1
00:00:00,120 --> 00:00:02,520
Speaker 1: We start with a wild week in the market, since

2
00:00:02,520 --> 00:00:05,600
Speaker 1: stocks and bonds responded to weak jobs numbers, a shift

3
00:00:05,600 --> 00:00:09,319
Speaker 1: in Japanese monetary policy, and geopolitical uncertainty. To take us

4
00:00:09,320 --> 00:00:11,600
Speaker 1: through what it all means, we turn once again to

5
00:00:11,680 --> 00:00:14,600
Speaker 1: our special contributor, Larry Summers of Harvard. So, Larry a

6
00:00:14,600 --> 00:00:17,400
Speaker 1: lot to sort through here. What was your overall take

7
00:00:17,800 --> 00:00:20,319
Speaker 1: on the terminil in the marketplace and the speculation the

8
00:00:20,320 --> 00:00:23,360
Speaker 1: speculation the Fed maybe should have an emergency rate, gud.

9
00:00:24,120 --> 00:00:28,520
Speaker 2: I would say on current facts, given that there has

10
00:00:28,600 --> 00:00:33,440
Speaker 2: been some recovery, given that volatility has come way down,

11
00:00:34,200 --> 00:00:35,960
Speaker 2: it we're not out.

12
00:00:35,800 --> 00:00:37,560
Speaker 3: Of the woods. You can't be certain.

13
00:00:37,640 --> 00:00:42,360
Speaker 2: The FED certainly needs to be watching carefully, but I

14
00:00:42,479 --> 00:00:50,960
Speaker 2: think an emergency response would be lauching, panicked, overheated, and

15
00:00:52,280 --> 00:00:57,760
Speaker 2: counterproductive on current facts, Which doesn't mean that the FED

16
00:00:57,800 --> 00:01:03,880
Speaker 2: shouldn't be watching very closely. Before they have another decision

17
00:01:03,960 --> 00:01:07,039
Speaker 2: to make in September, there's going to be a lot

18
00:01:07,080 --> 00:01:11,320
Speaker 2: more data that's going to come in, and I think

19
00:01:11,319 --> 00:01:14,680
Speaker 2: they should make clear that they're going to be watching

20
00:01:14,760 --> 00:01:18,000
Speaker 2: all that data and they're going to make a decision

21
00:01:18,160 --> 00:01:23,240
Speaker 2: reflecting the need to balance a concern of making sure

22
00:01:23,319 --> 00:01:30,880
Speaker 2: that we have stopped inflation with the concern of maximizing employment,

23
00:01:31,520 --> 00:01:36,680
Speaker 2: and I think they need to not be pressured into

24
00:01:37,040 --> 00:01:40,600
Speaker 2: specificity of a kind that is impossible.

25
00:01:41,240 --> 00:01:42,320
Speaker 1: Let me pick up on one of the things you

26
00:01:42,360 --> 00:01:45,000
Speaker 1: mentioned was volatility. The VICS really did spike up to

27
00:01:45,080 --> 00:01:47,400
Speaker 1: I think over sixty, maybe the highest it had been

28
00:01:47,480 --> 00:01:51,280
Speaker 1: since the pandemic first hit. How much attention should the

29
00:01:51,320 --> 00:01:54,520
Speaker 1: FED pay to that volatility index what it might be

30
00:01:54,520 --> 00:01:56,240
Speaker 1: telling you about the markets are functioning.

31
00:01:57,960 --> 00:02:04,600
Speaker 2: I actually think that the SEC and the relevant exchanges

32
00:02:05,200 --> 00:02:09,480
Speaker 2: may want to pay a bit of attention. My understanding

33
00:02:09,760 --> 00:02:13,920
Speaker 2: is that because there's some ill liquid instruments that go

34
00:02:14,120 --> 00:02:19,280
Speaker 2: into the calculation of the VIX, the VIX had a

35
00:02:19,400 --> 00:02:25,359
Speaker 2: somewhat artificial movement on Monday that if one looks at

36
00:02:25,360 --> 00:02:29,880
Speaker 2: the VIX futures, which are a somewhat different instrument, they

37
00:02:31,000 --> 00:02:38,560
Speaker 2: the movements were much much less dramatic. So I certainly

38
00:02:38,560 --> 00:02:42,840
Speaker 2: had my attention caught by the VICS early in the

39
00:02:42,919 --> 00:02:46,639
Speaker 2: day on Monday. But as I have looked into it,

40
00:02:47,280 --> 00:02:51,919
Speaker 2: I think you were learning more about issues around liquidity

41
00:02:51,960 --> 00:02:56,839
Speaker 2: in the options markets than you were about some profound

42
00:02:56,960 --> 00:03:00,959
Speaker 2: reassessment of the kind of economy.

43
00:03:01,120 --> 00:03:04,440
Speaker 3: And since that is so widely watched.

44
00:03:03,960 --> 00:03:10,040
Speaker 2: And indicator issues of liquidity issues around how it settles,

45
00:03:10,440 --> 00:03:14,560
Speaker 2: I think should be studied by the relevant parties in

46
00:03:14,600 --> 00:03:17,120
Speaker 2: the industry and the regulator, the SEC.

