Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the All Thoughts Podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Joe. Wasn't thal Joe?
Speaker 2: You know what sucks about getting old?
Speaker 4: You know what?
Speaker 1: I twisted him.
Speaker 3: I hurt my neck the other day and I was like,
Speaker 3: I said, you know, I was washing dishes and I
Speaker 3: hurt my neck, And I said, getting old is such
Speaker 3: a crime.
Speaker 5: I hate it.
Speaker 3: But what were you getting?
Speaker 2: Where were you going to Well, I was going to say,
Speaker 2: you start to lose shared experiences with a lot of people.
Speaker 2: And I realized this whenever I make a Simpsons joke.
Speaker 2: There are a lot of people now who do not
Speaker 2: get that frame of reference. And I was thinking about
Speaker 2: this in relation to the financial system, and specifically in
Speaker 2: relation to the two thousand and eight financial crisis.
Speaker 3: No, I've had this thought in the last year, which
Speaker 3: is that we're at the point where the two thousand
Speaker 3: and eight financial crisis is like capital age history.
Speaker 4: Right.
Speaker 3: It used to feel like when both of us started
Speaker 3: our careers that the crisis in the aftermath was current events,
Speaker 3: including several years in the aftermath. Now it's like when
Speaker 3: I was a kid and I heard about Woodstock or
Speaker 3: the moon landing stuff that really was not that long
Speaker 3: before I was born or whatever. But I had you
Speaker 3: know that, like various things when I was a kid,
Speaker 3: could all have been the same year, the moon landing,
Speaker 3: pro Harbor, etc. That was all just like capital age history.
Speaker 3: And we're getting to the point now where the Great
Speaker 3: Financial Crisis to a lot of people is just not
Speaker 3: something that either feels relevant or anything except out of
Speaker 3: history book.
Speaker 2: That's right. And by the way, just to scare you
Speaker 2: a little bit more, I asked perplexity how many Americans
Speaker 2: were born after two thousand and eight, and it said
Speaker 2: seventy millions. That's roughly twenty percent of the populations.
Speaker 3: If you figure the people who are like under ten. Yeah,
Speaker 3: before they know it's nothing to them either anyway.
Speaker 2: Right, So obviously here at oddlots, we take our jobs
Speaker 2: as lovers of financial crisis hindsight, and I guess purveyors
Speaker 2: of financial records extremely serious. And so we should talk
Speaker 2: about two thousand and eight. We should talk about financial crises.
Speaker 2: They obviously still exist. We haven't had anything on the
Speaker 2: scale of Lehman Brothers, but we've certainly had incidents like
Speaker 2: the collapse of SVB. There's also that market sell off
Speaker 2: in August which kind of came out of nowhere, a
Speaker 2: bunch of people talking about the risks of the carry trade,
Speaker 2: private credit. We have all these big worries stemming from
Speaker 2: the amount of debt the US has to refinance to
Speaker 2: really idiosyncratic things like the basis trade in US Treasury.
Speaker 2: So we should talk about it. Let's do it, Okay,
Speaker 2: So we really do have the perfect guest. We are
Speaker 2: speaking with Tim Geitner, the former Treasury Secretary, former head
Speaker 2: of the New York Fed, now at Warburg Pinkus, and
Speaker 2: also chair of the Program on Financial Stability over at Yale,
Speaker 2: which is why he's here today. The school is launching
Speaker 2: something called the New Badget Project, which is an online
Speaker 2: tool or compendium for designing financial crisis interventions. So Tim,
Speaker 2: welcome to the show.
Speaker 4: Nice to be with you both.
Speaker 2: So, first of all, I got to ask, you know,
Speaker 2: two hundred years ago, Walter Badget said that banks should
Speaker 2: lend freely against good collateral and then there would be
Speaker 2: no problems. So, you know, are we done here? Two
Speaker 2: hundred years ago we should have had this figured out.
Speaker 4: Yeah, I mean, financial crises have this classic tragic thing,
Speaker 4: the crises of beliefs in a sense, and the crisis
Speaker 4: of memory. And it's the loss of memory. It's the
Speaker 4: absence of any personal experience with what happens when things
Speaker 4: fall apart. It's the loss of memory about how panics
Speaker 4: start and what it takes to break panics and prevent
Speaker 4: panics from turning into great depressions, which is really what
Speaker 4: financial it was. Minsky wrote that, you know, stability breeds instability,
Speaker 4: so you have long periods of expansion, moderation and recessions
Speaker 4: as prices going up, which creates the seeds for crisis,
Speaker 4: causes memories to fade and allows these beliefs. There's some
Speaker 4: a lot of folk wisdom in these things, beliefs that
Speaker 4: get in the way of people doing what they have
Speaker 4: to do in a crisis to prevent it from turning
Speaker 4: into something catastrophic.
Speaker 3: Do you believe that there could be some new academic like, Okay,
Speaker 3: there's this new project. Can we actually escape this trap
Speaker 3: of forgetting history? Is there any prospect for humanity to
Speaker 3: avoid the endless cycle of forgetting?
