Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have a very special guest.
Speaker 1: His name is Ethan Harris, and he is Bank of
Speaker 1: America Merrill Lynches co head of Global Research. Really I
Speaker 1: call him the chief economist of Merry Lynch, but I know, uh,
Speaker 1: that's not his formal title. Uh. He is really an
Speaker 1: institutional guy whose clients are primarily big hedge funds, mutual funds,
Speaker 1: pension funds, institutions, as well as the high net worth
Speaker 1: group at Merrill Lynch, which remains one of the largest
Speaker 1: asset management firms UM in the world. And he's also
Speaker 1: a Federal Reserve expert and interest rate expert. And we
Speaker 1: the talk ranged far and wide, everything from what the
Speaker 1: FED did right and wrong, what various FED chiefs focused
Speaker 1: on and and were the right FED chiefs at the
Speaker 1: right moment uh, and some of the errors made by
Speaker 1: other Fed chiefs. And we also had a conversation about
Speaker 1: the state of the global economy, which I thought was
Speaker 1: very thoughtful and interesting UM and without going off into
Speaker 1: the weeds, without getting excessively wonky, it was very accessible
Speaker 1: if you're at all interested in interest rates, monetary policy, economics,
Speaker 1: and the state of the global economy. I think you're
Speaker 1: gonna find this a very interesting and informative um. Dare
Speaker 1: I say fascinating? Uh? Conversation. So, without any further ado
Speaker 1: my conversation with Ethan Harris. This is Masters in Business
Speaker 1: with Barry Ridholts on Bloomberg Radio. My special guest this
Speaker 1: week is Ethan Harris. He is the chief economist of
Speaker 1: Bank America Merrill Lynch, co head of the Global Economics Research.
Speaker 1: To a quick overview of his CV, I can't do
Speaker 1: the full one because it will take the whole show. UM.
Speaker 1: Ethan regularly ranks in the top of investor polls and
Speaker 1: forecasters surveys. He helps to coordinate the global economic forecast
Speaker 1: and manages the Developed Markets economics team. Before coming to
Speaker 1: Mary Lynch, Harris was the chief U S economist at
Speaker 1: Lehman Brothers. Previous to that, he worked as an economist
Speaker 1: at Barclays and JP Morrigan. He began his career spending
Speaker 1: nine years at the Federal Reserve Bank of New York.
Speaker 1: He has a PhD in economics from Columbia, where he
Speaker 1: is also a university fellow. Ethan Harris, Welcome to Bloomberk.
Speaker 1: Thank you. It's great to be here. So I also
Speaker 1: left out you're the author of Ben Bernanke's Fed the
Speaker 1: Federal Reserve after Great Span. We're gonna spend a lot
Speaker 1: of time talking about the FED later, but but let's
Speaker 1: just start basically. What what attracted you to economics? So
Speaker 1: I was a history buff as a kid with the
Speaker 1: name Ethan Harris growing up in in Massachusetts. Of course
Speaker 1: everyone talked about Ethan Allen in the Green Mountain were
Speaker 1: interviewing today, said aren't you Yeah, no, no, no, not now.
Speaker 1: So I was very interested in history. But what got
Speaker 1: me going into economics was that my older brother came
Speaker 1: back from the University of Chicago and economics major, and
Speaker 1: he said he started talking about economics with me. I
Speaker 1: then said, hey, you know, this sounds pretty interesting, you
Speaker 1: know because remember economics as a combination of history and
Speaker 1: and math, and so it really fit my skill set.
Speaker 1: And I was a pretty nerdy kid in high school.
Speaker 1: So I decided to spend the summer reading Samuelson's Introductory
Speaker 1: Economics textbook, and that hooked me in an economics. So
Speaker 1: I was an economics major the day I arrived in college.
Speaker 1: So your brother um is out of Chicago, you're out
Speaker 1: of Colombia. I'm gonna ask a question. I'm gonna pull
Speaker 1: it forward from another segment. Several economists, most notably Paul Krugman,
Speaker 1: has divided the University of Economists into freshwater and saltwater
Speaker 1: economists or coastal economists. And do you think that economy
Speaker 1: holds any any accuracy? Is there something to the multiple schools?
Speaker 1: I think there is, But there's also, as in a
Speaker 1: lot of academia, there's a lot of debate about pretty
Speaker 1: fine points. I mean, I think there is a broad
Speaker 1: consensus among macroeconomists about some fairly general things, the idea
Speaker 1: of the importance of free markets, the idea that you
Speaker 1: do need a central bank that will manage the economy
Speaker 1: to some degree. There are people whould argue that we
Speaker 1: don't need to fed. Aren't those in in opposition? We
Speaker 1: we want free markets. But at the same time this
Speaker 1: was always the conundrum with Alan Greenspan, a true free
Speaker 1: market mine Rand's acolyte, who was constantly accused of manipulating
Speaker 1: mart How do you find a balance? Well, I think
Speaker 1: I think we that's where the compromise comes. And so
Speaker 1: that you've got the extreme view of no no intervention
Speaker 1: at all, and then you've got the very aggressive intervention.
Speaker 1: I think the reality is. And certainly what I learned
Speaker 1: at the FED, which is obviously an interventionist institution, was
Speaker 1: you know, you nudge the markets and the economy along,
Speaker 1: you don't try to to micromanage it. And so that's
Speaker 1: where the agreement I think is. Now. Of course there's
Speaker 1: going to be debates, but I think that macre economics
Speaker 1: is not nearly as fractured as it sometimes looks like
Speaker 1: from the outside. So so let's go back to the
Speaker 1: New York FED. Where was that your first job out
Speaker 1: of Columbia? So who was the president at the time?
Speaker 1: So so, so my career started basically Jerry Corrigan, of course,
Speaker 1: and I ended up working closely with him. At one
Speaker 1: point I was the assistant corporate secretary, which doesn't sound
Speaker 1: very prestigious, but it put me in the president and
Speaker 1: first Vice president's office, doing you know, work, system wide
Speaker 1: type work as opposed to just the local bank work.
Speaker 1: And so I I learned a lot in the experience
Speaker 1: game to the FED right out of grad school. The
Speaker 1: great thing about working at the FED coming out of
Speaker 1: grad school is in grad school you learn a lot
Speaker 1: of math and statistics. Uh, what you do learn at
Speaker 1: the FED is how to apply it in a practical
Speaker 1: way to real questions of the day. And so the
Speaker 1: New York FED, with a lot of other young economists,
Speaker 1: there was really a great place to kind of make
Speaker 1: a transition out of academia into more practical use of economics.
Speaker 1: And if I recall correctly, Jerry Corrigan was really a
Speaker 1: major player UM in in if you read the history
Speaker 1: of the seven Crash, and my favorite book on the
Speaker 1: subject is Black Monday by Tim Metz, Corrigan is really
Speaker 1: a major behind the scenes actor working to keep the
Speaker 1: whole system together when it looks like it's falling apot well.
