Speaker 1: We start with a wild week in the market, since
Speaker 1: stocks and bonds responded to weak jobs numbers, a shift
Speaker 1: in Japanese monetary policy, and geopolitical uncertainty. To take us
Speaker 1: through what it all means, we turn once again to
Speaker 1: our special contributor, Larry Summers of Harvard. So, Larry a
Speaker 1: lot to sort through here. What was your overall take
Speaker 1: on the terminil in the marketplace and the speculation the
Speaker 1: speculation the Fed maybe should have an emergency rate, gud.
Speaker 2: I would say on current facts, given that there has
Speaker 2: been some recovery, given that volatility has come way down,
Speaker 2: it we're not out.
Speaker 3: Of the woods. You can't be certain.
Speaker 2: The FED certainly needs to be watching carefully, but I
Speaker 2: think an emergency response would be lauching, panicked, overheated, and
Speaker 2: counterproductive on current facts, Which doesn't mean that the FED
Speaker 2: shouldn't be watching very closely. Before they have another decision
Speaker 2: to make in September, there's going to be a lot
Speaker 2: more data that's going to come in, and I think
Speaker 2: they should make clear that they're going to be watching
Speaker 2: all that data and they're going to make a decision
Speaker 2: reflecting the need to balance a concern of making sure
Speaker 2: that we have stopped inflation with the concern of maximizing employment,
Speaker 2: and I think they need to not be pressured into
Speaker 2: specificity of a kind that is impossible.
Speaker 1: Let me pick up on one of the things you
Speaker 1: mentioned was volatility. The VICS really did spike up to
Speaker 1: I think over sixty, maybe the highest it had been
Speaker 1: since the pandemic first hit. How much attention should the
Speaker 1: FED pay to that volatility index what it might be
Speaker 1: telling you about the markets are functioning.
Speaker 2: I actually think that the SEC and the relevant exchanges
Speaker 2: may want to pay a bit of attention. My understanding
Speaker 2: is that because there's some ill liquid instruments that go
Speaker 2: into the calculation of the VIX, the VIX had a
Speaker 2: somewhat artificial movement on Monday that if one looks at
Speaker 2: the VIX futures, which are a somewhat different instrument, they
Speaker 2: the movements were much much less dramatic. So I certainly
Speaker 2: had my attention caught by the VICS early in the
Speaker 2: day on Monday. But as I have looked into it,
Speaker 2: I think you were learning more about issues around liquidity
Speaker 2: in the options markets than you were about some profound
Speaker 2: reassessment of the kind of economy.
Speaker 3: And since that is so widely watched.
Speaker 2: And indicator issues of liquidity issues around how it settles,
Speaker 2: I think should be studied by the relevant parties in
Speaker 2: the industry and the regulator, the SEC.
Speaker 3: Larry.
Speaker 1: We spent much of the week with various people getting
Speaker 1: advice to the FED. It included our former president Donald
Speaker 1: Trump on Thursday and a long news conference and which
Speaker 1: he addressed it, reiterating he thinks the president should have
Speaker 1: some say over monetary policy and rate setting, including saying, boy,
Speaker 1: he'd made an awful lot of money and he thinks
Speaker 1: he knows better than the chair of the FED. You
Speaker 1: had a reaction to that. I know you posted on
Speaker 1: that question. Give us your stance about how dangerous that
Speaker 1: could be.
Speaker 2: I guess I can't say I was surprised by ex
Speaker 2: President Trump because he had said things like that before, but.
Speaker 3: I sure was appalled how bad an idea it was.
Speaker 3: I mean, start with the preposterous arrogance.
Speaker 2: The Central Bank has nineteen members of the FOMC who
Speaker 2: spend more or less all their time scrutinizing every economic statistic.
Speaker 2: President's got a lot of things to do at any
Speaker 2: given moment, and is actually much less close to the economy.