Speaker 4: You know, when I went to the New York fed
Speaker 4: in two thousand and three, we were sort of in
Speaker 4: the foothills of that long financial boom. I had spent
Speaker 4: the previous eighteen years or fifteen years at the Treasury
Speaker 4: and the IMF watching countries confront a whole range of
Speaker 4: different financial crises, just not in the United States. And
Speaker 4: there's lots of reasons why. Of course, there's lots of
Speaker 4: parts of policy where the practice of policy, the design
Speaker 4: of policy is short of the frontier of knowledge, and
Speaker 4: closing that gap is a really important thing. If you
Speaker 4: ask yourself, why is it in the graveyard of mistakes
Speaker 4: the governments make of financial crisis? Why do they make
Speaker 4: those mistakes? Sometimes just because the politics are incompatible with
Speaker 4: what it takes to break a panic. You know, the
Speaker 4: basic challenge, which is it looks like what you need
Speaker 4: to break a panic or make people feel safe to
Speaker 4: keep their deposits in a bank, looks like you're aiding
Speaker 4: the arsenists, looks like you're rewarding the arsenists or the imprudent.
Speaker 4: So there's a bunch of folk wisdom about that gets
Speaker 4: in the way of doing the necessary thing quickly enough
Speaker 4: to make a difference. But a lot of the gap
Speaker 4: is because people don't know what to do because, as
Speaker 4: I said earlier, because memory fades. So I think there's
Speaker 4: a hugely compelling case for giving our successors a better
Speaker 4: body of knowledge about what works and what doesn't so
Speaker 4: they can act more quickly and be closer to the
Speaker 4: frontier of good response more quickly. And that's the basic
Speaker 4: case for what Andrew Metric and his colleagues had built
Speaker 4: at Yale.
Speaker 3: You know something, Tracy, one thing, just thinking about this,
Speaker 3: it occurs to me twenty twenty when COVID hit. You know,
Speaker 3: there were a lot of tools on the shelf developed
Speaker 3: in two thousand and eight, two thousand and nine, and
Speaker 3: it sounds like part of the idea is like, let's
Speaker 3: actually make this a shelf, you know, like let's actually
Speaker 3: like put that shelf out there. But it does seem
Speaker 3: like that helped the rapidity of the twenty twenty response.
Speaker 2: I was literally about to ask taking something off the
Speaker 2: shelf question? Okay, but on this note, how important is
Speaker 2: speed when you're fighting a financial crisis. Is it more
Speaker 2: important to have an idea of exactly what you're going
Speaker 2: to do or is it more important important to you know,
Speaker 2: say whatever it takes allocation to fill out the details.
Speaker 4: Later of course, you have to be able to make
Speaker 4: the credible commitment that you will backstop the financial system
Speaker 4: and make it safe to stay and to take risk again.
Speaker 4: You have to be able to make that commitment credible.
Speaker 4: But it's not enough to state it. People need to
Speaker 4: see it. And how you design that mix of risk
Speaker 4: sharing things that go way beyond badget is critical to
Speaker 4: the efficacy and the credibility of the commitment. So I
Speaker 4: think you're right though to say that if you look
Speaker 4: back at that early weeks of the pandemic, it was
Speaker 4: hugely valuable that a bunch of people around the table
Speaker 4: then were around the table in seven and eight, and
Speaker 4: that memory of what might work was still alive and
Speaker 4: they could draw from a set of cases examples and
Speaker 4: move more quickly to put them in place. But there
Speaker 4: is a huge value to speed when you're at the
Speaker 4: edge of panic. You know, it's like the classic thing,
Speaker 4: These happen very slowly and then way quickly, and you
Speaker 4: don't know what the margin is for something that is
Speaker 4: like burning slowly turning into something that's catastrophic, and so
Speaker 4: you need to be able to move very very quickly.
Speaker 4: And again, one of the barriers moving quickly there's lots
Speaker 4: of barriers. One of the bearers moving quickly is when
Speaker 4: people are not really sure because they hadn't lived it.
Speaker 4: There's no people around them in the institution or they're
Speaker 4: coming into who have any knowledge of it. When I
Speaker 4: went to the New York FED, I remember initially they
Speaker 4: had something they called the Doomsday Book. And the Doomsday
Speaker 4: Book was the comprehensive set of precedent of what the
Speaker 4: New York Fed had done in the decades since the
Speaker 4: Great Depression. How it was, and I was quite eager
Speaker 4: to see this book, and it was a quite fat book.
Speaker 4: But what was remarkable about the book was in those
Speaker 4: decades between the Great Depression and two thousand and seven,
Speaker 4: the things the US had to deal with were relatively modest,
Speaker 4: nothing like the classic systemic financial crisis, and so that
Speaker 4: body of precedent was of limited value. And you could
Speaker 4: have people sitting around the table saying, but what we
Speaker 4: should do what Sweden did, or not do what Japan did,
Speaker 4: or we help people have all these debates, but if
Speaker 4: you ask them what did Sweden actually do? There was
Speaker 4: no knowledge of that, and you know, you could you
Speaker 4: could spend your time calling the person in Sweden who
Speaker 4: had done that. But that takes some time.
Speaker 3: It's so funny because now I have this memory and
Speaker 3: I totally forgot it. I was a business insider at
Speaker 3: the time, and people are like, oh, the Swedish model
Speaker 3: of bailouds, and people were like debating this, and I
Speaker 3: was like, I have no idea what this is. I mean,
Speaker 3: I saw that term the Swedish model of Baylouds dozens
Speaker 3: or hundreds of times, the number of times I actually
Speaker 3: read something with some substantive you know you mentioned but
Speaker 3: between the Great Depression and the Great Financial Crisis, we
Speaker 3: didn't really have to deal with too much. But there
Speaker 3: were a few There were continental Illinois in nineteen eighty four.