Speaker 1: And that's that's the role of the New York FED.
Speaker 1: And so we have a history of that. Obviously with
Speaker 1: every time there's a big financial crisis, the president of
Speaker 1: the New York Fed is absolutely critical because that's the
Speaker 1: person who can talk to all the leaders of Wall
Speaker 1: Street UM and kind of get people's heads around the problem,
Speaker 1: get people working together. And so we've had multiple instances
Speaker 1: where UM in a crisis moment, the New York President
Speaker 1: has kind of really taken the lead and kind of
Speaker 1: saved the financial system. I'm thinking of longtime capital management.
Speaker 1: In the late nineties, there was a private sector rescue
Speaker 1: deal put together, but that was really shepherd along by
Speaker 1: the New York FED. And if memory serves, that deal
Speaker 1: might have even been done in the hallways from New
Speaker 1: York Fed. Absolutely, and and the you know, the idea
Speaker 1: there was. I mean, actually, if you go back in history,
Speaker 1: you go back all the way back to JP Morgan,
Speaker 1: back and before the FED existed, that's what he would do.
Speaker 1: He would gather together their bankers and in a financial crisis,
Speaker 1: which remember the original purpose of the FED was to
Speaker 1: prevent financial crisis, not to manage monetary policy, but prevent
Speaker 1: financial crisis. And so that role is now kind of
Speaker 1: moved into the New York FED, obviously working closely with
Speaker 1: the with the chairman. But that was one of the
Speaker 1: exciting things about working in the New York FED, right
Speaker 1: in the heart of Wall Street and then in the
Speaker 1: heart of the financial system. You're listening to Masters in
Speaker 1: Business on Bloomberg Radio. My special guest this week is
Speaker 1: Ethan Harris. He is the co head of Global Economics
Speaker 1: Research at Bank America, Merrill Lynch and I wanted to
Speaker 1: get into the specifics of interest rates and how they
Speaker 1: vary around the world. And I understand the academic answer
Speaker 1: to this, but it's never really been satisfactory. So ballpark,
Speaker 1: the ten year bond in the United States is about
Speaker 1: If you go to Germany, it's under half a percent,
Speaker 1: It's about point four four as of this recording, and
Speaker 1: Japan is about point to although given the most recent
Speaker 1: activity from the Bank of Japan, who knows where that
Speaker 1: will be by the time this broadcast. These are three
Speaker 1: of the most powerful economic um countries in the world,
Speaker 1: yet they seem to have wildly different rates. Why is
Speaker 1: it that the United States has to pay two Germany
Speaker 1: pays less than half a percent, and what maybe the
Speaker 1: most indebted developed nation, Japan at least major economic power,
Speaker 1: is paying less than a quarter percent? How do how
Speaker 1: do we reconcile? So I Bury, I think what's going
Speaker 1: on here is this is actually good news for the US.
Speaker 1: I mean, because what we're seeing in Europe and Japan
Speaker 1: is our markets that are pricing in a world of
Speaker 1: near zero interest rates for the indefinite future, no inflation
Speaker 1: for the indefinite future. That means that investors are very
Speaker 1: pessimistic about the prospects for growth in those countries. Neither
Speaker 1: country has managed to extract itself from this kind of low,
Speaker 1: near deflationary kind of environment. The the US, at least
Speaker 1: with two percent tenure yields, the markets are giving us
Speaker 1: some some hope that, yeah, the the US has heeled
Speaker 1: a good deal, that there is some prospect of an
Speaker 1: acceleration inflation. The Fed doesn't have to keep interest rates
Speaker 1: pegg to zero forever. So I think that the the
Speaker 1: interest rate differentials telling you something about the prospect of
Speaker 1: the US finally come out coming out of its malaise.
Speaker 1: But a lot of doubts in the markets about Japan,
Speaker 1: UM and UH in Europe. But but that spread has
Speaker 1: been Germany has been yielding less than the US and
Speaker 1: Japan less than Germany for the better part of a
Speaker 1: couple of decades. And so I know, if I go
Speaker 1: to a textbook, it's going to say, well, look at
Speaker 1: the yield versus the real GDP net of inflation. But
Speaker 1: that's not really satisfying. What I'm hearing from you is
Speaker 1: that people in Germany and to a greater degree in
Speaker 1: Japan are flocking to bonds because they don't have confidence
Speaker 1: in the economy. Is no, No, I think that yeah.
Speaker 1: I mean the bondmark of the tenure yield is amalgam
Speaker 1: of people's expectations were where interest rates are going over
Speaker 1: the next ten years. Um. You know, if you believe
Speaker 1: that the Fed has some chance of normalizing interest rates
Speaker 1: in the next few years, UM, you're going to demand
Speaker 1: a higher interest rate on your tenure yield because you
Speaker 1: need to cover the fact that you're you're going to
Speaker 1: miss out on those higher rates. So um. And I
Speaker 1: think that the I mean the longer history of of
Speaker 1: super low rates in Japan. I mean Japan has had
Speaker 1: not just a lost decade of growth. I mean people
Speaker 1: talk about the nineties being a lost decade, but in effect,
Speaker 1: Japan for twenty five years has been a low growth,
Speaker 1: zero or negative inflation country. Um. And so if you're
Speaker 1: buying bonds in Japan, you don't feel you need any
Speaker 1: compensation for inflation because there is no inflation. Well, you're
Speaker 1: really doing is parking money there. You're getting the tiniest
Speaker 1: of yield and it's a way to not be in equities,
Speaker 1: which twenty five years have not exactly been it's basically
Speaker 1: people saying, yeah, I'm not I don't have enough confidence
Speaker 1: in the economy to to put my money to work.
Speaker 1: I'm going to take the safest investment I can and
Speaker 1: just kind of sit on it um. Of course, what's
Speaker 1: also going on in both Europe and Japan is that
Speaker 1: the Central Bank is still buying debt and the FED
Speaker 1: is stopped their their quantitative easing debt buying program, and
Speaker 1: so there's an additional gap created by the fact that
Speaker 1: they're still in an aggressive bond buying program to try
Speaker 1: and artificially lower bond yields, as in hoping to stimulate
Speaker 1: their economy. Well, the FED this kind of specked away
Speaker 1: from that. So but I think that fundamentally that the
Speaker 1: story here is about, you know, faith in the long
Speaker 1: run growth and inflation prospects. It's not like people are
Speaker 1: bowled up about the US. It's just in you know,
Speaker 1: kind of the land of the blind. You know, the
Speaker 1: one eyed man is king, and that's that's that's where
Speaker 1: we are now. So so, although when we look at Germany,
Speaker 1: despite the issue with the refugees, despite all the other
Speaker 1: problems there, their economy seems to be running pretty strongly.
Speaker 1: I mean, that is the strong man of Europe, isn't it.
