,520 --> 00:06:14,159 Speaker 1: um NO. The bailing rules that already in place, the 93 00:06:14,200 --> 00:06:17,359 Speaker 1: implementation of the of the of the co codes are 94 00:06:17,400 --> 00:06:22,120 Speaker 1: convertible semi equity into equity or it's right down according 95 00:06:22,160 --> 00:06:24,960 Speaker 1: to the rules, and then beyond that, it's more necessary 96 00:06:25,120 --> 00:06:30,599 Speaker 1: the willingness to go after unsecured bondholders, and so it's 97 00:06:30,680 --> 00:06:33,120 Speaker 1: all there. We simply have to get to the point 98 00:06:33,120 --> 00:06:48,960 Speaker 1: of admitting that it needs to be done. Jeffrey Rosenberg 99 00:06:49,000 --> 00:06:52,360 Speaker 1: with us with black Rock, and of course bringing out 100 00:06:52,360 --> 00:06:56,000 Speaker 1: only fixed in common analysis and a wonderful process at 101 00:06:56,120 --> 00:07:02,200 Speaker 1: asset analysis, but doing it with mathematics and as well. Uh, 102 00:07:02,600 --> 00:07:05,599 Speaker 1: let me ask you this, Uh, in terms of Deutsche 103 00:07:05,640 --> 00:07:09,240 Speaker 1: Bank at its capital and it's funding, would you buy cocos? 104 00:07:09,520 --> 00:07:14,400 Speaker 1: I mean this is touted as a another level of protection, uh, 105 00:07:14,480 --> 00:07:19,200 Speaker 1: in terms of capital raising, but uh, if if you 106 00:07:19,320 --> 00:07:23,240 Speaker 1: know you're likely to get converted um and then you 107 00:07:23,280 --> 00:07:27,720 Speaker 1: get converted into lower on the seniority scale, And when 108 00:07:27,720 --> 00:07:30,320 Speaker 1: a bank is in trouble, wouldn't you try to get 109 00:07:30,320 --> 00:07:32,440 Speaker 1: out of those in a situation like this? And doesn't 110 00:07:32,440 --> 00:07:35,680 Speaker 1: that exacerbate the problem. So so maybe we should just 111 00:07:35,920 --> 00:07:38,400 Speaker 1: back that up a bit, so everybody understands cocoas are 112 00:07:38,440 --> 00:07:42,640 Speaker 1: contingent capital securities. So we're moving away from the conversation 113 00:07:42,680 --> 00:07:45,760 Speaker 1: on funding to the other part of the conversation around banks. 114 00:07:45,800 --> 00:07:48,520 Speaker 1: So you've got funding, which is basically, do you have liquidity, 115 00:07:48,560 --> 00:07:51,840 Speaker 1: do you have the ability to roll over your your liabilities, 116 00:07:52,000 --> 00:07:55,080 Speaker 1: and then you have capital. Capital is the cushion against 117 00:07:55,360 --> 00:07:58,440 Speaker 1: the past mistakes of having made bad loans. When those 118 00:07:58,440 --> 00:08:01,160 Speaker 1: bad loans come due, somebody he's got to pay the 119 00:08:01,200 --> 00:08:03,960 Speaker 1: freight for that, and that's generally expected to be not 120 00:08:04,040 --> 00:08:06,560 Speaker 1: the people who are deposit funders with people who have 121 00:08:06,960 --> 00:08:10,440 Speaker 1: senior bank liabilities, but rather the equity holders. And then 122 00:08:10,480 --> 00:08:14,960 Speaker 1: between this concept of depositors who who are not supposed 123 00:08:15,000 --> 00:08:17,640 Speaker 1: to be on the hook for bad lending decisions and 124 00:08:17,680 --> 00:08:20,960 Speaker 1: the equity owners, we have a lot of layers in 125 00:08:21,040 --> 00:08:26,360 Speaker 1: between where there's different kinds of relationships between are you 126 00:08:26,560 --> 00:08:30,920 Speaker 1: funding the bank or you equity And so contingent capital says, well, 127 00:08:31,040 --> 00:08:33,320 Speaker 1: for most of the time, you're going to be on 128 00:08:33,360 --> 00:08:35,679 Speaker 1: the funding side, and so you're gonna look like a 129 00:08:35,679 --> 00:08:39,880 Speaker 1: bond and you represent a safe asset. But if things 130 00:08:39,960 --> 00:08:44,280 Speaker 1: get difficult, we're going to push those losses down into you. 131 00:08:44,400 --> 00:08:46,959 Speaker 1: And so the difficulty that you're you're talking about, Mike, 132 00:08:47,080 --> 00:08:49,720 Speaker 1: is that we're when you get into these crisis periods, 133 00:08:49,800 --> 00:08:53,800 Speaker 1: these securities flip. They flip from having a debt perspective 134 00:08:54,120 --> 00:08:57,280 Speaker 1: and being held by people who have the perspective and 135 00:08:57,400 --> 00:09:00,640 Speaker 1: risk tolerance of debt instruments to all of a sudden 136 00:09:00,679 --> 00:09:04,760 Speaker 1: looking like equity, and that flip happens very quickly, and 137 00:09:04,800 --> 00:09:08,439 Speaker 1: so you can imagine what the pricing impact is when 138 00:09:08,600 --> 00:09:11,120 Speaker 1: all of a sudden, the security that people think is 139 00:09:11,200 --> 00:09:15,840 Speaker 1: like debt, safe, stable income generating all of a sudden 140 00:09:15,880 --> 00:09:19,199 Speaker 1: turns into equity, much higher volatility, and in this case 141 00:09:19,400 --> 00:09:21,960 Speaker 1: the potential would lose money, and so the price impacts 142 00:09:22,000 --> 00:09:24,880 Speaker 1: are are quite dramatic. And when that shift happens, the 143 00:09:24,880 --> 00:09:27,959 Speaker 1: other thing that happens is liquidity, the price, the bid 144 00:09:27,960 --> 00:09:31,160 Speaker 1: ask the change, the ability to move in and out 145 00:09:31,160 --> 00:09:34,520 Speaker 1: of those securities becomes very very expensive and very difficult 146 00:09:34,720 --> 00:09:38,679 Speaker 1: because it's like a call option right where the strike 147 00:09:38,800 --> 00:09:42,280 Speaker 1: is at expery. You you really don't know whether the 148 00:09:42,400 --> 00:09:44,560 Speaker 1: value is going to be par or the