Speaker 3: Could those have gotten really bad and become financial crisis
Speaker 3: like events had intervention been slower?
Speaker 4: I don't think that you had that mix of factors
Speaker 4: then that the type of dry tender, the left of
Speaker 4: vulnerable that why was that? You know, part of what
Speaker 4: makes you vulnerable to a classic panic is when the
Speaker 4: economy as a whole is so imbalanced, people have borrowed
Speaker 4: too much relative to income. There's a whole set of
Speaker 4: expectations that go into leverage and behavior based on a
Speaker 4: long period of rising house prices or acid prices, and
Speaker 4: you didn't have this period we called the Great moderation
Speaker 4: where people get used to the expectation that recessions we
Speaker 4: would be short and shallow, and that equity price readjustments
Speaker 4: you could call them, wouldn't cascade into something dangerous. So
Speaker 4: you need a long period for the economy to get
Speaker 4: way out of balance, which was true in seven. It
Speaker 4: was also true that in the decades after the Great Depression,
Speaker 4: the financialism outgrew the banking system and outgrew the protections
Speaker 4: in place around the banking system to prevent excess leverage
Speaker 4: and runs. In our system. This is a very important
Speaker 4: thing to remember, is that in our system in seven,
Speaker 4: you had a banking system which obviously did not have
Speaker 4: enough capital to withstand a terrible recession. But the more
Speaker 4: consequential risk for the system was you had a non
Speaker 4: bank financial system with a set of investment banks and
Speaker 4: non bank financial institutions like ge capital letters, and a
Speaker 4: whole bunch of funding vehicles that had classic bank type
Speaker 4: run risk, that were able to run with a huge
Speaker 4: amount of leverage because people had thought the last decades
Speaker 4: suggest the future would be A nine, and so that
Speaker 4: mix of factors, a more unbalanced economy with a financial
Speaker 4: system very vulnerable to runs took a long time to
Speaker 4: build up, and I don't think we had that mix
Speaker 4: of factors until O seven.
Speaker 2: So one of the big debates when it comes to
Speaker 2: financial stability is whether emergency funding should be directed at
Speaker 2: people versus financial institutions. So how do you think about
Speaker 2: bailing out banks versus maybe bailing out consumers, helping them
Speaker 2: to pay their mortgage, helping them to survive through the pandemic.
Speaker 2: Is that better than underwriting bad assets at a bank
Speaker 2: or a shadow bank, for instance.
Speaker 4: Yeah, excellent question, And they really are not. You can't
Speaker 4: think of them as choices, because there is no credible
Speaker 4: response to a financial crisis that does not come with
Speaker 4: a huge amount what we might call a classic Knesyan
Speaker 4: direct support to households, stay in local governments, and to
Speaker 4: business in some way. And you can figure out your
Speaker 4: financial system stuff and do that, well, it will not
Speaker 4: be sufficient because you need to use that massive Knesyan
Speaker 4: arsenal of force to help take out some of the
Speaker 4: risk of the acute recession. But it's also true that
Speaker 4: doing the Canesy stuff is not sufficient. No economy can
Speaker 4: survive the collapse of the banking system. And the only
Speaker 4: way to prevent the collapse of a banking system or
Speaker 4: a financial system is to guarantee deposits, lend freely against collateral,
Speaker 4: to solve institutions, and sometimes to recapitalize the banking system.
Speaker 4: So they are necessary things that go together, and it
Speaker 4: would be a mistake to try one with out of
Speaker 4: the other. And if you look back, and this is
Speaker 4: the right way to look back, and you know, part
Speaker 4: of what Andrew metro good esteem it built at Yale
Speaker 4: is just to try to do a careful, analytical, dispassionate
Speaker 4: look back at mistakes and lessons and choices. And it
Speaker 4: is absolutely fair to say that the US as a
Speaker 4: political system, as a country did not do enough of
Speaker 4: the classic kainsy and fiscal response early enough and sustained
Speaker 4: enough to complement the things we did to prevent the
Speaker 4: collapse of the financial system.
Speaker 3: One of the things that we've sort of realized during
Speaker 3: the podcast over the years is that even like a
Speaker 3: story like the Great Financial Crisis in eight two thousand
Speaker 3: and nine, people are still debating it. You know, people
Speaker 3: are still debating why and what actually was the cause.
Speaker 3: And you still get people who say things like, you know,
Speaker 3: actually some prime really wasn't that big and that actually
Speaker 3: was not as crazy as it sounded when it was
Speaker 3: asserted at the time. And it's like, actually, you know,
Speaker 3: the issue was like it was all those like yield
Speaker 3: hungry German land banks and stuff like that. I'm curious
Speaker 3: just for you, like you know, seventeen years later or
Speaker 3: whatever other things that you've changed or not in like
Speaker 3: necessarily the response, but when you think back, it like
Speaker 3: causes that like you see in a different light today
Speaker 3: than you did at the time.
Speaker 4: No, I mean you should never say no obviously, you
Speaker 4: should look fresh at these things all the time.
Speaker 3: Or is there any conventional wisdom from the time that
Speaker 3: you don't think has stood up as well as maybe.
Speaker 4: I think during the endurant debate everyone has still has.