Speaker 1: I mean they're they're um. Obviously, they're the one part
Speaker 1: of Europe that really looks healthy. And uh, it's not
Speaker 1: that Europe is collapsing, it's just the region has had
Speaker 1: a big double recession never really recovered, and so Germany
Speaker 1: is is kind of the model of strength there. But
Speaker 1: their interest rates are very tied into what other countries
Speaker 1: are paying. Their interest rates are determined by the same
Speaker 1: central bank as every other country there, so everyone's kind
Speaker 1: of tied into this low rate environment on the assumption
Speaker 1: that the ECB is not going to be able to
Speaker 1: raise interest rates anytime soon. So so let's as long
Speaker 1: as we're talking about Europe in Germany, I would be
Speaker 1: remiss if I didn't bring up the Swiss, who have
Speaker 1: been at times running negative interest rates. They are not
Speaker 1: on the euro, so they're affected by the central bank,
Speaker 1: but it's not like they're tied to the local currency.
Speaker 1: Why is Switzerland's getting the benefit of borrowing money at
Speaker 1: a negative rate. Here here's my money, and here's a
Speaker 1: little ACTRA to keep it safe. Yeah, well, I think
Speaker 1: that they are um. The one way to think of
Speaker 1: it with Switzerland is they're kind of an island of
Speaker 1: stability in Europe and so and I've been for centuries, centuries,
Speaker 1: and and the crisis in Europe has caused a lot
Speaker 1: of money to flow into UH, into UH Switzerland. That's
Speaker 1: one reason they can borrow a cheap right. The other
Speaker 1: thing is that it's created it's created an extremely strong currency,
Speaker 1: which hurts their economy. They're kind of they're they're actually
Speaker 1: in a sense there they're suffering worse from Europe's problems
Speaker 1: and than Europe itself is suffering because they end up
Speaker 1: with a very strong exchange rate, so they push interest
Speaker 1: rates into negative territory to prevent their currency from being
Speaker 1: so strong. And um, it's really a desperate battle by
Speaker 1: Switzerland to avoid importing the problems of Europe. This is
Speaker 1: Masters in Business on Bloomberg Radio. I'm Barry Ridhalts. My
Speaker 1: special guest this week is Bank America, Mary Lynch's co
Speaker 1: head of Global Economic Research, Ethan Harris. He is a
Speaker 1: former FED researcher, former chief economist for Lehman Brothers, and
Speaker 1: author of Ben Bernanke's Fed the Federal Reserve After Greenspan
Speaker 1: And let's talk a little bit about inflation. You in
Speaker 1: some or we'll talk about flation. As as was famously said,
Speaker 1: it doesn't look like most of the world is suffering
Speaker 1: from inflation. We're starting to see signs in the United
Speaker 1: States perhaps wages will tick up. In parts of the
Speaker 1: world we see deflation, and in other parts of the
Speaker 1: world we're seeing disinflation. For the person who may not
Speaker 1: be familiar with all these inflations, what are the differences? Yeah, so, um,
Speaker 1: you know, inflation is just a general rise in wages
Speaker 1: and prices and income. So everything's going up in value
Speaker 1: over time, but it's not increasing your ability to buy things.
Speaker 1: It's just prices going going higher. So if your wages
Speaker 1: go up and prices go up proportionately, exactly what you know,
Speaker 1: you're just you're paying more and you're earning more, but
Speaker 1: you're kind of in place. Um, you know, deflation is
Speaker 1: when you actually have falling prices across the economy. This
Speaker 1: is very unusual. It really only happens in depression like
Speaker 1: conditions for a sustained period of time, you know, the
Speaker 1: Great Depression of the nineteen thirties and Japan's last decade. Um,
Speaker 1: disinflation is just a slowing of inflation, so you're going
Speaker 1: from five percent to three percent. So that's the Those
Speaker 1: are the kind of words we bandy about all the time,
Speaker 1: So now we hear frequently, I see frequently discussions of
Speaker 1: deflation in commodities, deflation in China, and deflation in Japan.
Speaker 1: Is that the right way to describe it? Are we
Speaker 1: actually seeing deflation? Well? I mean when economists think about deflation,
Speaker 1: usually they're thinking about something that's sustained over a long
Speaker 1: period of time. So I think what you're seeing in
Speaker 1: commodity markets is really a repricing where you've gone from
Speaker 1: an environment of consistently high prices to consistently low prices.
Speaker 1: And so during that interim you have very rapid deflation.
Speaker 1: I mean, coal prices have dropped U seventy percent from
Speaker 1: their peak, so um, but that's really over a year
Speaker 1: year and it's a year and a half. Yeah, that's
Speaker 1: an amazing drop. Mean, and by the way, this isn't new.
Speaker 1: I mean, we've seen oil markets just flip and suddenly
Speaker 1: a market that had been sustaining at very high prices
Speaker 1: suddenly you have an oversupply problem. It just takes years
Speaker 1: to get rid of it, and you end up in
Speaker 1: this sustained low prices. But that's not deflation in the
Speaker 1: sense that from We're not gonna have oil. Oil prices
Speaker 1: can't drop ten dollars forever every month because they'll go
Speaker 1: into negative territory. That's more of a one time kind
Speaker 1: of big adjustment in the market. Real deflation is when
Speaker 1: um year after year prices keep keep dropping and and
Speaker 1: really the kinds of deflation that economists worry about and
Speaker 1: not so much. You know, a few items like oil falling,
Speaker 1: but it's really broad based price declines and broad based
Speaker 1: wage decreases. That's those are signs of a sick economy.
Speaker 1: So arguably the issue with oil this cycle has been
Speaker 1: a supply issue. We brought I Ran online, we would
Speaker 1: Iraq online, and the US has gone from a marginal
Speaker 1: producer to a significant producer. And at the same time,
Speaker 1: the Saudis, who normally would pull back are are continuing
Speaker 1: to pump NonStop. UH plus Russia could use the money,
Speaker 1: so they key, So the usual suppliers who would typically
Speaker 1: pull back aren't. So arguably this is a supply issue.
Speaker 1: What sort of deflationary environment is a demand issue? Well,
Speaker 1: demand issue would be UH in fact, a Japanese experience
Speaker 1: of the and two thousands a classic example that where
Speaker 1: you have an economy that never really gets growing and
Speaker 1: so over time UM prices and wage growth fade into
Speaker 1: negative territory because there's not enough spending going on the economy.
Speaker 1: And in Japan's case, I think it was a lot
Speaker 1: of it was a severely damaged banking industry, severely damage
Speaker 1: stock market and real estate market that just kind of
Speaker 1: hung over the economy for long periods of time, combined
Speaker 1: with a complete lack of confidence. I mean a lot
Speaker 1: of what the story of Japan was confidence. So those
Speaker 1: kind of when you have a big overhang of of
Speaker 1: broken markets and lack of confidence that those that's really
Speaker 1: what happens when you have these big deflation episodes. How
Speaker 1: much of the Japan story is is one of demographics.