Speaker 2: God knows, the skills associated with being an economic forecaster
Speaker 2: and the skills associated with being a successful real estate
Speaker 2: operator are very very different ones. So I don't think
Speaker 2: there's any particular reason to think that a president of
Speaker 2: the United States would have a intellectual contribution to make.
Speaker 2: And the reason why countries all over the world this
Speaker 2: isn't just an American thing, but countries essentially all over
Speaker 2: the world have moved to independent central banks, is that
Speaker 2: they recognize a profound conflict of interest.
Speaker 3: Who's ever an.
Speaker 2: Elective or political office always is tempted to put more
Speaker 2: money lower interest. Strates hit the accelerator hard to get
Speaker 2: a boost to the economy to make people.
Speaker 3: Feel good, But when everybody sees that.
Speaker 2: Coming, it doesn't actually make people feel good. It just
Speaker 2: raises the expectation they have for inflation, so you get
Speaker 2: more inflation and you don't get any substantial output gain.
Speaker 2: That's what happened when President Nixon was involved in bashing
Speaker 2: FED Chair Arthur Burns around the nineteen seventy two election.
Speaker 3: That's what's happened in.
Speaker 2: Numerable times in Latin America, and that's why the lesson
Speaker 2: has been pretty well internalized in the vast majority of
Speaker 2: mature democracies that you keep central banks independent because having
Speaker 2: the politicians involved is a fool's game. The FED doesn't listen,
Speaker 2: so you don't cut short term interest strates, and the
Speaker 2: markets do, and so long term interest rates go up
Speaker 2: with inflation expectations, and so you end up with higher
Speaker 2: inflation and a weeker economy.
Speaker 1: As we come toward the end of the week, one
Speaker 1: of the things that people are saying about what precipitated
Speaker 1: the market for fluctuations was what happened over in Japan
Speaker 1: with the Bank of the Japan really tightening monetary policy.
Speaker 1: They actually sort of backed off of it, saying they're
Speaker 1: not going to do any more right away given the
Speaker 1: market turmoil. You back in October on this program said
Speaker 1: they have to be careful as they move into a
Speaker 1: different direction of the monetary policy, given how much barring
Speaker 1: they've been done in relatively cheap end. Give us your sense,
Speaker 1: do you think the Bankageman is handling this correctly? What
Speaker 1: course should it set for itself?
Speaker 2: You know, David, when I remember when I first learned
Speaker 2: to drive a car, and I remember when I taught
Speaker 2: my kids to drive a car, that the first times
Speaker 2: they were driving a car, they tended to overseer. They
Speaker 2: turned the steering wheel too much one way, and then
Speaker 2: they have to turn it and they want to correct that,
Speaker 2: and they turn the steering wheel too much the other.
Speaker 3: Way, and we'd sort of make a wave down the road.
Speaker 2: I think there's a bit of a tendency for central bankers,
Speaker 2: particularly new central bankers, to do that kind of thing,
Speaker 2: and I think you saw a bit of that in Japan.
Speaker 2: I think the backing off after such a long time
Speaker 2: of such low interest rates could perhaps have been executed
Speaker 2: more gently, and then when it caused a big response,
Speaker 2: they didn't need to be quite as firm as they
Speaker 2: were about showing that they were responding to.
Speaker 3: The markets. So I think, you.
Speaker 2: Know, it's it's the stuff Machiavelli.
Speaker 3: Taught leaders. You always want to look unruffled.
Speaker 2: You want your actions to be small and then have
Speaker 2: accumulative impact, not be shouting when you already have a megaphone.
Speaker 2: And so I don't think it's ultimately going to be
Speaker 2: hugely consequential, and I think there was an adjustment that
Speaker 2: was going to need to come in Japanese monetary policy.
Speaker 3: But to use the language of this week's Olympics.
Speaker 2: I think i'd probably deduct a bit on style points
Speaker 2: from the Bank of Japan.
Speaker 1: Okay, Larry, thank you so very much once again for
Speaker 1: being with us. That is our special Wall Street Week contributor.
Speaker 1: He is Larry Summers of Harvard