Speaker 4: Is is a good debate to have, which is a
Speaker 4: version of your question, Tracy, which is that but couldn't
Speaker 4: we have done more for the individual? And shouldn't we
Speaker 4: have done more for the individual? And wouldn't have been
Speaker 4: more effective and less damaging? And absolutely that's the right
Speaker 4: question and the fiscal response of the US and the
Speaker 4: pandemic is just a good counter example. There's a good
Speaker 4: set of arguments that we overdid it in the pandemic,
Speaker 4: but the speed and the mix and the overall force
Speaker 4: and the composition of the fiscal policy measure put in place,
Speaker 4: they're a good counter example. And I think that is
Speaker 4: a very good lesson. Of course, you don't want to
Speaker 4: be like you know, you don't want to overlearn your
Speaker 4: lessons of these things. I think the other big lesson,
Speaker 4: of course is and we've talked about this is just
Speaker 4: again that you know, we were as a country, we
Speaker 4: were late to escalate on the purely financial dimensions of
Speaker 4: the crisis. And part of that was because, as we
Speaker 4: talked before, people had no memory of what it takes,
Speaker 4: and people would debate where we're going to have a
Speaker 4: crisis for a long period of time, and that got
Speaker 4: the way of speed. But probably because in our system
Speaker 4: a lot of the very powerful thing is run through
Speaker 4: the Congress and that it takes some time, and normally
Speaker 4: in our system and uniquely our system in some ways
Speaker 4: because of the checks and balances, things have to feel
Speaker 4: terrible before you can shake the Congress into action.
Speaker 2: Things have to feel like issues that people will actually
Speaker 2: vote on Okay, So how do you actually judge the
Speaker 2: success of a financial crisis intervention? Because this seems to
Speaker 2: me to be the real difficulty here. So you're trying
Speaker 2: to prove that the counterfactual would have been worse exactly,
Speaker 2: and that's probably impossible. So how do you go about
Speaker 2: thinking of this was good, this was successful, versus we
Speaker 2: should have done this, this was a total failure, et cetera.
Speaker 4: Yeah, there's a bunch of different measures you can use,
Speaker 4: and of course none of them are perfect. One is
Speaker 4: you could look at the quality of the macroeconomic outcomes
Speaker 4: relative to past crises, and it's not a great comparison.
Speaker 4: It seems like a low bar. But the classic comparison
Speaker 4: is to say what was the depth of the recession?
Speaker 4: Is duration? And what was the path of growth in
Speaker 4: the US in this experience relative to two things, two compartors.
Speaker 4: One is the great depression. We're unemployment p tw twenty
Speaker 4: five percent and you had like a decade of negative
Speaker 4: if not, you know, terrible growth outcomes. And the other
Speaker 4: comparison is to look at the other major economies that
Speaker 4: went through this crisis and what were those outcomes in
Speaker 4: terms of basic thing, depth of recession, speed of recovery,
Speaker 4: rise in unemployment, loss of income, loss of wealth. And
Speaker 4: those are not perfect comparisons, because everything is different, but
Speaker 4: I think they're pretty good comparisons. And I think that
Speaker 4: there's a bunch of arguments that and Ben BERNANKI knows,
Speaker 4: were written about this, that the size of the shock
Speaker 4: that precipitated the crisis of seven o eight was larger
Speaker 4: than at the beginnings of the Great Depression. And I
Speaker 4: think by that measure, us outcomes were dramatically better. Our
Speaker 4: outcomes were also significantly better than those of any other
Speaker 4: major economy went through the crisis. And I said, you know,
Speaker 4: we made a bunch of mistakes. We were short of
Speaker 4: the frontier of what was possible, we were late to escalate,
Speaker 4: didn't do enough fiscal So I think we should look
Speaker 4: at those things with open eyes. But on those two measures,
Speaker 4: I think that the quality of the choices we ultimately
Speaker 4: made were quite good. There's one other thing you can
Speaker 4: look at, which is what is the health of the
Speaker 4: system that emerges from the ashes of the crisis, what's
Speaker 4: the quality of the reforms that are put in place?
Speaker 4: And I think if you look at again, these are
Speaker 4: imperfect things. You can't per comparisons, but you know, our
Speaker 4: system emerged with much more capital than the peers of
Speaker 4: the major US institutions. Therefore, we had a much more
Speaker 4: resilient system and I think a system able to help
Speaker 4: finance at more rapid recovery. It was from many other countries,
Speaker 4: and I think we were able to still preserve a
Speaker 4: system which is still I think best in the world
Speaker 4: at channeling capital. People have had a good idea and
Speaker 4: the wave of innovation, massive innovation we've seen in the
Speaker 4: US economy in a decade since, and it's relative situation
Speaker 4: in the United States is partly a function of the
Speaker 4: fact that we were able to repair the damage onto
Speaker 4: this system relatively quickly and put in place a set
Speaker 4: of institutions and waste of fun, good ideas that still
Speaker 4: remains the envy of the world.
Speaker 3: It's interesting. Tracy and I have done like tons of
Speaker 3: episodes on like how the financial system has changed post
Speaker 3: Dodd Frank and we've talked a lot about multi strategy
Speaker 3: hedge funds and private credit, et cetera. And we could
Speaker 3: all come up in our minds with scenarios we're all
Speaker 3: that good's bad because right it's easy to come up with,
Speaker 3: but a lot of times that walk away from those conversations.