47
00:03:18,120 --> 00:03:18,360
Speaker 3: Larry.

48
00:03:18,360 --> 00:03:20,200
Speaker 1: We spent much of the week with various people getting

49
00:03:20,240 --> 00:03:23,040
Speaker 1: advice to the FED. It included our former president Donald

50
00:03:23,040 --> 00:03:25,919
Speaker 1: Trump on Thursday and a long news conference and which

51
00:03:25,919 --> 00:03:29,280
Speaker 1: he addressed it, reiterating he thinks the president should have

52
00:03:29,360 --> 00:03:33,040
Speaker 1: some say over monetary policy and rate setting, including saying, boy,

53
00:03:33,080 --> 00:03:34,639
Speaker 1: he'd made an awful lot of money and he thinks

54
00:03:34,639 --> 00:03:37,320
Speaker 1: he knows better than the chair of the FED. You

55
00:03:37,360 --> 00:03:40,080
Speaker 1: had a reaction to that. I know you posted on

56
00:03:40,120 --> 00:03:43,680
Speaker 1: that question. Give us your stance about how dangerous that

57
00:03:43,800 --> 00:03:44,440
Speaker 1: could be.

58
00:03:45,920 --> 00:03:50,480
Speaker 2: I guess I can't say I was surprised by ex

59
00:03:50,560 --> 00:03:56,400
Speaker 2: President Trump because he had said things like that before, but.

60
00:03:56,960 --> 00:04:02,600
Speaker 3: I sure was appalled how bad an idea it was.

61
00:04:03,640 --> 00:04:08,440
Speaker 3: I mean, start with the preposterous arrogance.

62
00:04:09,160 --> 00:04:15,920
Speaker 2: The Central Bank has nineteen members of the FOMC who

63
00:04:16,000 --> 00:04:22,080
Speaker 2: spend more or less all their time scrutinizing every economic statistic.

64
00:04:22,839 --> 00:04:27,000
Speaker 2: President's got a lot of things to do at any

65
00:04:27,040 --> 00:04:32,800
Speaker 2: given moment, and is actually much less close to the economy.

66
00:04:33,720 --> 00:04:40,960
Speaker 2: God knows, the skills associated with being an economic forecaster

67
00:04:41,200 --> 00:04:45,080
Speaker 2: and the skills associated with being a successful real estate

68
00:04:45,120 --> 00:04:50,040
Speaker 2: operator are very very different ones. So I don't think

69
00:04:50,040 --> 00:04:53,480
Speaker 2: there's any particular reason to think that a president of

70
00:04:53,480 --> 00:04:58,680
Speaker 2: the United States would have a intellectual contribution to make.

71
00:05:00,040 --> 00:05:04,480
Speaker 2: And the reason why countries all over the world this

72
00:05:04,560 --> 00:05:07,880
Speaker 2: isn't just an American thing, but countries essentially all over

73
00:05:07,920 --> 00:05:14,080
Speaker 2: the world have moved to independent central banks, is that

74
00:05:14,120 --> 00:05:18,280
Speaker 2: they recognize a profound conflict of interest.

75
00:05:18,560 --> 00:05:20,280
Speaker 3: Who's ever an.

76
00:05:19,760 --> 00:05:24,400
Speaker 2: Elective or political office always is tempted to put more

77
00:05:24,480 --> 00:05:29,760
Speaker 2: money lower interest. Strates hit the accelerator hard to get

78
00:05:29,760 --> 00:05:32,760
Speaker 2: a boost to the economy to make people.

79
00:05:32,440 --> 00:05:35,440
Speaker 3: Feel good, But when everybody sees that.

80
00:05:35,520 --> 00:05:39,120
Speaker 2: Coming, it doesn't actually make people feel good. It just

81
00:05:39,279 --> 00:05:45,000
Speaker 2: raises the expectation they have for inflation, so you get

82
00:05:45,040 --> 00:05:48,600
Speaker 2: more inflation and you don't get any substantial output gain.

83
00:05:49,200 --> 00:05:53,720
Speaker 2: That's what happened when President Nixon was involved in bashing

84
00:05:53,800 --> 00:05:59,320
Speaker 2: FED Chair Arthur Burns around the nineteen seventy two election.

85
00:06:00,040 --> 00:06:01,120
Speaker 3: That's what's happened in.

86
00:06:01,120 --> 00:06:06,919
Speaker 2: Numerable times in Latin America, and that's why the lesson

87
00:06:07,040 --> 00:06:13,240
Speaker 2: has been pretty well internalized in the vast majority of

88
00:06:13,960 --> 00:06:21,200
Speaker 2: mature democracies that you keep central banks independent because having

89
00:06:21,480 --> 00:06:26,680
Speaker 2: the politicians involved is a fool's game. The FED doesn't listen,

90
00:06:27,200 --> 00:06:30,840
Speaker 2: so you don't cut short term interest strates, and the

91
00:06:30,920 --> 00:06:34,680
Speaker 2: markets do, and so long term interest rates go up

92
00:06:34,720 --> 00:06:38,719
Speaker 2: with inflation expectations, and so you end up with higher

93
00:06:38,720 --> 00:06:41,960
Speaker 2: inflation and a weeker economy.