value is 149 00:09:44,559 --> 00:09:47,960 Speaker 1: going to be something significantly below that, and so it's 150 00:09:48,000 --> 00:09:50,960 Speaker 1: it's really hard to move. Those securities really should be 151 00:09:51,000 --> 00:09:54,480 Speaker 1: held by folks who who can absorb the equity price 152 00:09:54,600 --> 00:09:57,560 Speaker 1: if that comes, because if you try to trade around that, 153 00:09:57,840 --> 00:10:01,199 Speaker 1: it becomes very very expensive. Well that's why I asked, 154 00:10:01,240 --> 00:10:03,800 Speaker 1: because you know this, so would you buy them? I 155 00:10:03,840 --> 00:10:07,040 Speaker 1: mean they you're going to sell these two sophisticated investors 156 00:10:07,040 --> 00:10:09,600 Speaker 1: in theory, but sophisticated investors are going to know what 157 00:10:09,640 --> 00:10:12,680 Speaker 1: you just said, and there's been a question about whether 158 00:10:12,679 --> 00:10:15,120 Speaker 1: these will work, and it it begins to look when 159 00:10:15,120 --> 00:10:18,280 Speaker 1: you look at Deutsche's coco price now it's down another 160 00:10:18,320 --> 00:10:20,800 Speaker 1: four percent today, it begins to look like this is 161 00:10:20,800 --> 00:10:23,320 Speaker 1: not something that is actually going to help you in 162 00:10:23,360 --> 00:10:26,680 Speaker 1: the long run. Well, remember, the cocoas are are for 163 00:10:26,720 --> 00:10:30,800 Speaker 1: the benefit of the capital and therefore the benefit of 164 00:10:30,840 --> 00:10:34,000 Speaker 1: the stability of the bank's balance sheets. So when you 165 00:10:34,080 --> 00:10:37,320 Speaker 1: issue them, you issue them at par and the bank 166 00:10:37,400 --> 00:10:41,120 Speaker 1: gets that par level afterwards. The market value is the 167 00:10:41,160 --> 00:10:43,640 Speaker 1: impact on the investor, not the impact on the bank. 168 00:10:43,840 --> 00:10:48,240 Speaker 1: So that the securities work because they generate capital. That 169 00:10:48,360 --> 00:10:51,560 Speaker 1: capital the market value decline is basically saying the market 170 00:10:51,640 --> 00:10:53,880 Speaker 1: is pricing in the fact that the cocos are going 171 00:10:53,920 --> 00:10:56,720 Speaker 1: to work, that they are going to absorb those losses. 172 00:10:57,160 --> 00:10:59,160 Speaker 1: I'll agree with that. And there's a lot of fancy 173 00:10:59,760 --> 00:11:03,800 Speaker 1: uh financial philosophy there is. Well, the fact is a 174 00:11:03,840 --> 00:11:06,240 Speaker 1: stock price. A lot of academics will say it doesn't 175 00:11:06,280 --> 00:11:10,800 Speaker 1: matter bologna, it's about confidence. Is Well, we've seen that 176 00:11:10,920 --> 00:11:14,440 Speaker 1: time and time and time again in history. What do 177 00:11:14,520 --> 00:11:16,280 Speaker 1: the adults in the room. I have to do to 178 00:11:16,400 --> 00:11:19,160 Speaker 1: restore confidence? What is your study? You know, your years 179 00:11:19,160 --> 00:11:24,200 Speaker 1: of Carnegie Mellon, What is the study of an history institute? 180 00:11:24,240 --> 00:11:27,760 Speaker 1: Can can institutions restore confidence? Or do they just have 181 00:11:27,840 --> 00:11:30,440 Speaker 1: to flat out clear markets? So so it goes back 182 00:11:30,480 --> 00:11:34,320 Speaker 1: to that the first points I made about how structurally 183 00:11:34,480 --> 00:11:37,760 Speaker 1: different the system is confidence shocks in a in a 184 00:11:38,480 --> 00:11:43,120 Speaker 1: Western style financial system fractional reserve banking. Right, This goes 185 00:11:43,160 --> 00:11:46,400 Speaker 1: back to the history of our system and why we 186 00:11:46,440 --> 00:11:51,800 Speaker 1: have central banks to restore uh stability because when you 187 00:11:51,880 --> 00:11:54,480 Speaker 1: lose confidence, then you get these runs on the bank. 188 00:11:54,559 --> 00:11:57,360 Speaker 1: So you had lender of last resort as as a 189 00:11:57,360 --> 00:12:01,120 Speaker 1: as a band aid over that. Today the structural system 190 00:12:01,240 --> 00:12:06,960 Speaker 1: has changed where you you as a precondition to the system, 191 00:12:07,080 --> 00:12:11,040 Speaker 1: you have that liquidity support, particularly in Europe already in place. 192 00:12:11,080 --> 00:12:15,520 Speaker 1: So that buys you more time. It doesn't solve the 193 00:12:15,600 --> 00:12:19,440 Speaker 1: problem because the problem of any of these systemic risks 194 00:12:19,440 --> 00:12:23,040 Speaker 1: around banks is not the funding, but the capitalization, the 195 00:12:23,160 --> 00:12:27,920 Speaker 1: uncertainty around the asset side, and that's ultimately the solution here. 196 00:12:27,960 --> 00:12:30,920 Speaker 1: You've you've got to reduce the uncertainty around the asset 197 00:12:31,000 --> 00:12:35,160 Speaker 1: side and stabilize the capital, stabilizing the capital. Right, you 198 00:12:35,200 --> 00:12:37,680 Speaker 1: had an external shock, you had a fourteen billion dollar 199 00:12:37,720 --> 00:12:41,920 Speaker 1: headline and and that caused some uncertainty about the stability 200 00:12:41,920 --> 00:12:44,560 Speaker 1: of the count. So there's a regression function. Why equals 201 00:12:44,679 --> 00:12:46,040 Speaker 1: you know, let me let me do this first and 202 00:12:46,080 --> 00:12:49,600 Speaker 1: we'll get back to the math. Mike mckeeson, Let everybody 203 00:12:49,600 --> 00:12:51,680 Speaker 1: take a break before you get a break before we 204 00:12:51,720 --> 00:12:56,240 Speaker 1: get to UH limary regressions or quadratic Jeffrey Rosenberg with 205 00:12:56,360 --> 00:13:00,000 Speaker 1: US and what you just