Speaker 3: It's like, h seems like a lot of risk taking
Speaker 3: activity has in fact moved away from deposit taking institutions,
Speaker 3: but the deposit taking institutions still have function. I mean,
Speaker 3: like I I don't want Jink said, but it does
Speaker 3: seem like the financial system that exists today to some
Speaker 3: extent is the financial system that was conceived of with
Speaker 3: Dodd Frank.
Speaker 4: Yeah. Of course, as you said, you want to always
Speaker 4: be careful, and because you won't know until you have
Speaker 4: the more exacting test of resilience, and the more exacting
Speaker 4: test of resilience is a severe recession that starts outside
Speaker 4: the system, not within the financial system, and we haven't
Speaker 4: really had that test yet, and the pandemic was not
Speaker 4: a perfect test of that system, so we won't really know.
Speaker 4: But I think you're right to say that the system
Speaker 4: as it looks today has a banking system which has
Speaker 4: more capital, better set of protections around it, and the
Speaker 4: non bank system has more stable foundations. You know, it's
Speaker 4: it's it's a system where the credit that comes outside
Speaker 4: the banking system is in relatively stronger hands, less leverage
Speaker 4: less run risk. Now, of course there will be some
Speaker 4: sadness and there will be some pain, and people will
Speaker 4: lose some money, and there will be some failure in
Speaker 4: even modern shocks in this system. But that's the way
Speaker 4: the system should work. The test of a system is
Speaker 4: think Larry Summers said it should be safe for failure.
Speaker 4: And you want to build a system that is not
Speaker 4: prevents failure or where failures inconceivable, but where it's safe
Speaker 4: for failure, and that meaning you can allow a fair
Speaker 4: amount of failure to happen without needing to do the
Speaker 4: massive escalation that we had to do in that crisis.
Speaker 2: So, speaking of banking reform and DoD Frank and capital,
Speaker 2: I wanted to ask you about Basil because in the
Speaker 2: aftermath of the financial crisis, Basil was this huge, huge conversation,
Speaker 2: and if you wanted to do something or change something,
Speaker 2: you had to get all these different countries to come
Speaker 2: in and agree on that specific thing, all these different
Speaker 2: policy makers. Fast forward to today. I'm going to try
Speaker 2: to put this diplomatically, but it seems like the US
Speaker 2: is kind of going its own way in many respects.
Speaker 2: Does Basil matter anymore?
Speaker 4: You know, we have a relatively integrated global financial system,
Speaker 4: so it is very important there to be a sort
Speaker 4: of common floor to govern and regulate at least what
Speaker 4: the major banks do that operate across the system. That's
Speaker 4: a hugely valuable thing, and one of the great things
Speaker 4: that was done in the early nineties was that initial
Speaker 4: wave of setting of norms and standards. Very valuable. Of course,
Speaker 4: you want that floor to be set at a reasonably
Speaker 4: conservative level, not easily eroded over time, but countries should
Speaker 4: be free to go beyond that. And you might look
Speaker 4: at that, as we all did in the mid two
Speaker 4: thousands and afterwards, and say that floor was set too low,
Speaker 4: and you want to raise the floor. And you don't
Speaker 4: need to let the requirements of consensus or the long
Speaker 4: or global negotiations get the way of countries deciding they
Speaker 4: want to be more conservative. And we were more conservative
Speaker 4: in some ways. But anyway, I think it's a valuable
Speaker 4: framework and we should want to protect and preserve it,
Speaker 4: but always look at it fresh and careful and understand that,
Speaker 4: you know, the fundamental challenge and design of these safeguards
Speaker 4: is that you're going to create incentives for arbitrage, and
Speaker 4: you're going to create if you make the banking system safe,
Speaker 4: you're going to make it more economic for a whole
Speaker 4: bunch of risk to move outside the banking system, and
Speaker 4: you might leave yourself with a system where the banks
Speaker 4: look less likely to fail, but the system is more unstable,
Speaker 4: and that's the system thing you want to avoid. So
Speaker 4: you want to constantly be looking at that balance between
Speaker 4: how to make sure that the core of the system,
Speaker 4: that is the you know, it's the oxygen, lifeblood of
Speaker 4: any economy, is stable. But that's a necessary but not
Speaker 4: sufficient test. You want to make sure that the rest
Speaker 4: of the system, because of the incentive you creating for
Speaker 4: arbitrage migration, to not leave you with the with the
Speaker 4: overall less stable system. And you should look at the
Speaker 4: fresh at freshened that challenge all the time.
Speaker 3: You talked about this before. When you think about past crises,
Speaker 3: either in the United States or internationally, and there are
Speaker 3: various the book shelf again of the various tools, but
Speaker 3: then there's also the political reality. And even in the US,
Speaker 3: TARP failed the first time, famously, barely passed the second time,
Speaker 3: and of course TARP itself wasn't enough because then of
Speaker 3: course the FED had to engage in a number of
Speaker 3: different programs, and then there was the Obama stimulus on
Speaker 3: top of that afterwards, which was post tarp. You know,
Speaker 3: I'm curiously when you look back through history and the
Speaker 3: New Badget Project and stuff like that, how much is
Speaker 3: it when you think about like system design. This is
Speaker 3: a good way to bail out a whatever it is.
