WEBVTT - Tim Geithner on How to Fight the Next Financial Crisis 0:00:02.720 --> 0:00:14.000 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.600 --> 0:00:21.799 Hello and welcome to another episode of the All Thoughts Podcast. 0:00:21.920 --> 0:00:23.400 I'm Tracy Alloway. 0:00:23.079 --> 0:00:24.880 And I'm Joe. Wasn't thal Joe? 0:00:24.960 --> 0:00:26.520 You know what sucks about getting old? 0:00:28.400 --> 0:00:28.720 You know what? 0:00:28.760 --> 0:00:29.520 I twisted him. 0:00:29.560 --> 0:00:32.519 I hurt my neck the other day and I was like, 0:00:33.159 --> 0:00:35.159 I said, you know, I was washing dishes and I 0:00:35.200 --> 0:00:37.000 hurt my neck, And I said, getting old is such 0:00:37.000 --> 0:00:37.400 a crime. 0:00:37.479 --> 0:00:37.919 I hate it. 0:00:37.960 --> 0:00:38.800 But what were you getting? 0:00:38.800 --> 0:00:40.480 Where were you going to Well, I was going to say, 0:00:40.640 --> 0:00:44.680 you start to lose shared experiences with a lot of people. 0:00:44.720 --> 0:00:47.360 And I realized this whenever I make a Simpsons joke. 0:00:47.720 --> 0:00:49.159 There are a lot of people now who do not 0:00:49.240 --> 0:00:53.400 get that frame of reference. And I was thinking about 0:00:53.400 --> 0:00:57.000 this in relation to the financial system, and specifically in 0:00:57.040 --> 0:00:59.720 relation to the two thousand and eight financial crisis. 0:00:59.800 --> 0:01:01.760 No, I've had this thought in the last year, which 0:01:01.800 --> 0:01:04.640 is that we're at the point where the two thousand 0:01:04.640 --> 0:01:07.520 and eight financial crisis is like capital age history. 0:01:07.760 --> 0:01:07.960 Right. 0:01:08.280 --> 0:01:10.400 It used to feel like when both of us started 0:01:10.400 --> 0:01:13.840 our careers that the crisis in the aftermath was current events, 0:01:13.840 --> 0:01:18.400 including several years in the aftermath. Now it's like when 0:01:18.440 --> 0:01:21.319 I was a kid and I heard about Woodstock or 0:01:21.319 --> 0:01:23.759 the moon landing stuff that really was not that long 0:01:23.800 --> 0:01:26.120 before I was born or whatever. But I had you 0:01:26.160 --> 0:01:28.720 know that, like various things when I was a kid, 0:01:28.760 --> 0:01:31.080 could all have been the same year, the moon landing, 0:01:31.760 --> 0:01:34.960 pro Harbor, etc. That was all just like capital age history. 0:01:35.280 --> 0:01:37.320 And we're getting to the point now where the Great 0:01:37.360 --> 0:01:39.480 Financial Crisis to a lot of people is just not 0:01:39.720 --> 0:01:42.600 something that either feels relevant or anything except out of 0:01:42.680 --> 0:01:43.160 history book. 0:01:43.240 --> 0:01:45.240 That's right. And by the way, just to scare you 0:01:45.280 --> 0:01:48.560 a little bit more, I asked perplexity how many Americans 0:01:48.560 --> 0:01:51.080 were born after two thousand and eight, and it said 0:01:51.120 --> 0:01:56.000 seventy millions. That's roughly twenty percent of the populations. 0:01:55.520 --> 0:01:57.640 If you figure the people who are like under ten. Yeah, 0:01:57.680 --> 0:01:59.560 before they know it's nothing to them either anyway. 0:02:00.120 --> 0:02:03.200 Right, So obviously here at oddlots, we take our jobs 0:02:03.240 --> 0:02:07.400 as lovers of financial crisis hindsight, and I guess purveyors 0:02:07.440 --> 0:02:11.800 of financial records extremely serious. And so we should talk 0:02:11.960 --> 0:02:15.240 about two thousand and eight. We should talk about financial crises. 0:02:15.400 --> 0:02:18.800 They obviously still exist. We haven't had anything on the 0:02:18.800 --> 0:02:23.440 scale of Lehman Brothers, but we've certainly had incidents like 0:02:23.520 --> 0:02:27.600 the collapse of SVB. There's also that market sell off 0:02:27.760 --> 0:02:30.480 in August which kind of came out of nowhere, a 0:02:30.480 --> 0:02:34.200 bunch of people talking about the risks of the carry trade, 0:02:34.200 --> 0:02:37.720 private credit. We have all these big worries stemming from 0:02:37.840 --> 0:02:40.519 the amount of debt the US has to refinance to 0:02:41.120 --> 0:02:44.760 really idiosyncratic things like the basis trade in US Treasury. 