said about fourteen billion UH 206 00:13:00,040 --> 00:13:02,560 Speaker 1: gets you back to a linear function. Why equals a 207 00:13:02,880 --> 00:13:06,040 Speaker 1: X plus b Y plus ez plus the risk on 208 00:13:06,120 --> 00:13:09,640 Speaker 1: the end the epsilon? Are you suggesting that the massive 209 00:13:09,720 --> 00:13:12,439 Speaker 1: waiting of what we're in at the end of September 210 00:13:13,080 --> 00:13:17,880 Speaker 1: is about that US proposed fine of Deutsche Bank. Is 211 00:13:17,880 --> 00:13:20,360 Speaker 1: that the A X and the equation and has the 212 00:13:20,360 --> 00:13:23,760 Speaker 1: big waiting. Well, certainly that was a surprise to the 213 00:13:23,800 --> 00:13:26,600 Speaker 1: market and and it's and it's a big number, and 214 00:13:26,600 --> 00:13:29,840 Speaker 1: it's a big Bilbert at the Justice Department moved Deutsche 215 00:13:29,840 --> 00:13:34,200 Speaker 1: Bank last week by saying we would maybe amend with 216 00:13:34,320 --> 00:13:37,400 Speaker 1: European banks. So this is not the first time that 217 00:13:37,440 --> 00:13:41,319 Speaker 1: we've had these these situations that the differences is the 218 00:13:41,360 --> 00:13:44,880 Speaker 1: manner in which the information came to the public's attention, 219 00:13:45,280 --> 00:13:47,920 Speaker 1: and that the headline number came out and the headline 220 00:13:47,960 --> 00:13:51,640 Speaker 1: number had to be addressed by Deutsche Bank, and and 221 00:13:51,679 --> 00:13:55,400 Speaker 1: that's just a much bigger number than anyone was anticipating. 222 00:13:55,400 --> 00:14:00,480 Speaker 1: You know, the settlement numbers for you know, analysts look at, okay, well, 223 00:14:00,480 --> 00:14:04,600 Speaker 1: what's a reasonable way to extrapolate what the eventual settlement 224 00:14:04,600 --> 00:14:06,199 Speaker 1: would be. You look at the size of the pre 225 00:14:06,280 --> 00:14:10,840 Speaker 1: crisis banks exposure, what was its contribution to the crisis 226 00:14:10,880 --> 00:14:13,800 Speaker 1: based on its underwriting, the total size of its mortgages. 227 00:14:14,520 --> 00:14:16,600 Speaker 1: You go, you go through the process, and you had 228 00:14:16,679 --> 00:14:19,240 Speaker 1: numbers that were a fraction of that size. And so 229 00:14:19,640 --> 00:14:21,680 Speaker 1: the answer to your earlier question, how do you get 230 00:14:21,680 --> 00:14:23,800 Speaker 1: back to stability, Well, you've got to get to some 231 00:14:23,880 --> 00:14:27,160 Speaker 1: clarity around exactly what the size of that number will be. 232 00:14:27,600 --> 00:14:29,880 Speaker 1: And once you have clarified that, and if that number 233 00:14:29,960 --> 00:14:33,920 Speaker 1: is more in line with what analysts have been anticipating, 234 00:14:34,040 --> 00:14:35,840 Speaker 1: then you can then you can get to the point 235 00:14:35,840 --> 00:14:40,320 Speaker 1: where Okay, the Chinese assets sale, the the retained earnings, 236 00:14:40,360 --> 00:14:43,000 Speaker 1: the ability to raise a bit of capital, all of 237 00:14:43,040 --> 00:14:46,640 Speaker 1: that can then solve that capital whole and you remove 238 00:14:46,760 --> 00:14:49,040 Speaker 1: the confidence shock and you remove the uncertain On this 239 00:14:49,240 --> 00:14:51,960 Speaker 1: most interesting and nuanced Friday, we're going to continue with 240 00:14:52,040 --> 00:14:55,760 Speaker 1: Jeffrey Rosenberg of Black Rock. Michael McKee after a terrific 241 00:14:55,880 --> 00:14:59,760 Speaker 1: set of interviews in Dublin, remains no doubt playing golf 242 00:15:00,040 --> 00:15:03,960 Speaker 1: this weekend or enjoying the sites of Dublin. Wouldn't that 243 00:15:03,960 --> 00:15:10,520 Speaker 1: be lovely interviewing Walter and I are playing golf? Michael, 244 00:15:10,520 --> 00:15:13,080 Speaker 1: your thoughts in Dublin. I would say the filter is 245 00:15:13,120 --> 00:15:16,560 Speaker 1: different in Dublin on European banking than it is from 246 00:15:16,760 --> 00:15:20,480 Speaker 1: New York. Yes, because you're obviously that much closer to 247 00:15:20,520 --> 00:15:23,560 Speaker 1: the European bank situation. And of course Ireland in the 248 00:15:23,560 --> 00:15:27,120 Speaker 1: Eurozone and the Irish have gone through this as a 249 00:15:27,160 --> 00:15:30,440 Speaker 1: banking crisis, so they are front and center in terms 250 00:15:30,440 --> 00:15:32,960 Speaker 1: of advice on what the Europeans should do, which is 251 00:15:33,040 --> 00:15:35,280 Speaker 1: do what we did, bite the bullet, get rid of 252 00:15:35,320 --> 00:15:38,640 Speaker 1: the non performing loans. But they recognize the way you 253 00:15:38,720 --> 00:15:41,520 Speaker 1: do that has changed because the rules have changed. So 254 00:15:42,400 --> 00:15:46,080 Speaker 1: I think Will and Batter was he had it's some 255 00:15:46,160 --> 00:15:49,120 Speaker 1: interesting views on the fact that they could just go 256 00:15:49,160 --> 00:15:52,200 Speaker 1: ahead and do it, But I don't think the people 257 00:15:52,240 --> 00:15:57,000 Speaker 1: in banking feel it's quite that simple. Yeah, well, everybody 258 00:15:57,040 --> 00:16:01,400 Speaker 1: has an opinion. Bouder's answer is negative rates have advocacy 259 00:16:01,560 --> 00:16:05,880 Speaker 1: here for all, and the idea of the spread being there, 260 00:16:06,400 --> 00:16:08,920 Speaker 1: and that we've really, yes, yet to test the proper 261 00:16:09,080 --> 00:16:14,080 Speaker 1: usage of negative range. There is something Jeff, you and 262 00:16:14,120 --> 00:16:18,520 Speaker 1: I know that math of say black shoals continuous functions 263 