Speaker 3: This is a good way to backstop the deposits, This
Speaker 3: is a good way for the Fed to like find
Speaker 3: a price for buying private bonds, whatever it is, versus
Speaker 3: understanding the political reality of the country that had the
Speaker 3: successful bailout or the successful intervention, I should say at
Speaker 3: the time, because it really does seem to me that
Speaker 3: that's huge. Like in a parliamentary system, there's no division
Speaker 3: of government between the legislator and the head of state,
Speaker 3: and if they have the majority, they could probably pass
Speaker 3: it and you move fast, et cetera. It seems like
Speaker 3: a huge deal in the United States that we don't
Speaker 3: have that sort of same unilateral fiscal capacity often.
Speaker 4: Yeah, exactly. I mean we have a system which where
Speaker 4: the anchor of the global financial system has a central
Speaker 4: bank with much less authority than most major central banks,
Speaker 4: which is what they can do when assets they can
Speaker 4: buy in a crisis, and has a political system, as
Speaker 4: you said, unlike a dominant parliamentary model, where there's a
Speaker 4: set of checks and balances with a lot of rationale
Speaker 4: foundational justice to them, that is designed to make it
Speaker 4: hard for the executive branch to do a bunch of
Speaker 4: things that you have to do quickly in a crisis,
Speaker 4: and that creates a huge vulnerability to the US but
Speaker 4: also to the world. And I think it is something
Speaker 4: where there is a very good case to trying to
Speaker 4: make sure you have some delegated emergency authority at the
Speaker 4: level of the Central Bank and the Treasury, with some constraints,
Speaker 4: some discretion, and good framework for disclosure and protections so
Speaker 4: that you are not putting the country in the pos
Speaker 4: or the global financialism in the position where we are
Speaker 4: too late.
Speaker 2: So Joe mentioned earlier that it's pretty easy to come
Speaker 2: up with potential risks to worry about. Right There's like
Speaker 2: a long list of things at any one time. Right now,
Speaker 2: people talk a lot about the indebtedness of the US
Speaker 2: US treasuries, obviously a bedrock of global finance. People talk
Speaker 2: about things like the basis trade, private credit, all that stuff.
Speaker 2: Where do you see risks right now?
Speaker 4: You know, I think it's good for people to understand
Speaker 4: that these things that are foundational to how well economies
Speaker 4: do cross time, and how fair outcomes are, and the
Speaker 4: incentives for innovation and investment. A lot of these things
Speaker 4: rest on what are intangible some people say sort of
Speaker 4: magical things like the treasury is the risk free asset
Speaker 4: that people feel comfortable they can come take exposure to
Speaker 4: treasuries and to the dollar when they're worried about the world.
Speaker 4: Those things are hugely valuable. People tend to think of
Speaker 4: these things as partly around what's the dollar's roles reserve currency,
Speaker 4: But there's some foundational benefits and they're about a type
Speaker 4: of trust you could say about a confidence and stability
Speaker 4: and rule of law in property rights and predictability. Independence
Speaker 4: of the FED is one piece of that. And I
Speaker 4: think it's important for people to not take for granted
Speaker 4: the durability of those things, because many of them are
Speaker 4: not fully anchored at law. They're part of them, are
Speaker 4: a set of norms and customers, and you know, there's
Speaker 4: the kind of things that you know, you don't know
Speaker 4: you have them until you risk losing them. It's important
Speaker 4: to recognize that to what you've all been talking about,
Speaker 4: these are things that are about trust and credibility, and
Speaker 4: whether the world believes that the US can hold full
Speaker 4: of things together and defend them and protect them is
Speaker 4: you know, Again, it's partly a measure of how fiscally
Speaker 4: responsible we are. It's partly a measure of do people
Speaker 4: trust that FED can operate independent of politics, But it's
Speaker 4: also a function of whether people believe that those foundations
Speaker 4: of relative stability and expectations in rule of law and
Speaker 4: property rights and things like that are still durable protected
Speaker 4: assets of the country.
Speaker 2: So speaking of trust and people believing in the US,
Speaker 2: you were very involved in the FX the currency swap
Speaker 2: lines around the two thousand and eight financial crisis into
Speaker 2: two thousand and nine, and I saw a report over
Speaker 2: the weekend saying that European central banks are, you know,
Speaker 2: policy makers are questioning whether they can still rely on
Speaker 2: the US to actually provide that dollar liquidity in an emergency. Again,
Speaker 2: things are changing when it comes to the US's relationship
Speaker 2: with the rest of the world. So how do you
Speaker 2: think about that and the importance of I guess the
Speaker 2: US's a global role when it comes to financial stability.
Speaker 4: I think Americans and the world understands that the role
Speaker 4: we have, and it's built up over time. You know,
Speaker 4: it existed before World War Two, but its foundations were
Speaker 4: laid in the wake of the Second World War. That
Speaker 4: that system where the US was central and dominant and
Speaker 4: still is dominant today, is a system that's hugely beneficial
Speaker 4: to the United States. It's not designed as an active
Speaker 4: charity to the world. It's something that our presidents believe
Speaker 4: was deeply fundamentally in the US interests. So these things
Speaker 4: you talked about, like the swap lines or the willingness
Speaker 4: to give act to dollar liquidity to foreign central banks
Speaker 4: in a crisis, these things are foundational to the system,
Speaker 4: and they're foundational We made them at foundations is because
Speaker 4: we thought they were fundamental to US interests.