0:02:44.880 --> 0:02:47.480 So we should talk about it. Let's do it, Okay, 0:02:47.520 --> 0:02:50.520 So we really do have the perfect guest. We are 0:02:50.560 --> 0:02:54.679 speaking with Tim Geitner, the former Treasury Secretary, former head 0:02:54.680 --> 0:02:57.120 of the New York Fed, now at Warburg Pinkus, and 0:02:57.360 --> 0:03:01.120 also chair of the Program on Financial Stability over at Yale, 0:03:01.160 --> 0:03:04.720 which is why he's here today. The school is launching 0:03:04.760 --> 0:03:08.280 something called the New Badget Project, which is an online 0:03:08.320 --> 0:03:13.600 tool or compendium for designing financial crisis interventions. So Tim, 0:03:13.760 --> 0:03:14.680 welcome to the show. 0:03:14.960 --> 0:03:16.000 Nice to be with you both. 0:03:16.680 --> 0:03:19.400 So, first of all, I got to ask, you know, 0:03:19.440 --> 0:03:22.160 two hundred years ago, Walter Badget said that banks should 0:03:22.200 --> 0:03:25.240 lend freely against good collateral and then there would be 0:03:25.280 --> 0:03:28.880 no problems. So, you know, are we done here? Two 0:03:28.960 --> 0:03:30.919 hundred years ago we should have had this figured out. 0:03:31.240 --> 0:03:34.880 Yeah, I mean, financial crises have this classic tragic thing, 0:03:35.200 --> 0:03:38.400 the crises of beliefs in a sense, and the crisis 0:03:38.440 --> 0:03:42.880 of memory. And it's the loss of memory. It's the 0:03:42.920 --> 0:03:47.440 absence of any personal experience with what happens when things 0:03:47.480 --> 0:03:51.320 fall apart. It's the loss of memory about how panics 0:03:51.400 --> 0:03:56.280 start and what it takes to break panics and prevent 0:03:56.360 --> 0:03:59.760 panics from turning into great depressions, which is really what 0:04:00.720 --> 0:04:04.960 financial it was. Minsky wrote that, you know, stability breeds instability, 0:04:05.160 --> 0:04:12.320 so you have long periods of expansion, moderation and recessions 0:04:12.600 --> 0:04:17.360 as prices going up, which creates the seeds for crisis, 0:04:17.920 --> 0:04:23.000 causes memories to fade and allows these beliefs. There's some 0:04:23.080 --> 0:04:25.800 a lot of folk wisdom in these things, beliefs that 0:04:25.880 --> 0:04:29.159 get in the way of people doing what they have 0:04:29.240 --> 0:04:31.760 to do in a crisis to prevent it from turning 0:04:31.760 --> 0:04:33.160 into something catastrophic. 0:04:34.240 --> 0:04:39.320 Do you believe that there could be some new academic like, Okay, 0:04:39.360 --> 0:04:42.880 there's this new project. Can we actually escape this trap 0:04:42.920 --> 0:04:46.159 of forgetting history? Is there any prospect for humanity to 0:04:46.279 --> 0:04:49.039 avoid the endless cycle of forgetting? 0:04:49.720 --> 0:04:51.080 You know, when I went to the New York fed 0:04:51.240 --> 0:04:54.080 in two thousand and three, we were sort of in 0:04:54.120 --> 0:04:59.039 the foothills of that long financial boom. I had spent 0:04:59.200 --> 0:05:03.560 the previous eighteen years or fifteen years at the Treasury 0:05:03.560 --> 0:05:08.400 and the IMF watching countries confront a whole range of 0:05:08.400 --> 0:05:11.600 different financial crises, just not in the United States. And 0:05:11.960 --> 0:05:14.520 there's lots of reasons why. Of course, there's lots of 0:05:14.560 --> 0:05:18.880 parts of policy where the practice of policy, the design 0:05:18.960 --> 0:05:22.599 of policy is short of the frontier of knowledge, and 0:05:22.720 --> 0:05:25.400 closing that gap is a really important thing. If you 0:05:25.440 --> 0:05:29.200 ask yourself, why is it in the graveyard of mistakes 0:05:29.480 --> 0:05:31.600 the governments make of financial crisis? Why do they make 0:05:31.640 --> 0:05:36.920 those mistakes? Sometimes just because the politics are incompatible with 0:05:37.000 --> 0:05:38.760 what it takes to break a panic. You know, the 0:05:38.760 --> 0:05:42.000 basic challenge, which is it looks like what you need 0:05:42.040 --> 0:05:44.279 to break a panic or make people feel safe to 0:05:44.360 --> 0:05:47.480 keep their deposits in a bank, looks like you're aiding 0:05:47.560 --> 0:05:51.640 the arsenists, looks like you're rewarding the arsenists or the imprudent. 