WEBVTT - Former US Treasury secretary and Wall Street Week contributor Larry Summers Talks Marketplace Turmoil

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<v Speaker 1>We start with a wild week in the market, since

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<v Speaker 1>stocks and bonds responded to weak jobs numbers, a shift

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<v Speaker 1>in Japanese monetary policy, and geopolitical uncertainty. To take us

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<v Speaker 1>through what it all means, we turn once again to

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<v Speaker 1>our special contributor, Larry Summers of Harvard. So, Larry a

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<v Speaker 1>lot to sort through here. What was your overall take

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<v Speaker 1>on the terminil in the marketplace and the speculation the

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<v Speaker 1>speculation the Fed maybe should have an emergency rate, gud.

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<v Speaker 2>I would say on current facts, given that there has

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<v Speaker 2>been some recovery, given that volatility has come way down,

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<v Speaker 2>it we're not out.

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<v Speaker 3>Of the woods. You can't be certain.

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<v Speaker 2>The FED certainly needs to be watching carefully, but I

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<v Speaker 2>think an emergency response would be lauching, panicked, overheated, and

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<v Speaker 2>counterproductive on current facts, Which doesn't mean that the FED

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<v Speaker 2>shouldn't be watching very closely. Before they have another decision

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<v Speaker 2>to make in September, there's going to be a lot

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<v Speaker 2>more data that's going to come in, and I think

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<v Speaker 2>they should make clear that they're going to be watching

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<v Speaker 2>all that data and they're going to make a decision

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<v Speaker 2>reflecting the need to balance a concern of making sure

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<v Speaker 2>that we have stopped inflation with the concern of maximizing employment,

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<v Speaker 2>and I think they need to not be pressured into

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<v Speaker 2>specificity of a kind that is impossible.

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<v Speaker 1>Let me pick up on one of the things you

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<v Speaker 1>mentioned was volatility. The VICS really did spike up to

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<v Speaker 1>I think over sixty, maybe the highest it had been

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<v Speaker 1>since the pandemic first hit. How much attention should the

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<v Speaker 1>FED pay to that volatility index what it might be

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<v Speaker 1>telling you about the markets are functioning.

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<v Speaker 2>I actually think that the SEC and the relevant exchanges

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<v Speaker 2>may want to pay a bit of attention. My understanding

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<v Speaker 2>is that because there's some ill liquid instruments that go

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<v Speaker 2>into the calculation of the VIX, the VIX had a

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<v Speaker 2>somewhat artificial movement on Monday that if one looks at

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<v Speaker 2>the VIX futures, which are a somewhat different instrument, they

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<v Speaker 2>the movements were much much less dramatic. So I certainly

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<v Speaker 2>had my attention caught by the VICS early in the

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<v Speaker 2>day on Monday. But as I have looked into it,

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<v Speaker 2>I think you were learning more about issues around liquidity

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<v Speaker 2>in the options markets than you were about some profound

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<v Speaker 2>reassessment of the kind of economy.

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<v Speaker 3>And since that is so widely watched.

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<v Speaker 2>And indicator issues of liquidity issues around how it settles,

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<v Speaker 2>I think should be studied by the relevant parties in

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<v Speaker 2>the industry and the regulator, the SEC.

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<v Speaker 3>Larry.

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<v Speaker 1>We spent much of the week with various people getting

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<v Speaker 1>advice to the FED. It included our former president Donald

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<v Speaker 1>Trump on Thursday and a long news conference and which

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<v Speaker 1>he addressed it, reiterating he thinks the president should have

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<v Speaker 1>some say over monetary policy and rate setting, including saying, boy,

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<v Speaker 1>he'd made an awful lot of money and he thinks

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<v Speaker 1>he knows better than the chair of the FED. You

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<v Speaker 1>had a reaction to that. I know you posted on

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<v Speaker 1>that question. Give us your stance about how dangerous that

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<v Speaker 1>could be.

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<v Speaker 2>I guess I can't say I was surprised by ex

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<v Speaker 2>President Trump because he had said things like that before, but.

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<v Speaker 3>I sure was appalled how bad an idea it was.

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<v Speaker 3>I mean, start with the preposterous arrogance.

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<v Speaker 2>The Central Bank has nineteen members of the FOMC who

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<v Speaker 2>spend more or less all their time scrutinizing every economic statistic.

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<v Speaker 2>President's got a lot of things to do at any

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<v Speaker 2>given moment, and is actually much less close to the economy.