Speaker 1: I keep reading that there's almost no immigration. It's an
Speaker 1: aging society, and we all know your prime spending years
Speaker 1: or your forties and fifties. If you have an aging society,
Speaker 1: what does that do to uh deflation and spending? Well,
Speaker 1: I think that if you look at the origins of
Speaker 1: their crisis, it was a mass of real estate and
Speaker 1: equity bubble that burst and left them with a crippled
Speaker 1: banking system and a failure to kind of fix all
Speaker 1: those problems quickly, and that created this ongoing overhanging the
Speaker 1: econom mean, but I think over time the challenges for
Speaker 1: for Japan have shifted, and what you're talking about with
Speaker 1: the demographics is really the challenge going forward. It's the
Speaker 1: fact that you know, when Japan got into trouble, at first,
Speaker 1: demographic was not an important issue. But now we're in
Speaker 1: a shrink a country that's a shrinking population, very low
Speaker 1: birth rates and very little immigration, and so the new
Speaker 1: generation of workers is much smaller than the old generation retirees.
Speaker 1: That's a really serious challenge down the road for Japan.
Speaker 1: I'm Barry rid Holts. You're listening to Master's in Business
Speaker 1: on Bloomberg Radio. My special guest this week is b
Speaker 1: of A. Merrill. Lynch is Ethan Harris. He is the
Speaker 1: co head of Global Economic Research. He began his career
Speaker 1: at the New York Fed as a researcher. And let's
Speaker 1: talk a little bit about FED policy, because you mentioned
Speaker 1: in the prior segment Japan was slow to response on
Speaker 1: to their crisis, their markets and economy peaked in ninety.
Speaker 1: Here it is twenty five years later. They're still mired
Speaker 1: in soft uh economic I don't even want to call
Speaker 1: it an expansion. It's been a temporary blip up. What
Speaker 1: did the United States Feller Reserve do right that the
Speaker 1: Japanese Central Bank failed to do well? First of all,
Speaker 1: we should say that the FED had the benefit of
Speaker 1: Japan's experience, and you know, we know that for example, uh,
Speaker 1: Ben Bernanke spent a lot of time looking at Japan
Speaker 1: and the mistakes that they made the big difference. Didn't
Speaker 1: he do a big piece I want to say, oh
Speaker 1: three or something along those lines about here's what Japan
Speaker 1: should have done. I mean, been a student of the
Speaker 1: Great Depression, he said, here's the lesson Japan did not learn. Yeah. So,
Speaker 1: you know, Ben Bernanke is a very gentlemanly person, and
Speaker 1: he actually went over to Tokyo and gave some very
Speaker 1: pointed advice to the government about being more aggressive policy,
Speaker 1: and they did not like it, and so he was
Speaker 1: he uh, you know, this was something that he took
Speaker 1: very much to heart. The the the importance of a
Speaker 1: strong reaction. What the FED basically did is that they
Speaker 1: took a do whatever it takes attitude, and that was
Speaker 1: you know, if we cut interest rates and the economy
Speaker 1: doesn't respond, you cut them again. If cutting doesn't work,
Speaker 1: you promised to keep them low for a long time.
Speaker 1: If that doesn't work, you'd start buying lots of assets.
Speaker 1: And I think that the key to this was it
Speaker 1: gave a sense to people in the markets in a
Speaker 1: very panic condition that the FED was there, that that
Speaker 1: that the FED was never going to be out of ammunition.
Speaker 1: They were always going to have another weapon to put
Speaker 1: to work. And so it was the the aggressiveness, and
Speaker 1: it was the body language around their actions that we
Speaker 1: will keep trying until it works that made FED policy
Speaker 1: so effective. If you look recently at the European Central
Speaker 1: Bank success US under Druggy, it's he's taken a page
Speaker 1: out of the Bernanke playbook. His idea of do whatever
Speaker 1: it takes. He understands. I think that you know, when
Speaker 1: you're in a world of panic and people don't know
Speaker 1: how to value anything and um and the economy and
Speaker 1: the markets are are collapsing, uh, people want a sense
Speaker 1: that some in some way there's a support system out there.
Speaker 1: And so I think that that was the basic key
Speaker 1: to the success was the aggressiveness and the confidence building
Speaker 1: aspects of the policy response. Is it accurate to say
Speaker 1: the US lead the train in two thousand and eight
Speaker 1: with an aggressive policy policy response. Six years later, the
Speaker 1: Bank of Japan decided to follow suit and begin what
Speaker 1: arguably is even stronger policy response, at least relative to
Speaker 1: g d P and Europe seems to be the laguatal
Speaker 1: though they're finally seemed to be getting on board as well. Yeah,
Speaker 1: so I think that the that there has been lessons
Speaker 1: learned overseas. So the Bank of Japan was for a
Speaker 1: long time almost in denial that these policies work at all.
Speaker 1: When they first adopted quantitative easing, you know, the big
Speaker 1: bond buying program that date to close to zero. The
Speaker 1: first time they adopted that, they when they before they
Speaker 1: announced it at the previous meeting, they basically said, we
Speaker 1: are not going to do quantitative easing because it doesn't work, okay,
Speaker 1: and then they went the next meeting they announced it.
Speaker 1: So if you think about it, it's it's really what
Speaker 1: they what they basically told the markets is were so desperate,
Speaker 1: We're going to do a policy that doesn't work. Bernanke
Speaker 1: did the opposite. He said, we don't know whether it's
Speaker 1: going to be a super powerful weapon or not, but
Speaker 1: we're going to try as hard as we can, and
Speaker 1: we're gonna keep trying until it works. And that's been
Speaker 1: the change that we saw the Bank of Japan recently
Speaker 1: kind of taking a much more aggressive attitude um and
Speaker 1: with Draggy taking over at the c B, UM kind
Speaker 1: of you know, learning the lesson that. Yes, you know,
Speaker 1: those central banks have been active, they've been keeping rates low,
Speaker 1: they've been um stimulating growth, but they haven't really made
Speaker 1: the effort and that that's the difference. So so we're
Speaker 1: recording this the day the Japanese Central Bank surprised investors
Speaker 1: by forcing rates to go negative. What's the thinking behind that,
Speaker 1: what's the impact of that action? Uh? And what does
Speaker 1: that mean to the Japanese economy and potentially it's stock market? Well,
Speaker 1: I mean, looking at the bigger picture that I'm encouraged
Speaker 1: by the fact that the two central bank, the two
Speaker 1: big ones that are still easing policy, the b o
Speaker 1: J and the ECB, are taking steps in the middle
Speaker 1: of this very negative stock market we're in right now,
Speaker 1: this risk off trade and global capital markets. I think
Speaker 1: that that's helpful. It's help when people investor is there
Speaker 1: in a panic mode, you know, getting their mind on
Speaker 1: something else is quite useful. It's kind of like a
Speaker 1: slap in the face. And so the fact that both
Speaker 1: the ECB and the b o J are now saying
Speaker 1: we're ready to act and support growth, I think has
Speaker 1: really helped a lot in in stabilizing equity markets. Now
Speaker 1: we'll see if it works on a sustained basis, but
Speaker 1: it's it's very helpful. I think what they're doing is
Speaker 1: is there. I don't think this policy of going to
Speaker 1: a small negative interest rate on reserves, which is what
Speaker 1: they've done. They're going to actually charge banks a little
Speaker 1: bit for reserves. That's gonna help lower uh in borrowing
Speaker 1: rates in the economy broadly by a small amount. I
Speaker 1: think it's more of a symbolic gesture to tell you
Speaker 1: the truth, than anything major. UM. But I think it's
Speaker 1: important that given UH, given the fact that the Japanese
Speaker 1: economy has felt soft lately UM and their their markets
Speaker 1: are suffering the same pressure we're seeing in the US
Speaker 1: and Europe. UM, it was important. I think that the
Speaker 1: central Bank show that it's still in the game, and
Speaker 1: I think that's basically what they're doing. So I'm always
Speaker 1: reluctant to say, well, the stock market reacted, We're up
Speaker 1: almost three hundred points, so therefore this action resulted in that, UM,
Speaker 1: because that's so fraught with danger and sometimes it's random, etcetera, etcetera.