0:05:52.279 --> 0:05:54.320 So there's a bunch of folk wisdom about that gets 0:05:54.320 --> 0:05:57.760 in the way of doing the necessary thing quickly enough 0:05:57.760 --> 0:05:59.839 to make a difference. But a lot of the gap 0:06:00.839 --> 0:06:03.039 is because people don't know what to do because, as 0:06:03.080 --> 0:06:06.360 I said earlier, because memory fades. So I think there's 0:06:06.760 --> 0:06:12.080 a hugely compelling case for giving our successors a better 0:06:12.120 --> 0:06:15.320 body of knowledge about what works and what doesn't so 0:06:15.360 --> 0:06:17.919 they can act more quickly and be closer to the 0:06:17.920 --> 0:06:21.480 frontier of good response more quickly. And that's the basic 0:06:21.560 --> 0:06:23.640 case for what Andrew Metric and his colleagues had built 0:06:23.640 --> 0:06:24.000 at Yale. 0:06:24.360 --> 0:06:27.560 You know something, Tracy, one thing, just thinking about this, 0:06:28.000 --> 0:06:31.560 it occurs to me twenty twenty when COVID hit. You know, 0:06:31.680 --> 0:06:33.680 there were a lot of tools on the shelf developed 0:06:33.720 --> 0:06:35.599 in two thousand and eight, two thousand and nine, and 0:06:35.640 --> 0:06:38.120 it sounds like part of the idea is like, let's 0:06:38.120 --> 0:06:40.719 actually make this a shelf, you know, like let's actually 0:06:40.720 --> 0:06:42.559 like put that shelf out there. But it does seem 0:06:42.600 --> 0:06:44.919 like that helped the rapidity of the twenty twenty response. 0:06:44.960 --> 0:06:47.760 I was literally about to ask taking something off the 0:06:47.800 --> 0:06:51.400 shelf question? Okay, but on this note, how important is 0:06:51.560 --> 0:06:54.480 speed when you're fighting a financial crisis. Is it more 0:06:54.520 --> 0:06:58.560 important to have an idea of exactly what you're going 0:06:58.640 --> 0:07:01.080 to do or is it more important important to you know, 0:07:01.240 --> 0:07:06.240 say whatever it takes allocation to fill out the details. 0:07:06.320 --> 0:07:08.200 Later of course, you have to be able to make 0:07:08.240 --> 0:07:12.280 the credible commitment that you will backstop the financial system 0:07:12.600 --> 0:07:15.760 and make it safe to stay and to take risk again. 0:07:16.120 --> 0:07:17.960 You have to be able to make that commitment credible. 0:07:18.280 --> 0:07:20.720 But it's not enough to state it. People need to 0:07:20.760 --> 0:07:23.680 see it. And how you design that mix of risk 0:07:23.720 --> 0:07:27.480 sharing things that go way beyond badget is critical to 0:07:27.520 --> 0:07:30.800 the efficacy and the credibility of the commitment. So I 0:07:30.800 --> 0:07:33.040 think you're right though to say that if you look 0:07:33.080 --> 0:07:35.920 back at that early weeks of the pandemic, it was 0:07:36.080 --> 0:07:39.480 hugely valuable that a bunch of people around the table 0:07:39.520 --> 0:07:43.800 then were around the table in seven and eight, and 0:07:43.840 --> 0:07:47.920 that memory of what might work was still alive and 0:07:48.000 --> 0:07:52.360 they could draw from a set of cases examples and 0:07:52.720 --> 0:07:55.120 move more quickly to put them in place. But there 0:07:55.160 --> 0:07:57.720 is a huge value to speed when you're at the 0:07:57.840 --> 0:08:01.320 edge of panic. You know, it's like the classic thing, 0:08:01.360 --> 0:08:06.440 These happen very slowly and then way quickly, and you 0:08:06.480 --> 0:08:09.000 don't know what the margin is for something that is 0:08:09.240 --> 0:08:13.480 like burning slowly turning into something that's catastrophic, and so 0:08:13.520 --> 0:08:15.520 you need to be able to move very very quickly. 