00:16:18,600 --> 00:16:21,840 Speaker 1: is convenient and squishy, and that the real world we 264 00:16:21,960 --> 00:16:24,640 Speaker 1: deal in is t T plus one T plus two. 265 00:16:25,080 --> 00:16:27,600 Speaker 1: We can look back at T minus one. Let us 266 00:16:27,640 --> 00:16:30,800 Speaker 1: start with Cherry Yellin's press conference where there seems to 267 00:16:30,800 --> 00:16:34,240 Speaker 1: be a mass confusion where we are in the time 268 00:16:34,280 --> 00:16:37,360 Speaker 1: function to begin with, Can a central bank get out 269 00:16:37,400 --> 00:16:39,880 Speaker 1: in front of the debate and get out in front 270 00:16:39,880 --> 00:16:44,400 Speaker 1: of defense events at T plus one T plus two 271 00:16:44,760 --> 00:16:48,080 Speaker 1: or do they just have to wait for the evidence 272 00:16:48,120 --> 00:16:50,760 Speaker 1: of t plos four T plus five. So a lot 273 00:16:50,800 --> 00:16:54,240 Speaker 1: of that conversation has been around UH inflation and inflation 274 00:16:54,280 --> 00:16:59,680 Speaker 1: expectations and will they act based on a forecast of 275 00:17:00,040 --> 00:17:02,720 Speaker 1: lation meeting their target of two percent, or where they 276 00:17:02,760 --> 00:17:06,560 Speaker 1: act based on the actual inflation. And they have in 277 00:17:06,640 --> 00:17:09,479 Speaker 1: the beginning they talked about moving under the forecast and 278 00:17:09,720 --> 00:17:13,159 Speaker 1: and they've really shifted the goal posts in terms of 279 00:17:13,200 --> 00:17:16,639 Speaker 1: talking about waiting for actual inflation. But even when you 280 00:17:16,680 --> 00:17:20,040 Speaker 1: talk about even when you talk about actual inflation, the 281 00:17:20,080 --> 00:17:23,320 Speaker 1: fact is core PC is one point six percent, but 282 00:17:23,400 --> 00:17:28,480 Speaker 1: the interpretation by various members of them depends on whether 283 00:17:28,520 --> 00:17:31,480 Speaker 1: you round that number up. Stand Fisher rounds up. One 284 00:17:31,520 --> 00:17:34,960 Speaker 1: point six is pretty close. Leo Branard, she rounds down. 285 00:17:35,320 --> 00:17:38,640 Speaker 1: We're far away. So even when the facts are not 286 00:17:38,800 --> 00:17:42,159 Speaker 1: in dispute, the interpretation of those facts, the communication around that, 287 00:17:42,400 --> 00:17:44,040 Speaker 1: and and it really starts to add a lot of 288 00:17:44,080 --> 00:17:47,080 Speaker 1: volatility uncertainty in the market. And Michael McGhee to translate 289 00:17:47,200 --> 00:17:51,320 Speaker 1: difference equation or recurrence function mathematics, it's like getting out 290 00:17:51,320 --> 00:17:55,440 Speaker 1: in front of Broncos Buccaneers football four oh five pm, 291 00:17:55,480 --> 00:17:58,159 Speaker 1: I believe on Sunday, or do you wait for the 292 00:17:58,400 --> 00:18:03,680 Speaker 1: evidence of the bronc was to defeat the mighty Buccaneers. Uh. Well, 293 00:18:03,760 --> 00:18:06,320 Speaker 1: if you're a fan, you hide your head under the 294 00:18:06,320 --> 00:18:08,480 Speaker 1: covers until the game is over. So that's what Janney 295 00:18:08,760 --> 00:18:14,600 Speaker 1: are you are? You are the cover. Actually, what I'm doing, 296 00:18:14,680 --> 00:18:18,280 Speaker 1: Tom is looking at the price of Brent crude because 297 00:18:18,280 --> 00:18:21,200 Speaker 1: that is going up, and as it goes up, that's 298 00:18:21,200 --> 00:18:23,920 Speaker 1: going to bring inflation higher, and that's going to bring 299 00:18:24,000 --> 00:18:27,639 Speaker 1: us closer to the two percent target. But the fet is, 300 00:18:27,880 --> 00:18:31,600 Speaker 1: while they say they look at the PC that's where 301 00:18:31,640 --> 00:18:34,520 Speaker 1: they base their two percent number on, the truth is, Jeff, 302 00:18:34,560 --> 00:18:39,080 Speaker 1: they really are looking at the inflation expectations numbers and 303 00:18:39,119 --> 00:18:42,359 Speaker 1: you can pick your indicator, and those don't move nearly 304 00:18:42,600 --> 00:18:46,240 Speaker 1: as much as the CPI and PC does. I mean, 305 00:18:46,240 --> 00:18:49,240 Speaker 1: the markets aren't convinced yet that we're going to see 306 00:18:49,440 --> 00:18:53,840 Speaker 1: inflation generated by these guys. So until that turns, it 307 00:18:53,920 --> 00:18:57,080 Speaker 1: seems hard to believe they would do a whole lot um. 308 00:18:57,200 --> 00:19:00,359 Speaker 1: What's it going to take to convince the people who 309 00:19:00,640 --> 00:19:03,280 Speaker 1: by the futures that there is an issue and they 310 00:19:03,320 --> 00:19:07,040 Speaker 1: should get ahead of any kind of inflation. So you're 311 00:19:07,080 --> 00:19:09,200 Speaker 1: you raised a whole bunch of really important points. First, 312 00:19:09,240 --> 00:19:11,479 Speaker 1: the thing that I would I would correct or disagree 313 00:19:11,480 --> 00:19:13,159 Speaker 1: a little bit is you don't need oil prices to 314 00:19:13,160 --> 00:19:16,480 Speaker 1: go up for the oil contribution to inflation UH to 315 00:19:16,560 --> 00:19:19,000 Speaker 1: go up. You just need oil to to stabilize in 316 00:19:19,040 --> 00:19:21,119 Speaker 1: the year over year figures will start to increase. The 317 00:19:21,160 --> 00:19:24,840 Speaker 1: other big factor is the dollar and and similarly, if 318 00:19:24,880 --> 00:19:27,840 Speaker 1: you just keep the dollar stable, the dollar contribution on 319 00:19:27,880 --> 00:19:31,119 Speaker 1: import prices will also lead to higher inflation figures. So 320 00:19:31,440 --> 00:19:35,400 Speaker 1: baked into the cake based on nothing changing around those variables, 321 00:19:35,440 --> 00:19:39,040 Speaker 1: you're gonna have inflation start to feed back into the figures. 