Speaker 1: But I can help but note that as soon as
Speaker 1: this cross the tape early early this morning, markets around
Speaker 1: the world flipped from red to green and it was
Speaker 1: a substantial positive response. What is it that stock markets
Speaker 1: like so much about such an aggressive Japanese central bank? Well,
Speaker 1: I mean, I think we have to I think we
Speaker 1: have to step back and ask ourselves, why are the
Speaker 1: markets selling off so much to begin with? I think
Speaker 1: the global equity markets, I think at the beginning of
Speaker 1: the year got hit from every angle there, like a
Speaker 1: collapsing pocket around a quarterback. You know, you had geopolitical risk,
Speaker 1: you had weakness in China, you had currency and stock
Speaker 1: market action in China. So that's kind of been people's minds.
Speaker 1: You've had the weakness and the oil market. So the
Speaker 1: global equity market has gotten itself really uh, kind of
Speaker 1: overwhelmed by by negative news. UM and and as I said,
Speaker 1: I think what happens when the central banks step in,
Speaker 1: as they kind of they offer this kind of sense
Speaker 1: that there is it's not all bad news, that we
Speaker 1: do have central banks that still can lower interest rates,
Speaker 1: can create a little bit of stimulus into the markets.
Speaker 1: And so just kind of getting uh, kind of changing
Speaker 1: the story. I think um is helpful to the markets. Now. Well,
Speaker 1: we'll see going forward. I mean we um. I personally
Speaker 1: feel the global economy is okay and that this isn't
Speaker 1: the beginning of a big negative market. But um, but
Speaker 1: you know, we need to see how well the economy
Speaker 1: stands up to would have been some fairly ugly developments
Speaker 1: in the markets. So so let me ask you a
Speaker 1: completely different question. You alluded to the global economy being okay.
Speaker 1: A lot of the things we've been talking about have
Speaker 1: been downside surprises geopolitics and collapsing commodities and weakness in China.
Speaker 1: What is required to take place for there to be
Speaker 1: a global upside surprising growth? Or or perhaps asked more
Speaker 1: more simply, what might the pessimists be missing what might
Speaker 1: not be anticipating? Well, I would turn that question around
Speaker 1: a bit. I don't I don't think there's any big
Speaker 1: upside story actually, to tell you the truth going forward,
Speaker 1: I think that, um, the one thing you can always
Speaker 1: point to is that you have, you know, some pretty
Speaker 1: impressive new technology going on in the economy. Historically, we've
Speaker 1: had these cycles where you'll have say a ten year
Speaker 1: boom in in productivity due to a tech breakthrough. The
Speaker 1: breakthroughs we're having now are pretty impressive. They're not they
Speaker 1: don't seem to be delivering anything on the economy, but
Speaker 1: there's always that kind of that kind of breakthrough. Um.
Speaker 1: I think that the way I would phrase it is
Speaker 1: what the markets need to do is they need to
Speaker 1: start stop hyperventilating about low oil prices and weakness in China. Right,
Speaker 1: is China really that important to the US economy? I mean,
Speaker 1: we only sell eight tenths of a percent of our
Speaker 1: GDP to China. The Chinese equity market has been off
Speaker 1: on its own tangent for the last year and a half.
Speaker 1: It had a buge zoom up and now big collapse.
Speaker 1: We didn't pay any attention when it went up, so
Speaker 1: why do we care if it's going down? It's kind
Speaker 1: of it's it's on its own little planet. It's very
Speaker 1: much a a immature and almost purely retail market developed
Speaker 1: a structure, so and and and normally, you know, global
Speaker 1: markets pay no attention to the Chinese market for just
Speaker 1: that reason. It's not really integrated. It's not like the
Speaker 1: close connections you get between European and US markets where
Speaker 1: investors there's a lot of cross flow of investing and
Speaker 1: people look at them as mature markets that function effectively.
Speaker 1: So we really need to investors need to kind of
Speaker 1: stop hyperventilating about China. So if anyone wants to find
Speaker 1: your research, they they can access your work at be
Speaker 1: a very Merrill Lynch. Is there other any of specific
Speaker 1: places they can read your work? Well, I mean that's
Speaker 1: that's the thing. I don't have a blog out there anything.
Speaker 1: I write for Bank American Mary Lynch. So if you
Speaker 1: are a client of the firm in any way, you know, um,
Speaker 1: you know, you'd have access to all the stuff that
Speaker 1: we write and when. By the way, I've got a
Speaker 1: really great team that works for I am the pretty face.
Speaker 1: I have a great team, and that's why you're on radio.
Speaker 1: If you enjoy this conversation, be sure and hang around
Speaker 1: and listen to our podcast. Extras where we keep the
Speaker 1: tape rolling and continue chatting. Be sure and check out
Speaker 1: my daily column on Bloomberg View dot com or follow
Speaker 1: me on Twitter at Ridolts. I'm Barry Ritolts. You've been
Speaker 1: listen and into Masters in Business on Bloomberg Radio. Welcome
Speaker 1: to the podcast I was mentioning earlier. My guest this
Speaker 1: week is Ethan Harris. And Ethan, thank you so much
Speaker 1: for for doing this. I know many of your colleagues,
Speaker 1: but I don't think you and I have ever met before.
Speaker 1: Have we we have met before? It must have been
Speaker 1: much more memorable for me than for you. Was it
Speaker 1: at a dinner? Um? Where we meet? I think we
Speaker 1: met at at one of these economics get togethers, But
Speaker 1: I definitely, maybe maybe only know you through your personality
Speaker 1: as a as a great radio host. It's um, well,
Speaker 1: the personality thing. It's all an act as it has
Speaker 1: nothing h I'm not really like this in real life
Speaker 1: as as much as U. Although if this was an
Speaker 1: act it would be a tough one to maintain over
Speaker 1: long periods of time. But um um, I'm trying to think.