0:08:15.520 --> 0:08:18.600 And again, one of the barriers moving quickly there's lots 0:08:18.600 --> 0:08:20.880 of barriers. One of the bearers moving quickly is when 0:08:20.880 --> 0:08:25.920 people are not really sure because they hadn't lived it. 0:08:26.160 --> 0:08:28.720 There's no people around them in the institution or they're 0:08:28.760 --> 0:08:31.480 coming into who have any knowledge of it. When I 0:08:31.480 --> 0:08:33.040 went to the New York FED, I remember initially they 0:08:33.080 --> 0:08:35.960 had something they called the Doomsday Book. And the Doomsday 0:08:35.960 --> 0:08:39.719 Book was the comprehensive set of precedent of what the 0:08:39.760 --> 0:08:42.960 New York Fed had done in the decades since the 0:08:43.000 --> 0:08:46.480 Great Depression. How it was, and I was quite eager 0:08:46.520 --> 0:08:49.560 to see this book, and it was a quite fat book. 0:08:49.600 --> 0:08:52.520 But what was remarkable about the book was in those 0:08:52.520 --> 0:08:55.480 decades between the Great Depression and two thousand and seven, 0:08:56.200 --> 0:08:59.880 the things the US had to deal with were relatively modest, 0:09:00.840 --> 0:09:04.440 nothing like the classic systemic financial crisis, and so that 0:09:05.080 --> 0:09:10.439 body of precedent was of limited value. And you could 0:09:10.480 --> 0:09:12.600 have people sitting around the table saying, but what we 0:09:12.640 --> 0:09:16.120 should do what Sweden did, or not do what Japan did, 0:09:16.200 --> 0:09:17.720 or we help people have all these debates, but if 0:09:17.720 --> 0:09:20.559 you ask them what did Sweden actually do? There was 0:09:20.600 --> 0:09:22.520 no knowledge of that, and you know, you could you 0:09:22.559 --> 0:09:24.880 could spend your time calling the person in Sweden who 0:09:24.880 --> 0:09:26.560 had done that. But that takes some time. 0:09:26.760 --> 0:09:28.760 It's so funny because now I have this memory and 0:09:28.800 --> 0:09:31.000 I totally forgot it. I was a business insider at 0:09:31.000 --> 0:09:32.880 the time, and people are like, oh, the Swedish model 0:09:32.880 --> 0:09:35.680 of bailouds, and people were like debating this, and I 0:09:35.720 --> 0:09:37.280 was like, I have no idea what this is. I mean, 0:09:37.360 --> 0:09:40.960 I saw that term the Swedish model of Baylouds dozens 0:09:41.040 --> 0:09:43.800 or hundreds of times, the number of times I actually 0:09:43.840 --> 0:09:47.120 read something with some substantive you know you mentioned but 0:09:47.320 --> 0:09:49.480 between the Great Depression and the Great Financial Crisis, we 0:09:49.480 --> 0:09:51.320 didn't really have to deal with too much. But there 0:09:51.360 --> 0:09:54.880 were a few There were continental Illinois in nineteen eighty four. 0:09:54.960 --> 0:09:59.280 Could those have gotten really bad and become financial crisis 0:09:59.320 --> 0:10:01.280 like events had intervention been slower? 0:10:02.120 --> 0:10:04.800 I don't think that you had that mix of factors 0:10:04.800 --> 0:10:07.839 then that the type of dry tender, the left of 0:10:07.960 --> 0:10:11.040 vulnerable that why was that? You know, part of what 0:10:11.120 --> 0:10:13.480 makes you vulnerable to a classic panic is when the 0:10:13.559 --> 0:10:17.520 economy as a whole is so imbalanced, people have borrowed 0:10:17.559 --> 0:10:20.160 too much relative to income. There's a whole set of 0:10:20.160 --> 0:10:23.560 expectations that go into leverage and behavior based on a 0:10:23.600 --> 0:10:26.800 long period of rising house prices or acid prices, and 0:10:26.840 --> 0:10:29.000 you didn't have this period we called the Great moderation 0:10:29.160 --> 0:10:32.839 where people get used to the expectation that recessions we 0:10:32.880 --> 0:10:36.760 would be short and shallow, and that equity price readjustments 0:10:36.760 --> 0:10:40.200 you could call them, wouldn't cascade into something dangerous. So 0:10:40.320 --> 0:10:43.000 you need a long period for the economy to get 0:10:43.160 --> 0:10:46.080 way out of balance, which was true in seven. It 0:10:46.160 --> 0:10:49.559 was also true that in the decades after the Great Depression, 0:10:50.240 --> 0:10:54.480 the financialism outgrew the banking system and outgrew the protections 0:10:54.520 --> 0:10:57.960 in place around the banking system to prevent excess leverage 0:10:58.120 --> 0:11:01.640 and runs. In our system. This is a very important 0:11:01.679 --> 0:11:04.640 thing to remember, is that in our system in seven, 0:11:05.080 --> 0:11:07.559 you had a banking system which obviously did not have 0:11:07.679 --> 0:11:11.240 enough capital to withstand a terrible recession. But the more 0:11:11.240 --> 0:11:13.400 consequential risk for the system was you had a non 0:11:13.400 --> 0:11:16.840 bank financial system with a set of investment banks and 0:11:17.120 --> 0:11:19.720 non bank financial institutions like ge capital letters, and a 0:11:19.720 --> 0:11:22.960 whole bunch of funding vehicles that had classic bank type 0:11:23.000 --> 0:11:24.880 run risk, that were able to run with a huge 0:11:24.880 --> 0:11:27.520 amount of leverage because people had thought the last decades 0:11:27.640 --> 0:11:30.240 suggest the future would be A nine, and so that 0:11:30.760 --> 0:11:35.079 mix of factors, a more unbalanced economy with a financial 0:11:35.120 --> 0:11:37.920 system very vulnerable to runs took a long time to 0:11:38.000 --> 0:11:39.679 build up, and I don't think we had that mix 0:11:39.720 --> 0:11:40.880 of factors until O seven. 0:11:56.760 --> 0:11:58.600 So one of the big debates when it comes to 0:11:58.640 --> 0:12:03.959 financial stability is whether emergency funding should be directed at 0:12:04.200 --> 0:12:08.960 people versus financial institutions. So how do you think about 0:12:09.280 --> 0:12:13.719 bailing out banks versus maybe bailing out consumers, helping them 0:12:13.720 --> 0:12:17.640 to pay their mortgage, helping them to survive through the pandemic. 0:12:18.280 --> 0:12:21.440 Is that better than underwriting bad assets at a bank 0:12:21.520 --> 0:12:22.800 or a shadow bank, for instance. 0:12:22.920 --> 0:12:26.160 Yeah, excellent question, And they really are not. You can't 0:12:26.160 --> 0:12:29.200 think of them as choices, because there is no credible 0:12:29.240 --> 0:12:31.920 response to a financial crisis that does not come with 0:12:32.280 --> 0:12:34.640 a huge amount what we might call a classic Knesyan 0:12:35.400 --> 0:12:40.240 direct support to households, stay in local governments, and to 0:12:40.320 --> 0:12:44.040 business in some way. And you can figure out your 0:12:44.080 --> 0:12:47.560 financial system stuff and do that, well, it will not 0:12:47.760 --> 0:12:51.040 be sufficient because you need to use that massive Knesyan 0:12:52.000 --> 0:12:55.320 arsenal of force to help take out some of the 0:12:55.400 --> 0:12:59.040 risk of the acute recession. But it's also true that 0:12:59.160 --> 0:13:02.319 doing the Canesy stuff is not sufficient. No economy can 0:13:02.360 --> 0:13:05.280 survive the collapse of the banking system. And the only 0:13:05.360 --> 0:13:07.240 way to prevent the collapse of a banking system or 0:13:07.280 --> 0:13:11.559 a financial system is to guarantee deposits, lend freely against collateral, 0:13:11.600 --> 0:13:15.480 to solve institutions, and sometimes to recapitalize the banking system. 0:13:15.679 --> 0:13:18.000 So they are necessary things that go together, and it 0:13:18.040 --> 0:13:20.040 would be a mistake to try one with out of 0:13:20.040 --> 0:13:22.360 the other. And if you look back, and this is 0:13:22.400 --> 0:13:24.000 the right way to look back, and you know, part 0:13:24.040 --> 0:13:26.240 of what Andrew metro good esteem it built at Yale 0:13:26.280 --> 0:13:30.679 is just to try to do a careful, analytical, dispassionate 0:13:31.280 --> 0:13:35.120 look back at mistakes and lessons and choices. And it 0:13:35.200 --> 0:13:38.600 is absolutely fair to say that the US as a 0:13:38.640 --> 0:13:42.040 political system, as a country did not do enough of 0:13:42.080 --> 0:13:45.960 the classic kainsy and fiscal response early enough and sustained 0:13:46.080 --> 0:13:49.600 enough to complement the things we did to prevent the 0:13:49.640 --> 0:13:51.160 collapse of the financial system. 