322 00:19:39,040 --> 00:19:41,679 Speaker 1: And most importantly, when you break down inflation, it's the 323 00:19:41,720 --> 00:19:45,399 Speaker 1: goods prices, the oil related impact, the dollar impact holding 324 00:19:45,440 --> 00:19:48,439 Speaker 1: down goods inflation that starts to dissipate, it starts to 325 00:19:48,440 --> 00:19:50,520 Speaker 1: come off. Inflation is going to start to go up, 326 00:19:50,680 --> 00:19:52,920 Speaker 1: so the numbers on a forecast basis are going to 327 00:19:53,000 --> 00:19:55,080 Speaker 1: start to go up. And what we've learned from the 328 00:19:55,119 --> 00:19:58,399 Speaker 1: Bank of Japan and their experience is that people have 329 00:19:58,480 --> 00:20:01,720 Speaker 1: adaptive expectations on inflation. What does that mean. It simply 330 00:20:01,760 --> 00:20:04,840 Speaker 1: means we set our inflation expectations in the future based 331 00:20:04,840 --> 00:20:08,280 Speaker 1: on the inflation we've experienced in the past. So once 332 00:20:08,320 --> 00:20:11,720 Speaker 1: you start to see those inflation numbers come in, then 333 00:20:11,800 --> 00:20:15,199 Speaker 1: the inflation expectations start to rise as well, and you 334 00:20:15,240 --> 00:20:18,119 Speaker 1: can get this momentum going on inflation. And the hawks 335 00:20:18,160 --> 00:20:20,400 Speaker 1: on the committee, that's what they're worried about. They're worried 336 00:20:20,400 --> 00:20:24,480 Speaker 1: about getting too far behind the curve and not being anticipatory, 337 00:20:24,520 --> 00:20:28,200 Speaker 1: not being forward looking enough, and then having the more 338 00:20:28,280 --> 00:20:31,679 Speaker 1: historical experience of being in the position where the Feds 339 00:20:31,720 --> 00:20:33,919 Speaker 1: behind the curve, and that's where you see this debate, 340 00:20:34,119 --> 00:20:35,879 Speaker 1: so that the debate is not going to settle on 341 00:20:36,320 --> 00:20:39,080 Speaker 1: when they raise rates, but rather the pace that they 342 00:20:39,160 --> 00:20:42,159 Speaker 1: subsequently follow. And right now what they're telling you we're 343 00:20:42,200 --> 00:20:44,399 Speaker 1: going to be very slow. The issue will be whether 344 00:20:44,440 --> 00:20:47,760 Speaker 1: the market and the inflation evolution allows them to be 345 00:20:47,840 --> 00:20:50,040 Speaker 1: as slow as they would like to be, and that's 346 00:20:50,040 --> 00:20:52,520 Speaker 1: going to be the future issue for not that long 347 00:20:52,680 --> 00:20:55,280 Speaker 1: next year that will be really critical, particularly if we 348 00:20:55,320 --> 00:20:57,840 Speaker 1: start to see these inflation figures show up. You haven't 349 00:20:57,840 --> 00:20:59,880 Speaker 1: seen it in the markets as you as you pointed out, 350 00:21:00,000 --> 00:21:03,280 Speaker 1: because it's been a very very disappointing trade to be 351 00:21:03,520 --> 00:21:06,119 Speaker 1: hoping and expecting inflation to arise when every time you've 352 00:21:06,160 --> 00:21:08,320 Speaker 1: been disappointed on that. But do you think it's going 353 00:21:08,359 --> 00:21:10,959 Speaker 1: to start to turn? As the numbers turn, people will 354 00:21:11,000 --> 00:21:13,240 Speaker 1: begin to believe that it's going to happen and they'll 355 00:21:13,240 --> 00:21:15,360 Speaker 1: start pricing it in. I think you have this this 356 00:21:15,800 --> 00:21:19,000 Speaker 1: confluence of events where you have the kind of math 357 00:21:19,040 --> 00:21:21,680 Speaker 1: that cannot the math that's baked in the cake over 358 00:21:21,720 --> 00:21:24,680 Speaker 1: the year of a year figures around the oil and 359 00:21:24,720 --> 00:21:27,320 Speaker 1: the dollar impacts. You have the scenario where the FED 360 00:21:27,440 --> 00:21:30,119 Speaker 1: is acknowledging that and raising rates, and you have a 361 00:21:30,240 --> 00:21:35,520 Speaker 1: very low price in tips, for example, treasury inflation protection securities, 362 00:21:35,520 --> 00:21:39,919 Speaker 1: where where there's no cushion in the price to increases 363 00:21:39,960 --> 00:21:42,119 Speaker 1: in inflation. So the Fed's talking about a two percent target, 364 00:21:42,200 --> 00:21:45,320 Speaker 1: the TIPS markets pricing one and a half, so you 365 00:21:45,440 --> 00:21:47,959 Speaker 1: have some room there to catch up very quickly. It's 366 00:21:47,960 --> 00:21:50,080 Speaker 1: part of the reason why a little bit longer term perspective, 367 00:21:50,440 --> 00:21:53,720 Speaker 1: tips is a sector that we really think is something 368 00:21:53,760 --> 00:21:56,280 Speaker 1: to be thinking about. Fixing by tips. Is you've got 369 00:21:56,280 --> 00:21:59,960 Speaker 1: a certain asset price to a TIPS vehicle, and since 370 00:22:00,000 --> 00:22:04,560 Speaker 1: you're looking for a higher inflation that TIPS vehicles appreciates 371 00:22:04,840 --> 00:22:08,320 Speaker 1: two things here to yes one one one is one 372 00:22:08,440 --> 00:22:11,600 Speaker 1: is their most attractive when the increase in interest rates 373 00:22:11,600 --> 00:22:15,439 Speaker 1: that you expect comes about because of rising inflation. And 374 00:22:15,520 --> 00:22:19,040 Speaker 1: that's the whole story that I just told. But we 375 00:22:19,080 --> 00:22:22,760 Speaker 1: think about TIPS as as a substitution. Listeners in the 376 00:22:22,800 --> 00:22:25,040 Speaker 1: portfolio will think about TIPS in well, if I have 377 00:22:25,119 --> 00:22:28,120 Speaker 1: treasuries in my portfolio and if inflation is starting to rise, 378 00:22:28,119 --> 00:22:30,600 Speaker 1: I'm holding the treasuries in my portfolio for a different reason, 379 00:22:30,920 --> 00:22:35,000 Speaker 1: holding them for security for ballast in the portfolio in 380 00:22:35,000 --> 00:22:37,720 Speaker 1: case something goes wrong, but it might be better to 381 00:22:37,800 --> 00:22:40,800 Speaker 1: substitute that for tips if I'm worried at the same 382 00:22:40,880 --> 00:22:43,200 Speaker 1: time that inflation maybe going. You're not doing a sell 383 00:22:43,240 --> 00:22:45,159 Speaker 1: side thing. But what you're calling the fed here are we? 384 00:22:45,200 --> 00:22:48,400 Speaker 1: Are we done for the year? I mean Novembers are dead, Madia? 