Speaker 1: I'm trying to remember where we met and if it
Speaker 1: was one of those Wednesday night dinners at Bobby Vans
Speaker 1: or something like that. That's the only recollection I have UM.
Speaker 1: But it was never a one on one thing. It
Speaker 1: was if you're in a room with eight or twelve people,
Speaker 1: it's really hard to I actually met the Pope's outside
Speaker 1: money manager at an event like that where there's fourteen
Speaker 1: people there and you want to talk to each person
Speaker 1: for a few minutes, but a two hour dinner goes
Speaker 1: by like that. It's like I wanted to ask, how
Speaker 1: is the Pope allocated? You would think he would have
Speaker 1: a long time perspective, although truth be told, church has
Speaker 1: done pretty well on its own. No, and I don't
Speaker 1: think he's he is any errors that he needs to
Speaker 1: leave money too. So it's a whole it's a very
Speaker 1: different sort of sort of investment process. So there is
Speaker 1: a list of stuff I blew through during the broadcast
Speaker 1: portion that I that I want to come come back
Speaker 1: to before I get to my favorite UM questions. We
Speaker 1: did not talk about the book Ben Bernanke's Fed, and
Speaker 1: I also, I know I'm gonna get hate mail. One
Speaker 1: of the questions I was going to ask, is, hey,
Speaker 1: you're describing what the FED did, right, what did the
Speaker 1: FED do wrong? So let me let me ask you that.
Speaker 1: So over the past couple of decades, what was it
Speaker 1: that the FED did wrong? Are they to blame in
Speaker 1: some degree for the eight o nine financial crisis? Well,
Speaker 1: I think when you look at the causes of the crisis,
Speaker 1: you have to kind of spread the blame pretty widely.
Speaker 1: I mean, Um, for one thing, we all know that
Speaker 1: the regulatory structure of the US financial system was out
Speaker 1: of date and it left over patchwork of of regulatory
Speaker 1: agencies and regulations, and so it really needed reform, but
Speaker 1: it's kind of a lack of political will to do that.
Speaker 1: We also know that there is pressure from both parties
Speaker 1: to promote growth in home ownership to the point where
Speaker 1: there's kind of a loss of sight of you know,
Speaker 1: whether it really it's appropriate for people with weak credit
Speaker 1: and low incomes to to own real estate. I mean,
Speaker 1: and so there's a bit of a political push in
Speaker 1: that direction. I've been I've been pushing back on that
Speaker 1: argument because when you do, when you do the deep
Speaker 1: dive into warehouses went bad and what sort of mortgages
Speaker 1: blew up, it wasn't necessarily I mean, we know countrywide
Speaker 1: had issues but it wasn't necessarily the City banks, Bank America,
Speaker 1: those sort of of more Wells Fargo underwriters. There was
Speaker 1: this huge swath of private sector banks. Alan Greenspan called
Speaker 1: them the financial innovators, and they ultimately ended up going
Speaker 1: belly up. By the hundreds, there was a website called
Speaker 1: mL implode mortgage lend their implode dot com. I think
Speaker 1: by the time everything was done, it was almost five
Speaker 1: specific underwriters who had come about in order to create
Speaker 1: more just to sell the security. And I think that
Speaker 1: one of the core problems with the way the mortgage
Speaker 1: market was regulated before the crisis was that there are
Speaker 1: competitive regulators, right, so if you were you know, you
Speaker 1: had a state and federal regulators covering different kinds of
Speaker 1: institutions that were lending into the market, and so it
Speaker 1: was a bit of a race to the bottom. You know,
Speaker 1: whoever was the loosest lender got the business right and
Speaker 1: so m the inability to have a more integrated, clear
Speaker 1: ownership of this sector and you know, who's really regulating
Speaker 1: and what are sensible rules I think was a big
Speaker 1: part of the problem. And so I think that the
Speaker 1: the FED shared blame with every other regulator, not really
Speaker 1: aggress of the addressing what was aggressive lending practices. But
Speaker 1: it's hard to describe blame when you have a system
Speaker 1: that was so poorly put together to begin with. Um,
Speaker 1: you know, I a portion blame to a lot of
Speaker 1: a lot of entities, both private sector and government. But
Speaker 1: I remember looking at all those private sector mortgage writers,
Speaker 1: primarily located in California, And I have friends who insist
Speaker 1: on blaming one party or the other, like two groups.
Speaker 1: It was the Democrats, it was Republicans, and really you
Speaker 1: can point to all sorts of things that each party
Speaker 1: did wrong. And when you look in California, that was
Speaker 1: a Democratic legislature that basically said, why do we want
Speaker 1: to thwart growth? This is a booming financial sector that's
Speaker 1: giving mortgages to people who might not have otherwise had it.
Speaker 1: At the same time, you had President Bush and the
Speaker 1: Office of o c See telling state regulators, we're going
Speaker 1: to federally prompt you and eliminate your predatory lending rules
Speaker 1: because they conflict with the federal ones. So it was
Speaker 1: the Democrats and the Republicans just growth in any cost,
Speaker 1: and we know what the cost ended up being. Yeah,
Speaker 1: And I think that I mean the lesson of all
Speaker 1: this is what is that we know that in the
Speaker 1: in the housing market, it's important that the borrow have
Speaker 1: skin in the game, that they have a real down payment,
Speaker 1: and that they have adequate ability to repay the mortgage
Speaker 1: based on a sensible estimation their income flow. So those
Speaker 1: are two of the very basic things that got lost
Speaker 1: along the way, and and that is the key. I mean,
Speaker 1: if you have the reason the mortgage crisis was so
Speaker 1: so virulent is because with all, because you really didn't
Speaker 1: need to lose that much money in the value of
Speaker 1: your house before you're underwater, because there's almost no down payment,
Speaker 1: in which case that distressed property becomes a sale, and
Speaker 1: in every sale creates new distress properties by creating over
Speaker 1: supply into the market. So it's critical. I think that
Speaker 1: I think that the core lesson to me in terms
Speaker 1: of regulate the mortgage market is you need down payments
Speaker 1: and you need effective income document. Didn't we at one
Speaker 1: time require a twenty or down payment and if you
Speaker 1: didn't have it, you had to take out more pm
Speaker 1: I insurance. Yeah. The the to me, the the uh UM.
Speaker 1: In the ninety nineties, you had a fairly sensible mortgage
Speaker 1: landing practice. When I bought my house in in uh
Speaker 1: uh the early nineties, and we put down and we
Speaker 1: really you know, had to scrape and scrim to get
Speaker 1: the money together. And uh that meant that that it
Speaker 1: would have taken a horrendous housing market for us to
Speaker 1: be underwater in our house. And so that was a
Speaker 1: very kind of safe uh mortgage to have in play. Um.
Speaker 1: But when we went to the more exotic mortgages were
Speaker 1: almost no money down, lack of adequate income documentation, all
Speaker 1: that then that we know, we're kind of getting over
Speaker 1: our skis at that. I love that expression of our skis.