Speaker 3: Can you explain that for how? Because I do think
Speaker 3: some of the big questions are people look at the
Speaker 3: United States's relationship with the world and they sort of ask, like, oh,
Speaker 3: what are we getting out of this? So how would
Speaker 3: you articulate the US's role and what we get out
Speaker 3: of it?
Speaker 4: You know, it's a hard thing to explain and defend.
Speaker 4: It's one of those things that until you lose it,
Speaker 4: it's hard for people to appreciate it. One way to
Speaker 4: think about it is, you know, we're I don't know,
Speaker 4: we're single digit percent of the world's population. We're twenty
Speaker 4: five percent of the world's GDP. That would make you
Speaker 4: think that we have a big stake in the basic
Speaker 4: quality of economic outcomes outside of the United States just
Speaker 4: by that basic ratio, But we're seventy five percent of
Speaker 4: the market cap of equity markets globally, So we have
Speaker 4: a huge fundamental economic interest that comes from what happens
Speaker 4: outside are the frontiers of our borders and a lot
Speaker 4: of benefits to us and trying to make sure we
Speaker 4: protect and sustain that can't be indifferent to the fates
Speaker 4: of otter nations.
Speaker 2: So you're a former civil servant, even before you were
Speaker 2: US Treasury secretary. You were a civil servant way back
Speaker 2: in the day. And obviously government bureaucracy is a big
Speaker 2: story right now, and we've done a couple episodes on
Speaker 2: DOGE and what they're doing specifically at US Treasury in
Speaker 2: the payment system. There's a lot of back and forth
Speaker 2: about exactly what the goal is, how much coding power
Speaker 2: the team actually has. But what's your impression of what's
Speaker 2: going on here and how much modernization I guess based
Speaker 2: on your experience at Treasury is actually needed in that system.
Speaker 4: I you know, as you said, I grew up in
Speaker 4: the Treasury in some sense, you know, I got to
Speaker 4: work with a hugely talented group of people, ethical people,
Speaker 4: very smart people. Wonderful, amazing experience for me. And of
Speaker 4: course anybody who's been in government has lived with a
Speaker 4: whole bunch of things, obviously technology, but not just technology,
Speaker 4: a bunch of things where of course if you took
Speaker 4: a fresh look at you'd say, gee, we could make
Speaker 4: that better. And I think a huge amount of credibility
Speaker 4: and trust in government requires people in those roles trying
Speaker 4: to continually bring a objective reform and improvement acknowledge. I mean.
Speaker 4: One of the things that I first met Larry Summers
Speaker 4: when he first came to run the international part of
Speaker 4: the Treasury when I was a civil servant, and one
Speaker 4: of the things that I admired about him most I
Speaker 4: still admired on the most is that he came in
Speaker 4: and he had this deep conviction that anything we were doing,
Speaker 4: any type of policy, any type of practice was short
Speaker 4: of the frontier of knowledge, and that our basic idea
Speaker 4: job was to get it closer to the front here.
Speaker 4: And I think it's very important for people to come
Speaker 4: into these jobs, whether you're a civil servant, where you're
Speaker 4: coming in fresh political thing, to bring that basic have
Speaker 4: that sense of obligation and a possibility. So of course
Speaker 4: there's you know, huge frontiers where you can if you
Speaker 4: bring an effort to improve and reform. And it's not
Speaker 4: just the not just the tech stack of the IRS
Speaker 4: or the Treasury or the FED fast opportunities there.
Speaker 2: So Joe and I we love historical anecdotes, We love stories.
Speaker 2: Our listeners do too. What was the most creative thing
Speaker 2: that you did as a policy maker back in two
Speaker 2: thousand and eight in the financial crisis? The thing that
Speaker 2: you know, you don't have to necessarily be the most
Speaker 2: proud of it, but the thing that was like the
Speaker 2: most I guess out there creative solution.
Speaker 4: This is not going to be as interesting to ask
Speaker 4: your question. When I left my old job and I
Speaker 4: was writing about the financial crisis, and I was starting
Speaker 4: to teach with Andrew metri ga Yale the financial crisis,
Speaker 4: I spent a lot of time looking back over a
Speaker 4: bunch of those choices we made or went into them,
Speaker 4: and I remember having the experience over and over again,
Speaker 4: which I love, which is I'd convene this team of
Speaker 4: people that are working on some aspect of the crisis,
Speaker 4: and I'd ask them and who where did that idea
Speaker 4: come from? Whose idea was that? And I love the
Speaker 4: fact that people would say over and over again, you know,
Speaker 4: I can't really remember I remember this for the meeting
Speaker 4: Maature ideas it was. Anyways, it was a great group
Speaker 4: of people. I think that the most valuable, in some ways,
Speaker 4: the most innovative thing we did was how we decided
Speaker 4: to recapitalize the banking system and what became known as
Speaker 4: the stress test as a way to you know, what
Speaker 4: we basically said is, we want to make sure the
Speaker 4: banking system has enough capital to survive a great depression
Speaker 4: like outcome, and we're going to get people a chance
Speaker 4: to go raise that capital, and if they can't raise it,
Speaker 4: we're going to give them the capital. And that alongside
Speaker 4: all the things that had been done in the fall
Speaker 4: of a weight, alongside the Kynesian stimulus, the first initial simulus,
Speaker 4: and what the FED was doing that was very, very
Speaker 4: very helpful in trying to take out the remaining risk
Speaker 4: that we'd fall off the abyss, and that that was
Speaker 4: something that countries hadn't done quite that way before.