0:13:52.200 --> 0:13:54.240 One of the things that we've sort of realized during 0:13:54.280 --> 0:13:56.840 the podcast over the years is that even like a 0:13:56.880 --> 0:13:59.760 story like the Great Financial Crisis in eight two thousand 0:13:59.760 --> 0:14:01.920 and nine, people are still debating it. You know, people 0:14:01.920 --> 0:14:05.600 are still debating why and what actually was the cause. 0:14:05.679 --> 0:14:08.520 And you still get people who say things like, you know, 0:14:08.600 --> 0:14:10.920 actually some prime really wasn't that big and that actually 0:14:10.960 --> 0:14:12.800 was not as crazy as it sounded when it was 0:14:12.840 --> 0:14:14.880 asserted at the time. And it's like, actually, you know, 0:14:14.960 --> 0:14:17.000 the issue was like it was all those like yield 0:14:17.040 --> 0:14:20.120 hungry German land banks and stuff like that. I'm curious 0:14:20.160 --> 0:14:22.560 just for you, like you know, seventeen years later or 0:14:22.600 --> 0:14:25.960 whatever other things that you've changed or not in like 0:14:26.120 --> 0:14:28.880 necessarily the response, but when you think back, it like 0:14:29.040 --> 0:14:32.320 causes that like you see in a different light today 0:14:32.360 --> 0:14:33.320 than you did at the time. 0:14:34.120 --> 0:14:37.200 No, I mean you should never say no obviously, you 0:14:37.200 --> 0:14:39.560 should look fresh at these things all the time. 0:14:40.240 --> 0:14:42.920 Or is there any conventional wisdom from the time that 0:14:43.000 --> 0:14:46.000 you don't think has stood up as well as maybe. 0:14:46.000 --> 0:14:49.120 I think during the endurant debate everyone has still has. 0:14:49.440 --> 0:14:52.600 Is is a good debate to have, which is a 0:14:52.720 --> 0:14:56.400 version of your question, Tracy, which is that but couldn't 0:14:56.400 --> 0:15:00.680 we have done more for the individual? And shouldn't we 0:15:00.720 --> 0:15:02.880 have done more for the individual? And wouldn't have been 0:15:03.680 --> 0:15:08.280 more effective and less damaging? And absolutely that's the right 0:15:08.360 --> 0:15:10.920 question and the fiscal response of the US and the 0:15:10.960 --> 0:15:14.760 pandemic is just a good counter example. There's a good 0:15:14.800 --> 0:15:16.920 set of arguments that we overdid it in the pandemic, 0:15:17.440 --> 0:15:20.640 but the speed and the mix and the overall force 0:15:20.760 --> 0:15:24.520 and the composition of the fiscal policy measure put in place, 0:15:24.520 --> 0:15:26.360 they're a good counter example. And I think that is 0:15:26.400 --> 0:15:28.360 a very good lesson. Of course, you don't want to 0:15:28.360 --> 0:15:30.120 be like you know, you don't want to overlearn your 0:15:30.160 --> 0:15:32.840 lessons of these things. I think the other big lesson, 0:15:32.880 --> 0:15:34.800 of course is and we've talked about this is just 0:15:34.880 --> 0:15:38.080 again that you know, we were as a country, we 0:15:38.080 --> 0:15:41.960 were late to escalate on the purely financial dimensions of 0:15:42.000 --> 0:15:44.280 the crisis. And part of that was because, as we 0:15:44.320 --> 0:15:46.720 talked before, people had no memory of what it takes, 0:15:46.760 --> 0:15:48.120 and people would debate where we're going to have a 0:15:48.120 --> 0:15:49.640 crisis for a long period of time, and that got 0:15:49.680 --> 0:15:52.600 the way of speed. But probably because in our system 0:15:52.640 --> 0:15:54.520 a lot of the very powerful thing is run through 0:15:54.520 --> 0:15:57.520 the Congress and that it takes some time, and normally 0:15:57.520 --> 0:16:00.800 in our system and uniquely our system in some ways 0:16:00.840 --> 0:16:03.160 because of the checks and balances, things have to feel 0:16:03.240 --> 0:16:06.440 terrible before you can shake the Congress into action. 