Speaker 1: I remember the first time I started reading about piggyback mortgages.
Speaker 1: We were borrowing from one bank as your primary mortgage
Speaker 1: and from another bank as a down payment. And you
Speaker 1: would think, well, that's ridiculous, until the hundred loan to
Speaker 1: value mortgages came along. So the idea was you could
Speaker 1: borrow the whole cost of the house plus another to
Speaker 1: do renovations to make it worth that much more. How
Speaker 1: could those ever, ever, Well yeah right, yeah, And that
Speaker 1: that's the story of that period and and my my
Speaker 1: feeling in real time as is writing about as an economist,
Speaker 1: was that in the early two thousands, I felt okay
Speaker 1: about the mortgage market. You know, it was getting more aggressive,
Speaker 1: but it hadn't reached these very extraordinary levels. In two
Speaker 1: thousand four and two thousand five, you had this very
Speaker 1: rapid escalation of exotic mortgages with with very aggressive features
Speaker 1: to them. And that's what kind of set a bell
Speaker 1: off in my own head worrying about the housing market.
Speaker 1: Of course, I don't think any one in the business
Speaker 1: understood the extent. Well, if you understood housing, you might
Speaker 1: not have understood the whole CDs market and the how
Speaker 1: the credit to fault swaps were built on top of
Speaker 1: the securitized CDO market. You really it took a while
Speaker 1: before all those different pieces of the puzzle came into focus.
Speaker 1: Since you're a global guy, let's let's ask you about
Speaker 1: our neighbor to the north. During our housing boom and bust,
Speaker 1: it looked like the Canadians came out pretty well. They
Speaker 1: have a very aggressive regulatory scheme and just a handful
Speaker 1: of money center thanks. But after our boom and bust,
Speaker 1: it's looked like they just kept going, what's happening in well?
Speaker 1: You know, so I mean this is again I mean
Speaker 1: the problem of course with we know that financial cycles
Speaker 1: over time is that uh, you know, people learn their
Speaker 1: lesson and they're very cautious and then they kind of
Speaker 1: overtime unlearned the lesson. So years or so before everybody
Speaker 1: forget Yeah, and so in the case of when the
Speaker 1: U S went into its uh it's subprime mortgage problem,
Speaker 1: Canadians had learned their lesson of their past housing crisis. So, um,
Speaker 1: I don't think we're seeing anything in in Canada that
Speaker 1: that compares to what happened in the US at the
Speaker 1: peak of the crisis. Though, I think that Canada, um,
Speaker 1: you know, is has you know, has things under control there.
Speaker 1: So if memory serves, they lowered their down payment amount
Speaker 1: that you have to have mortgage insurance. I'm doing this
Speaker 1: off the top of my head. It was twenty or
Speaker 1: twenty to fifteen percent. If you put less than fifteen
Speaker 1: percent down you needed p M I insurance. Is are
Speaker 1: you familiar to all with that? But I remember a
Speaker 1: few years ago that was a big change and people
Speaker 1: were up in arms about it, and I'm like, wait,
Speaker 1: we don't we no longer have a mortgage. It doesn't
Speaker 1: seem we have that mortgage insurance requirement that the US
Speaker 1: used to and I'm I'm gonna have to look into
Speaker 1: look into that and see, um why that went why
Speaker 1: and when that went away. So so let me shift
Speaker 1: gears a little bit and talk to you, UM about
Speaker 1: yield curve. I know this is an area you're you're
Speaker 1: very interested in. Um. Why is the yield curve so important?
Speaker 1: What does it mean to looking at future economic activity? Well,
Speaker 1: I mean, remember, the yield curve is telling you what
Speaker 1: people is in effect telling you what people expect to
Speaker 1: happen to interest rates over the say, if you're comparing
Speaker 1: one year yields to ten year the tenure yield is
Speaker 1: higher than the one year yield, it must mean that
Speaker 1: investors expect interest rates to go higher. Right. One way
Speaker 1: to think about it as a rough approximation is the
Speaker 1: average one year yield every year for the next ten
Speaker 1: years should roughly equal the current tenure yield, and then
Speaker 1: that way you're getting the same investment return UM. And
Speaker 1: so the yelkurve right now is pretty steep, and so
Speaker 1: the yelkurve is telling us UM that the markets are
Speaker 1: pretty comfortable. The idea of the FED is going to
Speaker 1: be raising interest rates that you know, ten years from now,
Speaker 1: we're gonna have an interest rate of above two percent
Speaker 1: UM and UM. Now it's not saying that they're gonna
Speaker 1: be high interest rates because we're going from zero UM,
Speaker 1: but it's a it is a it is a bit
Speaker 1: of a vote of confidence in that you know, we're
Speaker 1: not stuck forever at zero. I mean, there are people
Speaker 1: out there say the Fed, it's one and done. The
Speaker 1: Fed can't can't hike rates. They're never going to get
Speaker 1: close to the three four percent they would hope they
Speaker 1: would get to UM and uh. I think the markets
Speaker 1: are saying, well, we we think there. We don't think
Speaker 1: we'll get all the way to that level, but we
Speaker 1: do think the Fed will be able to hike. So
Speaker 1: so there is a contingent of Fed haters out there
Speaker 1: who who some feel that there shouldn't be a federal
Speaker 1: Reserve in the first place. Others feel that if there's
Speaker 1: a FED, they should be a little handcuffed and should
Speaker 1: only have small incremental tools. What is it that the
Speaker 1: Fed haters get wrong? Well, I mean, first of all,
Speaker 1: let's let's let's step back and see what's talking about.
Speaker 1: What what economists in general believe so. The University of
Speaker 1: Chicago has a poll they do periodically of forty top
Speaker 1: academic economists and one of the questions they asked them
Speaker 1: is whether it would be a good idea to go
Speaker 1: back to the gold standard? Right right? And the answer
Speaker 1: they get is that they have zero of the forty
Speaker 1: advocate going back to the gold standard, and the vast
Speaker 1: majority strongly opposed the idea. And the reason is because
Speaker 1: we go back in time before the FED existed. Um, yes,
Speaker 1: we had low inflation, but we had a recession every
Speaker 1: three years, and the account and the financial markets are
Speaker 1: extremely unstable. So the FED we need some kind of
Speaker 1: guiding hand in in monetary policy. It may you could
Speaker 1: argue about whether the FED should be more or less aggressive,
Speaker 1: but the idea of not having a central bank there,
Speaker 1: I think history suggests strongly it would be it would
Speaker 1: be a bad idea. I think the critics of the FED. UM.
Speaker 1: What I like about the FED, and in fact, why
Speaker 1: I worked there at the beginning of my career, is
Speaker 1: I really believe the leadership of the FED are technocrats.