385 00:22:48,440 --> 00:22:50,399 Speaker 1: What are we gonna do in December? December? You know 386 00:22:50,440 --> 00:22:53,600 Speaker 1: every everybody's expectations are you know, conditional on What we 387 00:22:53,680 --> 00:22:56,639 Speaker 1: know today is that December is the is the is 388 00:22:56,720 --> 00:23:00,360 Speaker 1: the increase. And the key here, however, is if they 389 00:23:00,400 --> 00:23:05,480 Speaker 1: increase in December, December basis point will look very different 390 00:23:05,680 --> 00:23:09,280 Speaker 1: than December two fifteen. Remembered last year when they gave 391 00:23:09,440 --> 00:23:13,199 Speaker 1: they gave you four times a year expectation. That has 392 00:23:13,280 --> 00:23:16,520 Speaker 1: gone so it's gonna be twenty five coupled with but 393 00:23:16,600 --> 00:23:19,159 Speaker 1: don't worry, We're gonna be very very slow. Come on, 394 00:23:19,240 --> 00:23:20,960 Speaker 1: is it a one off? Not a one off? There 395 00:23:21,040 --> 00:23:24,360 Speaker 1: you say this for the end of the conversation. Are 396 00:23:24,400 --> 00:23:27,240 Speaker 1: they going to establish a vector to higher rates or 397 00:23:27,240 --> 00:23:29,159 Speaker 1: can they do a one and done not one and 398 00:23:29,240 --> 00:23:32,760 Speaker 1: done button a vector that is very very shallow. It's 399 00:23:32,840 --> 00:23:36,760 Speaker 1: one per year December's FED raised rates hike month, and 400 00:23:37,160 --> 00:23:40,520 Speaker 1: we'll rename in honor of Rosenberg. I put out on 401 00:23:40,560 --> 00:23:44,119 Speaker 1: Twitter row equals Envy linear momentum. It's sort of like 402 00:23:44,359 --> 00:23:46,720 Speaker 1: you know, we had to do. That's Friday. That's good. 403 00:23:47,359 --> 00:23:49,520 Speaker 1: It's the last day of September, so you you can 404 00:23:49,560 --> 00:23:51,480 Speaker 1: get away with the math for the rest of today. 405 00:23:51,480 --> 00:23:54,040 Speaker 1: But in October, I hear there may be a ban 406 00:23:54,200 --> 00:23:58,119 Speaker 1: on math. It's math free October this year, right, Yeah, 407 00:23:58,880 --> 00:24:02,200 Speaker 1: so do it out, can't Why you get the medication. 408 00:24:02,280 --> 00:24:04,840 Speaker 1: I'm gonna need it. Jeff Rozenberger, Black Rock, thank you 409 00:24:04,920 --> 00:24:10,800 Speaker 1: so much. Who you put your trust in matters. Investors 410 00:24:10,800 --> 00:24:14,159 Speaker 1: have put their trust in independent registered investment advisors to 411 00:24:14,200 --> 00:24:18,600 Speaker 1: the tune of four trillion dollars. Why they see their 412 00:24:18,680 --> 00:24:22,560 Speaker 1: role is to serve, not sell. That's why Charles Schwab 413 00:24:22,640 --> 00:24:25,600 Speaker 1: is committed to the success of over seven thousand independent 414 00:24:25,600 --> 00:24:30,480 Speaker 1: financial advisors who passionately dedicate themselves to helping people achieve 415 00:24:30,480 --> 00:24:34,800 Speaker 1: their financial goals. Learn more and find your independent advisor 416 00:24:34,880 --> 00:24:41,720 Speaker 1: dot com. From Carnegie Mellon, one of our historians, one 417 00:24:41,720 --> 00:24:45,080 Speaker 1: of our great economists, Alan Meltzer, Professor Meltzer has been 418 00:24:45,080 --> 00:24:48,159 Speaker 1: far too long in your recent note, you cite the 419 00:24:48,160 --> 00:24:52,040 Speaker 1: work of your colleague Marvin good Friend on the efficacy 420 00:24:52,320 --> 00:24:56,760 Speaker 1: of negative rates. Within the report, there was little talk 421 00:24:57,359 --> 00:25:00,800 Speaker 1: of the linkage of Meltzer or good Friend, end or 422 00:25:00,960 --> 00:25:08,520 Speaker 1: Krugman or abouter economics with the banking system. Do we 423 00:25:08,560 --> 00:25:12,320 Speaker 1: need to have our economics now of central banks think 424 00:25:12,520 --> 00:25:19,679 Speaker 1: more about the ramifications on commercial banking? Absolutely? Absolutely, I 425 00:25:19,680 --> 00:25:24,640 Speaker 1: mean they the Dodd Frank Act destroyed something like from 426 00:25:24,720 --> 00:25:31,399 Speaker 1: eight thousand to less than fifty banks. Those banks, medium sized, 427 00:25:31,440 --> 00:25:35,919 Speaker 1: small banks were the lenders too new and start up 428 00:25:36,000 --> 00:25:40,639 Speaker 1: businesses and to two smaller firms. And they did it 429 00:25:40,760 --> 00:25:43,240 Speaker 1: not on the basis of balance sheets, but on the 430 00:25:43,280 --> 00:25:48,080 Speaker 1: basis of character. And they were mighty important in the 431 00:25:48,119 --> 00:25:51,400 Speaker 1: growth of the American economy. And that they've been destroyed, 432 00:25:51,760 --> 00:25:57,359 Speaker 1: and it's destroyed the strength of the financial system, and 433 00:25:57,400 --> 00:26:03,360 Speaker 1: it's carnalized the system into four or five enormous banks. 