94
00:06:42,440 --> 00:06:44,000
Speaker 1: As we come toward the end of the week, one

95
00:06:44,040 --> 00:06:46,840
Speaker 1: of the things that people are saying about what precipitated

96
00:06:46,839 --> 00:06:49,320
Speaker 1: the market for fluctuations was what happened over in Japan

97
00:06:49,760 --> 00:06:52,640
Speaker 1: with the Bank of the Japan really tightening monetary policy.

98
00:06:53,080 --> 00:06:55,320
Speaker 1: They actually sort of backed off of it, saying they're

99
00:06:55,320 --> 00:06:56,800
Speaker 1: not going to do any more right away given the

100
00:06:56,800 --> 00:07:00,599
Speaker 1: market turmoil. You back in October on this program said

101
00:07:00,920 --> 00:07:03,280
Speaker 1: they have to be careful as they move into a

102
00:07:03,279 --> 00:07:06,440
Speaker 1: different direction of the monetary policy, given how much barring

103
00:07:06,480 --> 00:07:09,600
Speaker 1: they've been done in relatively cheap end. Give us your sense,

104
00:07:09,680 --> 00:07:12,440
Speaker 1: do you think the Bankageman is handling this correctly? What

105
00:07:12,640 --> 00:07:14,240
Speaker 1: course should it set for itself?

106
00:07:16,200 --> 00:07:22,280
Speaker 2: You know, David, when I remember when I first learned

107
00:07:22,280 --> 00:07:26,040
Speaker 2: to drive a car, and I remember when I taught

108
00:07:26,080 --> 00:07:32,200
Speaker 2: my kids to drive a car, that the first times

109
00:07:32,320 --> 00:07:37,360
Speaker 2: they were driving a car, they tended to overseer. They

110
00:07:37,480 --> 00:07:39,600
Speaker 2: turned the steering wheel too much one way, and then

111
00:07:39,640 --> 00:07:41,760
Speaker 2: they have to turn it and they want to correct that,

112
00:07:41,880 --> 00:07:44,800
Speaker 2: and they turn the steering wheel too much the other.

113
00:07:44,640 --> 00:07:50,040
Speaker 3: Way, and we'd sort of make a wave down the road.

114
00:07:50,960 --> 00:07:54,880
Speaker 2: I think there's a bit of a tendency for central bankers,

115
00:07:55,040 --> 00:08:01,440
Speaker 2: particularly new central bankers, to do that kind of thing,

116
00:08:02,040 --> 00:08:04,480
Speaker 2: and I think you saw a bit of that in Japan.

117
00:08:04,720 --> 00:08:09,520
Speaker 2: I think the backing off after such a long time

118
00:08:09,680 --> 00:08:14,040
Speaker 2: of such low interest rates could perhaps have been executed

119
00:08:14,640 --> 00:08:19,200
Speaker 2: more gently, and then when it caused a big response,

120
00:08:19,960 --> 00:08:23,520
Speaker 2: they didn't need to be quite as firm as they

121
00:08:23,600 --> 00:08:30,040
Speaker 2: were about showing that they were responding to.

122
00:08:31,600 --> 00:08:34,640
Speaker 3: The markets. So I think, you.

123
00:08:34,600 --> 00:08:38,559
Speaker 2: Know, it's it's the stuff Machiavelli.

124
00:08:39,320 --> 00:08:45,640
Speaker 3: Taught leaders. You always want to look unruffled.

125
00:08:46,360 --> 00:08:51,280
Speaker 2: You want your actions to be small and then have

126
00:08:51,960 --> 00:09:01,719
Speaker 2: accumulative impact, not be shouting when you already have a megaphone.

127
00:09:02,040 --> 00:09:04,760
Speaker 2: And so I don't think it's ultimately going to be

128
00:09:05,559 --> 00:09:08,920
Speaker 2: hugely consequential, and I think there was an adjustment that

129
00:09:09,080 --> 00:09:13,439
Speaker 2: was going to need to come in Japanese monetary policy.

130
00:09:13,600 --> 00:09:18,120
Speaker 3: But to use the language of this week's Olympics.

131
00:09:18,960 --> 00:09:23,000
Speaker 2: I think i'd probably deduct a bit on style points

132
00:09:23,040 --> 00:09:24,240
Speaker 2: from the Bank of Japan.

133
00:09:25,160 --> 00:09:27,320
Speaker 1: Okay, Larry, thank you so very much once again for

134
00:09:27,360 --> 00:09:30,199
Speaker 1: being with us. That is our special Wall Street Week contributor.

135
00:09:30,240 --> 00:09:32,080
Speaker 1: He is Larry Summers of Harvard