0:16:06.640 --> 0:16:09.120 Things have to feel like issues that people will actually 0:16:09.240 --> 0:16:12.680 vote on Okay, So how do you actually judge the 0:16:12.720 --> 0:16:16.240 success of a financial crisis intervention? Because this seems to 0:16:16.240 --> 0:16:19.320 me to be the real difficulty here. So you're trying 0:16:19.360 --> 0:16:23.120 to prove that the counterfactual would have been worse exactly, 0:16:23.200 --> 0:16:27.120 and that's probably impossible. So how do you go about 0:16:27.160 --> 0:16:30.360 thinking of this was good, this was successful, versus we 0:16:30.400 --> 0:16:33.080 should have done this, this was a total failure, et cetera. 0:16:33.480 --> 0:16:35.480 Yeah, there's a bunch of different measures you can use, 0:16:35.520 --> 0:16:37.640 and of course none of them are perfect. One is 0:16:37.720 --> 0:16:40.160 you could look at the quality of the macroeconomic outcomes 0:16:40.320 --> 0:16:43.440 relative to past crises, and it's not a great comparison. 0:16:43.440 --> 0:16:45.840 It seems like a low bar. But the classic comparison 0:16:45.920 --> 0:16:48.880 is to say what was the depth of the recession? 0:16:49.000 --> 0:16:52.120 Is duration? And what was the path of growth in 0:16:52.160 --> 0:16:57.400 the US in this experience relative to two things, two compartors. 0:16:57.480 --> 0:17:00.080 One is the great depression. We're unemployment p tw twenty 0:17:00.120 --> 0:17:02.320 five percent and you had like a decade of negative 0:17:02.360 --> 0:17:05.040 if not, you know, terrible growth outcomes. And the other 0:17:05.080 --> 0:17:08.280 comparison is to look at the other major economies that 0:17:08.320 --> 0:17:10.560 went through this crisis and what were those outcomes in 0:17:10.640 --> 0:17:16.320 terms of basic thing, depth of recession, speed of recovery, 0:17:17.119 --> 0:17:20.959 rise in unemployment, loss of income, loss of wealth. And 0:17:21.280 --> 0:17:24.600 those are not perfect comparisons, because everything is different, but 0:17:24.640 --> 0:17:26.719 I think they're pretty good comparisons. And I think that 0:17:27.160 --> 0:17:30.159 there's a bunch of arguments that and Ben BERNANKI knows, 0:17:30.200 --> 0:17:33.040 were written about this, that the size of the shock 0:17:33.680 --> 0:17:36.520 that precipitated the crisis of seven o eight was larger 0:17:36.560 --> 0:17:41.000 than at the beginnings of the Great Depression. And I 0:17:41.040 --> 0:17:45.600 think by that measure, us outcomes were dramatically better. Our 0:17:45.640 --> 0:17:48.480 outcomes were also significantly better than those of any other 0:17:48.520 --> 0:17:52.159 major economy went through the crisis. And I said, you know, 0:17:52.200 --> 0:17:55.040 we made a bunch of mistakes. We were short of 0:17:55.119 --> 0:17:57.919 the frontier of what was possible, we were late to escalate, 0:17:57.960 --> 0:17:59.840 didn't do enough fiscal So I think we should look 0:17:59.840 --> 0:18:03.520 at those things with open eyes. But on those two measures, 0:18:03.560 --> 0:18:06.000 I think that the quality of the choices we ultimately 0:18:06.080 --> 0:18:09.360 made were quite good. There's one other thing you can 0:18:09.400 --> 0:18:14.760 look at, which is what is the health of the 0:18:14.840 --> 0:18:18.040 system that emerges from the ashes of the crisis, what's 0:18:18.080 --> 0:18:20.159 the quality of the reforms that are put in place? 