Speaker 2: Do you remember how you came up with that idea?
Speaker 4: A lot of awesome people sitting at a table together.
Speaker 3: Tim Guidner, thank you so much for coming on odd Losa.
Speaker 3: Nice to see you guys really appreciate it.
Speaker 4: I'm a big fan of what you guys do. I
Speaker 4: love the you know, the long, deep exploration.
Speaker 3: I love to hear it.
Speaker 4: Of the highly technical but consequential chapters of financial history.
Speaker 2: Producers.
Speaker 5: Keep that in, Yeah, keep that in, all right, they'll
Speaker 5: take care of him.
Speaker 1: Joe.
Speaker 2: Obviously, that was a fascinating conversation. Again, we have a
Speaker 2: bias towards talking about this stuff because we lived through it.
Speaker 2: But I did think that Tim's point about institution tutional
Speaker 2: memory is really important, and it is true. You know,
Speaker 2: two thousand and eight is fading into the background capital
Speaker 2: h history, as you mentioned, which means if something happens,
Speaker 2: then potentially people aren't going to have that sort of
Speaker 2: instinctual knee jerk knowledge of what they need to do.
Speaker 2: And so from that perspective, I find this new Badget
Speaker 2: program very interesting.
Speaker 3: Yeah, I did too.
Speaker 1: You know.
Speaker 3: The other thing that I think is interesting is like, Okay,
Speaker 3: so you have to go a certain amount of time
Speaker 3: for people to forget and for people to just sort
Speaker 3: of not remember what the playbook looks like, et cetera.
Speaker 3: But also he said, and I thought it was really interesting,
Speaker 3: is you also need time for some sort of balance
Speaker 3: sheet dislocation or lopsidedness to emerge, or the dry tinder
Speaker 3: that can explode. And so why, you know, why didn't
Speaker 3: we have a crisis in nineteen eighty four with Continental Illinois.
Speaker 3: Well maybe at that time there just wasn't some derange
Speaker 3: of the financial system that that had the ability to
Speaker 3: set off. And so I don't know, you know, obviously,
Speaker 3: like COVID was this very bizarre shock where the economy
Speaker 3: was sort of shut down and then there was a
Speaker 3: financial crisis for about five minutes. But you do wonder
Speaker 3: whether these sort of like imbalances have built up in
Speaker 3: some extreme way that we haven't seen is like a really.
Speaker 2: Interesting question, right, And just since you brought up the pandemic,
Speaker 2: this was the other thing that struck me so there
Speaker 2: is that argument that in two thousand and eight the
Speaker 2: US should have done more on the fiscal side, so
Speaker 2: you know, help people pay their mortgages, mortgages, write some checks,
Speaker 2: helicopter money and all of that. And then in the
Speaker 2: pandemic we actually did that, We handed out some money
Speaker 2: for both people and businesses, and then we had inflation.
Speaker 2: And so I guess, like the needle kind it feels
Speaker 2: like we're swinging from like on a pendulum, right, like
Speaker 2: it's either too little fiscal or too much, and we've
Speaker 2: never gotten it exactly.
Speaker 3: Right, and we'll never get it exactly right. But two things,
Speaker 3: like in April twenty twenty, I still think a lot
Speaker 3: of people would be pretty happy with the economic outcome
Speaker 3: that we had, you know, two or three years later.
Speaker 3: But also more deeply, we did a bunch of stuff
Speaker 3: in the twenty twenties that I've said many times on
Speaker 3: the podcast we probably should have done in the twenty tens,
Speaker 3: not just on the pure helicopter money fiscal stimulus, but
Speaker 3: a lot of the things on like you know, industrial policy, energy,
Speaker 3: et cetera. When there was widely available labor, when there
Speaker 3: was widely available raw materials, because so much of the economy,
Speaker 3: global economy was slack or in a state of slack,
Speaker 3: A little bit of a missed opportunity.
Speaker 2: There, Yeah, like you know, build Jim Conways.
Speaker 3: Do we need to bring Tim back in here? I
Speaker 3: need to make this one last point to him. Yeah,
Speaker 3: I just need to tell you I think you miss it. No,
Speaker 3: I'm just kidding.
Speaker 2: But on that note, I mean Tim was bringing up
Speaker 2: the Great Depression as the sort of baseline for judging
Speaker 2: the success of interventions, which again probably a low bar.
Speaker 2: But we did some stuff during the Great Depression, like
Speaker 2: we built things and that provided jobs to a lot
Speaker 2: of people during a very bad time. So shall we
Speaker 2: leave it there.
Speaker 3: One day we'll get one, right, that's right.
Speaker 2: Okay. This has been another episode of the Audlots podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 3: Follow our producers Carmen Rodriguez at Carmen Armann, dash Ol
Speaker 3: Bennett at Dashbot and Keil Brooks at Kale Brooks. And
Speaker 3: check out the new Badget project at the Yale Program
Speaker 3: on Financial Stability. Really fascinating stuff, really interesting research. I'm
Speaker 3: sure even if you're not a central banker in a crisis,
Speaker 3: you'll learn something from reading through it. From our Oddlass content,
Speaker 3: go to Bloomberg dot com slash odd Lots. We have
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