434 00:26:03,400 --> 00:26:06,880 Speaker 1: Just a terrible piece of legislation. Alan Meltzer I sat 435 00:26:06,920 --> 00:26:10,800 Speaker 1: behind Martin Martin Feldstein of Harvard and Dean Hobbard Glenn 436 00:26:10,840 --> 00:26:13,919 Speaker 1: Hubbard of Columbia at the Trump speech at the Economic 437 00:26:14,240 --> 00:26:16,400 Speaker 1: Club of New York. If you'd been in the front 438 00:26:16,520 --> 00:26:18,800 Speaker 1: row that speech. You would have thrown a bread roll 439 00:26:19,280 --> 00:26:22,600 Speaker 1: at Mr Trump when he speaks about the politics and 440 00:26:22,640 --> 00:26:27,679 Speaker 1: politicization of your central bank. How do you respond? I 441 00:26:27,720 --> 00:26:32,280 Speaker 1: think he's a right. The central Bank did what no 442 00:26:32,480 --> 00:26:35,080 Speaker 1: central bank should do and what the Federals the original 443 00:26:35,119 --> 00:26:39,520 Speaker 1: Federal Reserve Act tried mightily to prevent. That is, it 444 00:26:39,960 --> 00:26:44,080 Speaker 1: financed the government's deficit a zero interest rates. That's the 445 00:26:44,880 --> 00:26:48,720 Speaker 1: giving up, the surrender of independence. I was asked by 446 00:26:48,720 --> 00:26:52,960 Speaker 1: a British journalist, did the Federal Reserve lose its independence? 447 00:26:53,200 --> 00:26:56,320 Speaker 1: I said, no, it gave it away. It would Would 448 00:26:56,320 --> 00:26:58,439 Speaker 1: you agree, Allen, that they did not do it because 449 00:26:58,480 --> 00:27:02,720 Speaker 1: they wanted to help Barack Obama or Hillary Clinton in 450 00:27:02,760 --> 00:27:05,359 Speaker 1: a political race against Donald Trump. They did it because 451 00:27:05,760 --> 00:27:07,720 Speaker 1: they felt it was the right thing to do. You 452 00:27:07,840 --> 00:27:10,480 Speaker 1: disagree that it's the right thing to do. But they 453 00:27:10,520 --> 00:27:13,840 Speaker 1: did not sell out for political reasons. Well, I don't 454 00:27:13,840 --> 00:27:17,280 Speaker 1: know what was in their minds uh, And I'm sure 455 00:27:17,320 --> 00:27:20,040 Speaker 1: that some of them may have wanted to help the 456 00:27:20,119 --> 00:27:23,199 Speaker 1: administration and believe that they were doing it. But the 457 00:27:23,240 --> 00:27:25,760 Speaker 1: biggest problem that I have with central banks at the moment, 458 00:27:25,800 --> 00:27:29,000 Speaker 1: and not just the FED, is that they're all printing 459 00:27:29,040 --> 00:27:32,439 Speaker 1: money in the belief that they're going to do something 460 00:27:32,440 --> 00:27:35,680 Speaker 1: about the economy. The economy in the United States and 461 00:27:35,800 --> 00:27:39,040 Speaker 1: Britain and in Japan, oh sorry, in Europe and in 462 00:27:39,160 --> 00:27:45,040 Speaker 1: Japan have all all have big, real problems. Monetary policy 463 00:27:45,119 --> 00:27:50,359 Speaker 1: cannot do anything about those problems except create future problems. 464 00:27:50,840 --> 00:27:55,360 Speaker 1: But they can't solve the real problems because they are 465 00:27:55,440 --> 00:27:59,960 Speaker 1: real problems, not money monetary problems. And the first less 466 00:28:00,000 --> 00:28:03,960 Speaker 1: in an economics is to separate the two. Well, are 467 00:28:04,000 --> 00:28:08,439 Speaker 1: they at this point doing harm or just doing no good? 468 00:28:10,960 --> 00:28:14,560 Speaker 1: I'll leave that distinction to others. Well, I mean the 469 00:28:14,640 --> 00:28:17,960 Speaker 1: question comes up though, because it is monetary policy at 470 00:28:17,960 --> 00:28:21,199 Speaker 1: this point. Um, you disagree with what they're doing, but 471 00:28:21,440 --> 00:28:25,320 Speaker 1: what's the impact of it. The impact is that they're 472 00:28:25,359 --> 00:28:30,639 Speaker 1: doing no good. They're printing money, building up future problems. 473 00:28:30,920 --> 00:28:35,080 Speaker 1: I mean, do they have a proposal for what they're 474 00:28:35,080 --> 00:28:36,959 Speaker 1: going to do about the two and a half trillion 475 00:28:37,000 --> 00:28:40,840 Speaker 1: dollars of idle reserves sitting on the bank balance sheets? No, 476 00:28:41,000 --> 00:28:44,400 Speaker 1: they do not, So no one can know whether that 477 00:28:45,000 --> 00:28:47,720 Speaker 1: what damage there is in the future that's going to 478 00:28:48,760 --> 00:28:52,520 Speaker 1: Professor Meltzer, I've always kidded you about writing volume three 479 00:28:52,600 --> 00:28:55,600 Speaker 1: of your History of the Federal Reserve. You may you 480 00:28:55,640 --> 00:28:57,560 Speaker 1: may want to in the in the energy that you 481 00:28:57,680 --> 00:29:01,760 Speaker 1: have in the coming decade, um want to consider rules 482 00:29:01,760 --> 00:29:04,640 Speaker 1: and discretion? Where are we in the great debate of 483 00:29:04,720 --> 00:29:07,680 Speaker 1: rules and discretion? If you and Mr Krugman were to 484 00:29:07,720 --> 00:29:12,280 Speaker 1: have a cup of coffee at the Temper School in Pittsburgh, Well, 485 00:29:12,280 --> 00:29:15,840 Speaker 1: how would the two of you talk about rules and discretion? 