0:18:20.840 --> 0:18:23.479 And I think if you look at again, these are 0:18:23.520 --> 0:18:27.400 imperfect things. You can't per comparisons, but you know, our 0:18:27.480 --> 0:18:32.480 system emerged with much more capital than the peers of 0:18:32.560 --> 0:18:35.800 the major US institutions. Therefore, we had a much more 0:18:35.840 --> 0:18:40.280 resilient system and I think a system able to help 0:18:40.359 --> 0:18:43.760 finance at more rapid recovery. It was from many other countries, 0:18:44.080 --> 0:18:45.960 and I think we were able to still preserve a 0:18:46.000 --> 0:18:48.480 system which is still I think best in the world 0:18:48.760 --> 0:18:51.760 at channeling capital. People have had a good idea and 0:18:51.840 --> 0:18:55.960 the wave of innovation, massive innovation we've seen in the 0:18:56.040 --> 0:19:00.399 US economy in a decade since, and it's relative situation 0:19:00.440 --> 0:19:02.239 in the United States is partly a function of the 0:19:02.280 --> 0:19:06.320 fact that we were able to repair the damage onto 0:19:06.400 --> 0:19:09.840 this system relatively quickly and put in place a set 0:19:09.880 --> 0:19:14.320 of institutions and waste of fun, good ideas that still 0:19:14.359 --> 0:19:15.560 remains the envy of the world. 0:19:15.760 --> 0:19:17.879 It's interesting. Tracy and I have done like tons of 0:19:17.920 --> 0:19:21.600 episodes on like how the financial system has changed post 0:19:21.640 --> 0:19:24.000 Dodd Frank and we've talked a lot about multi strategy 0:19:24.040 --> 0:19:27.080 hedge funds and private credit, et cetera. And we could 0:19:27.119 --> 0:19:30.240 all come up in our minds with scenarios we're all 0:19:30.320 --> 0:19:32.840 that good's bad because right it's easy to come up with, 0:19:33.040 --> 0:19:35.800 but a lot of times that walk away from those conversations. 0:19:35.800 --> 0:19:37.720 It's like, h seems like a lot of risk taking 0:19:38.040 --> 0:19:42.480 activity has in fact moved away from deposit taking institutions, 0:19:42.720 --> 0:19:46.240 but the deposit taking institutions still have function. I mean, 0:19:46.320 --> 0:19:48.720 like I I don't want Jink said, but it does 0:19:48.800 --> 0:19:52.240 seem like the financial system that exists today to some 0:19:52.440 --> 0:19:55.720 extent is the financial system that was conceived of with 0:19:55.840 --> 0:19:56.359 Dodd Frank. 0:19:57.720 --> 0:19:59.960 Yeah. Of course, as you said, you want to always 0:19:59.960 --> 0:20:04.400 be careful, and because you won't know until you have 0:20:04.520 --> 0:20:07.840 the more exacting test of resilience, and the more exacting 0:20:07.880 --> 0:20:12.600 test of resilience is a severe recession that starts outside 0:20:12.600 --> 0:20:15.280 the system, not within the financial system, and we haven't 0:20:15.640 --> 0:20:17.679 really had that test yet, and the pandemic was not 0:20:17.720 --> 0:20:20.000 a perfect test of that system, so we won't really know. 0:20:20.520 --> 0:20:23.240 But I think you're right to say that the system 0:20:23.280 --> 0:20:27.720 as it looks today has a banking system which has 0:20:27.760 --> 0:20:32.359 more capital, better set of protections around it, and the 0:20:32.440 --> 0:20:36.880 non bank system has more stable foundations. You know, it's 0:20:36.680 --> 0:20:40.120 it's it's a system where the credit that comes outside 0:20:40.160 --> 0:20:46.440 the banking system is in relatively stronger hands, less leverage 0:20:46.640 --> 0:20:49.919 less run risk. Now, of course there will be some 0:20:50.040 --> 0:20:52.760 sadness and there will be some pain, and people will 0:20:52.760 --> 0:20:55.399 lose some money, and there will be some failure in 0:20:55.440 --> 0:20:57.840 even modern shocks in this system. But that's the way 0:20:57.840 --> 0:20:59.760 the system should work. The test of a system is 0:21:00.000 --> 0:21:03.080 think Larry Summers said it should be safe for failure. 0:21:03.680 --> 0:21:06.919 And you want to build a system that is not 0:21:07.119 --> 0:21:11.440 prevents failure or where failures inconceivable, but where it's safe 0:21:11.480 --> 0:21:13.280 for failure, and that meaning you can allow a fair 0:21:13.320 --> 0:21:15.199 amount of failure to happen without needing to do the 0:21:15.240 --> 0:21:18.120 massive escalation that we had to do in that crisis. 0:21:18.880 --> 0:21:22.640 So, speaking of banking reform and DoD Frank and capital, 0:21:22.680 --> 0:21:25.240 I wanted to ask you about Basil because in the 0:21:25.240 --> 0:21:30.000