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<v Speaker 2>God knows, the skills associated with being an economic forecaster

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<v Speaker 2>and the skills associated with being a successful real estate

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<v Speaker 2>operator are very very different ones. So I don't think

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<v Speaker 2>there's any particular reason to think that a president of

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<v Speaker 2>the United States would have a intellectual contribution to make.

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<v Speaker 2>And the reason why countries all over the world this

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<v Speaker 2>isn't just an American thing, but countries essentially all over

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<v Speaker 2>the world have moved to independent central banks, is that

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<v Speaker 2>they recognize a profound conflict of interest.

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<v Speaker 3>Who's ever an.

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<v Speaker 2>Elective or political office always is tempted to put more

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<v Speaker 2>money lower interest. Strates hit the accelerator hard to get

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<v Speaker 2>a boost to the economy to make people.

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<v Speaker 3>Feel good, But when everybody sees that.

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<v Speaker 2>Coming, it doesn't actually make people feel good. It just

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<v Speaker 2>raises the expectation they have for inflation, so you get

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<v Speaker 2>more inflation and you don't get any substantial output gain.

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<v Speaker 2>That's what happened when President Nixon was involved in bashing

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<v Speaker 2>FED Chair Arthur Burns around the nineteen seventy two election.

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<v Speaker 3>That's what's happened in.

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<v Speaker 2>Numerable times in Latin America, and that's why the lesson

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<v Speaker 2>has been pretty well internalized in the vast majority of

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<v Speaker 2>mature democracies that you keep central banks independent because having

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<v Speaker 2>the politicians involved is a fool's game. The FED doesn't listen,

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<v Speaker 2>so you don't cut short term interest strates, and the

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<v Speaker 2>markets do, and so long term interest rates go up

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<v Speaker 2>with inflation expectations, and so you end up with higher

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<v Speaker 2>inflation and a weeker economy.

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<v Speaker 1>As we come toward the end of the week, one

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<v Speaker 1>of the things that people are saying about what precipitated

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<v Speaker 1>the market for fluctuations was what happened over in Japan

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<v Speaker 1>with the Bank of the Japan really tightening monetary policy.

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<v Speaker 1>They actually sort of backed off of it, saying they're

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<v Speaker 1>not going to do any more right away given the

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<v Speaker 1>market turmoil. You back in October on this program said

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<v Speaker 1>they have to be careful as they move into a

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<v Speaker 1>different direction of the monetary policy, given how much barring

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<v Speaker 1>they've been done in relatively cheap end. Give us your sense,

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<v Speaker 1>do you think the Bankageman is handling this correctly? What

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<v Speaker 1>course should it set for itself?

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<v Speaker 2>You know, David, when I remember when I first learned

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<v Speaker 2>to drive a car, and I remember when I taught

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<v Speaker 2>my kids to drive a car, that the first times

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<v Speaker 2>they were driving a car, they tended to overseer. They

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<v Speaker 2>turned the steering wheel too much one way, and then

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<v Speaker 2>they have to turn it and they want to correct that,

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<v Speaker 2>and they turn the steering wheel too much the other.

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<v Speaker 3>Way, and we'd sort of make a wave down the road.

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<v Speaker 2>I think there's a bit of a tendency for central bankers,

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<v Speaker 2>particularly new central bankers, to do that kind of thing,

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<v Speaker 2>and I think you saw a bit of that in Japan.

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<v Speaker 2>I think the backing off after such a long time

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<v Speaker 2>of such low interest rates could perhaps have been executed

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<v Speaker 2>more gently, and then when it caused a big response,

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<v Speaker 2>they didn't need to be quite as firm as they

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<v Speaker 2>were about showing that they were responding to.

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<v Speaker 3>The markets. So I think, you.

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<v Speaker 2>Know, it's it's the stuff Machiavelli.

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<v Speaker 3>Taught leaders. You always want to look unruffled.

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<v Speaker 2>You want your actions to be small and then have

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<v Speaker 2>accumulative impact, not be shouting when you already have a megaphone.

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<v Speaker 2>And so I don't think it's ultimately going to be

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<v Speaker 2>hugely consequential, and I think there was an adjustment that

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<v Speaker 2>was going to need to come in Japanese monetary policy.

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<v Speaker 3>But to use the language of this week's Olympics.

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<v Speaker 2>I think i'd probably deduct a bit on style points

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<v Speaker 2>from the Bank of Japan.

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<v Speaker 1>Okay, Larry, thank you so very much once again for

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<v Speaker 1>being with us. That is our special Wall Street Week contributor.

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<v Speaker 1>He is Larry Summers of Harvard