486 00:29:16,200 --> 00:29:18,640 Speaker 1: Well I would be for them, and and I'm quite 487 00:29:18,640 --> 00:29:22,240 Speaker 1: sure he would be against them. But look, let's look 488 00:29:22,280 --> 00:29:25,200 Speaker 1: at the at two things which are critical for that. 489 00:29:25,640 --> 00:29:28,960 Speaker 1: Look at the history of the FED in a hundred years, 490 00:29:29,560 --> 00:29:34,720 Speaker 1: the period in which in which Alan Greenspan from two 491 00:29:34,720 --> 00:29:37,680 Speaker 1: thousand two more or less followed the rule and had 492 00:29:37,680 --> 00:29:40,800 Speaker 1: a medium term strategy, which is what the rule is 493 00:29:40,840 --> 00:29:45,280 Speaker 1: supposed to provide, a medium term strategy. We had the 494 00:29:45,320 --> 00:29:50,400 Speaker 1: best monetary policy ever that we've had. So that's point one. 495 00:29:50,520 --> 00:29:53,560 Speaker 1: They've never been able to do that with discretion. The 496 00:29:53,680 --> 00:29:59,360 Speaker 1: second thing is compare the more or less moderate programmed 497 00:30:00,240 --> 00:30:05,160 Speaker 1: Swiss National Bank under Breton Woods. The Swiss blank was 498 00:30:05,160 --> 00:30:08,880 Speaker 1: worth twenty cents, It's now worth more than a door. 499 00:30:09,360 --> 00:30:14,000 Speaker 1: Has that hurt Switzerland? No Switzerland g d P per 500 00:30:14,080 --> 00:30:17,720 Speaker 1: capita is now substance ley higher than the U S 501 00:30:17,800 --> 00:30:20,480 Speaker 1: G d P per capita. So they've done better than 502 00:30:20,520 --> 00:30:22,560 Speaker 1: we have, and they've done better than we have by 503 00:30:22,560 --> 00:30:26,240 Speaker 1: a modest policy of medium terms strategy, and that's what 504 00:30:26,280 --> 00:30:30,600 Speaker 1: we lack. Professor you mentioned Switzerland. Adjacent is Germany, which 505 00:30:30,640 --> 00:30:33,800 Speaker 1: is challenged within their banking system. What is the Alan 506 00:30:33,880 --> 00:30:38,240 Speaker 1: Meltzer prescription for Mario drag Chancellor Miracle and the German 507 00:30:38,280 --> 00:30:44,280 Speaker 1: people to bring stability to their banking they and they 508 00:30:44,320 --> 00:30:49,320 Speaker 1: need to solve the real problems of the European Central 509 00:30:49,320 --> 00:30:53,440 Speaker 1: Bank agreement. I mean when they when they agreed to 510 00:30:53,480 --> 00:30:57,680 Speaker 1: the European Central Bank, they took away the one mechanism 511 00:30:57,760 --> 00:31:01,800 Speaker 1: that they used to adjust Germany, France and Italy the 512 00:31:01,880 --> 00:31:06,720 Speaker 1: major countries there to to each other, and they didn't 513 00:31:06,760 --> 00:31:10,040 Speaker 1: put anything in its place. So the Germans have been 514 00:31:10,640 --> 00:31:17,000 Speaker 1: pretty good about adjusting prices and wages to reflect to 515 00:31:17,240 --> 00:31:22,440 Speaker 1: maintain the productivity of Germany. But France and Italy, the 516 00:31:22,480 --> 00:31:26,240 Speaker 1: second and third largest countries, are unable to do that politically, 517 00:31:26,880 --> 00:31:31,080 Speaker 1: try as they might, and they have tried in modest ways, 518 00:31:31,960 --> 00:31:36,120 Speaker 1: so there is no adjustment mechanism. So the way to 519 00:31:36,200 --> 00:31:39,760 Speaker 1: get the system to move again to begin to land again, 520 00:31:40,080 --> 00:31:43,320 Speaker 1: to grow again. The way he is to do the 521 00:31:43,400 --> 00:31:47,480 Speaker 1: real harm, to to adjust to the real arm which 522 00:31:47,560 --> 00:31:52,160 Speaker 1: comes from the political power that prevents any kind of adjustment. 523 00:31:53,640 --> 00:31:55,640 Speaker 1: And until they do that, there's not going to be 524 00:31:55,800 --> 00:32:00,120 Speaker 1: a successful ECB. And there's nothing that Mr d do 525 00:32:00,240 --> 00:32:03,080 Speaker 1: about that. Well, there you go. You just answered my question. 526 00:32:03,120 --> 00:32:05,360 Speaker 1: That's not a problem that the ECB can deal with. 527 00:32:05,400 --> 00:32:08,479 Speaker 1: That has to come from the political leaders. Yes, of 528 00:32:08,520 --> 00:32:13,320 Speaker 1: course it's a political problem. But then uh is draggy 529 00:32:13,440 --> 00:32:16,560 Speaker 1: trying to do too much? Is he sort of whistling 530 00:32:16,600 --> 00:32:18,800 Speaker 1: past the graveyard spinning into the wind? However you want 531 00:32:18,800 --> 00:32:23,880 Speaker 1: to put it with his monetary policy in a in 532 00:32:23,920 --> 00:32:27,240 Speaker 1: a union that the policy doesn't work because of the 533 00:32:27,280 --> 00:32:32,440 Speaker 1: political side, that's correct. The policy doesn't work because it's 534 00:32:32,480 --> 00:32:36,360 Speaker 1: not a monetary problem. It's a real political it's a 535 00:32:36,360 --> 00:32:41,160 Speaker 1: real problem which can be solved by political activity. That is, 536 00:32:41,240 --> 00:32:44,960 Speaker 1: by the governments of France and Italy doing what to 537 00:32:45,480 --> 00:32:47,960 Speaker 1: some extent the government's want to do, but which the 538 00:32:48,120 --> 00:32:51,440 Speaker 1: parliaments won't agree to. Alan Meltzer, thank you so much 539 00:32:51,440 --> 00:32:55,440 Speaker 1: for the time this morning. Professor Meltzer's university Professor Carnegie 540 00:32:55,520 --> 00:33:00,920 Speaker 1: Mellon University Thanks for listening to The Bloombergs of England's podcast. 541 00:33:01,280 --> 00:33:06,360 Speaker 1: Subscribe and listen to interviews on iTunes, SoundCloud, or whichever 542 00:33:06,520 --> 00:33:10,440 Speaker 1: podcast platform you prefer. I'm on Twitter at Tom Keane, 543 00:33:10,840 --> 00:33:14,800 Speaker 1: Michael McKee is at Economy Before the podcast. You can 544 00:33:14,840 --> 00:33:25,240 Speaker 1: always catch us worldwide. I'm Bloomberg Radio. Who you put 545 00:33:25,280 --> 00:33:29,160 Speaker 1: your trust in matters. Investors have put their trust in 546 00:33:29,160 --> 00:33:33,400 Speaker 1: independent registered investment advisors to the tune of four trillion dollars. 547 00:33:33,840 --> 00:33:40,520 Speaker 1: Why learn more and find your independent advisor dot com