Speaker 1: You know, there are people who are have that job
Speaker 1: because they want to, you know, make the economy better,
Speaker 1: and I don't think that it's a remarkably non political
Speaker 1: institution um. And it's in one of the kind of
Speaker 1: you know, not only do economists almost all agree that
Speaker 1: you want um, you don't want to go back to
Speaker 1: the gold standard, but almost every commost degree you need
Speaker 1: an independent central bank. You don't want a politician the
Speaker 1: political system running your central bank. This is what has
Speaker 1: gotten countries into serious trouble historically. I'd rather have a
Speaker 1: technocrat who might or might not be right on what
Speaker 1: that they're doing than have somebody with a political agenda
Speaker 1: running the FED. So so let's look at some of
Speaker 1: the folks who ran the FED. We could go back
Speaker 1: to Paul Volker, pretty uniformly looked at as one of
Speaker 1: the giants of the Federal Reserve. Do you share that
Speaker 1: that belief? Well, I mean, you know, he's kind of
Speaker 1: like when you determine which presidents of the United States
Speaker 1: are the greatest presidents, it's actually the ones that were
Speaker 1: there during the war, right, It's people like people like one,
Speaker 1: well Lincoln gets both, yeah, but it's the ones who
Speaker 1: go through And Vulgar deserves credit as one of the
Speaker 1: best FED chairman ever because He stepped in at a
Speaker 1: time where it took a lot of courage for the
Speaker 1: FED to basically say, Okay, that's it. Inflations out of control.
Speaker 1: We're going to cause a recession, but we don't care.
Speaker 1: What's what we have to do. We're not going to
Speaker 1: We're not going to admit it. But the reality is,
Speaker 1: we know that we're probably gonna be causing a recession here,
Speaker 1: and so we're gonna we're because up to that point,
Speaker 1: the FED had done half measures. Inflation was is a
Speaker 1: ratcheting process. Inflation go up, the Fed push it down
Speaker 1: a little bit, then I'll go up some more. And
Speaker 1: the FED never really got its arms around the problem.
Speaker 1: And he came in UH in an incredibly tough political
Speaker 1: environment and and stuck to the policy and and and
Speaker 1: vanquished UH inflation. And so I think that, you know,
Speaker 1: because he was he did the right thing at an
Speaker 1: incredibly difficult time, you have to rank him as one
Speaker 1: of the top ever. And And so let's fast forward.
Speaker 1: How is Jenney yelling yelling doing what is she now
Speaker 1: barely two years in the job, not even yeah, well
Speaker 1: you know, you look at it again. So you have
Speaker 1: to give high marks to her predecessor because because he
Speaker 1: you think about the the modern history of the US economy,
Speaker 1: you've got, you know, three big events that that where
Speaker 1: the central Bank had to really intervene. You had the
Speaker 1: Great Depression, where the Fed actually did a poor job
Speaker 1: and didn't really do its job of keeping a banking
Speaker 1: system going. Then you had the fighting of the inflation
Speaker 1: by vulcar A a successful war there. And then you
Speaker 1: had Bernankey come in and say, listen, I'm not gonna
Speaker 1: listen to the critics. I'm gonna gonna focus on getting
Speaker 1: growth in the economy back. I'm not gonna listen to
Speaker 1: people who say I'm creating inflation and hyper inflation, right,
Speaker 1: all those predictions about that, that what he's doing, and
Speaker 1: so you have to put very high marks in him.
Speaker 1: For for Janet Yellen, it's more of a she's in
Speaker 1: a in a less dramatic position, She's making less important judgments.
Speaker 1: She hasn't been faced with a kind of challenge. But
Speaker 1: but I'm I think that she's doing a good job.
Speaker 1: I think she was a good choice. Is off. She's
Speaker 1: a stay of course, sort of not not gonna undo
Speaker 1: what Bernan She's She's very much in his mold, no
Speaker 1: question about it. Yeah, and then I would be remiss
Speaker 1: if I did not mention um the Federal Reserve chairman
Speaker 1: formally known as the Maestro emphasis formally Alan Greenspan saw
Speaker 1: his reputation go from the man who could do no
Speaker 1: wrong to the goat of the financial christ Yeah, and
Speaker 1: so um. I in my book I wrote about Bernaki
Speaker 1: had two chapters on green Span, because you can't really
Speaker 1: talk about his his uh you know and thank you
Speaker 1: without talking about who he's replacing. The first chapter was
Speaker 1: about what Greenspan got right, in the second was about
Speaker 1: what he got wrong, which, yeah, well that this was
Speaker 1: before the crisis had really played out, so at the time,
Speaker 1: you know, your valuation of Greenspan would have been less negative.
Speaker 1: But what I found striking is that the the problem
Speaker 1: that what what happened green Span is that this is
Speaker 1: partly because of the development frankly of business uh television,
Speaker 1: was that this cult of personality developed a chairman and
Speaker 1: he became the the face of of of business financial
Speaker 1: markets TV and so the the the exaggerated description of
Speaker 1: his powers of you know, forecasting and all that was
Speaker 1: was way overdone. And what happened late in his career,
Speaker 1: as he made some mistakes, you know, such to me,
Speaker 1: the big mistake was taking rates down below two and
Speaker 1: keeping him there for three years. I think they were
Speaker 1: at one percent for over a year, and that kicked
Speaker 1: off the whole inflationary spiral. And and I think, so
Speaker 1: what I felt, so I to be you know, I
Speaker 1: think to be honest about I have to talk about
Speaker 1: what I wrote in real time, because hindsight is a
Speaker 1: little bit unfair. So what I wrote in real time
Speaker 1: was I didn't understand why he felt so obliged to
Speaker 1: raise rates so carefully, you know, the gradualist approach, because
Speaker 1: what happened, you know, as you said, he they had
Speaker 1: lowered rates to very low levels and then they took
Speaker 1: such a long time to get them back to normal.
Speaker 1: They didn't they didn't create any financial restraint. I mean,
Speaker 1: they was like they weren't even hiking because they took
Speaker 1: all the shock out of it. The bond market rallied,
Speaker 1: the equity market rallied. You had a massive expansion in
Speaker 1: the in cheap credit in the house market. And so
Speaker 1: that the mistake he made, I thought in real time,
Speaker 1: and you know, in hindsight, I thought, obviously the mistake
Speaker 1: looks much bigger. But in real time I thought, why
Speaker 1: are you being so gentle here? Why can't what is
Speaker 1: there a law against raising interest rates fifty basis points?
Speaker 1: And and uh. The other thing that I didn't like
Speaker 1: about him in real time again, I don't want to
Speaker 1: be because I think that the that I, you know,
Speaker 1: would I have made similar mistakes. I didn't like the
Speaker 1: way he talked about the housing market at that time
Speaker 1: he was a cheerleader for the housing market, and that
Speaker 1: he should not have been doing that. He he gave
Speaker 1: speeches that suggested that risks housing are very low and um,
Speaker 1: and I and I can point back to pieces I
Speaker 1: wrote at the time where I said, listen, you know
Speaker 1: it's not true. You know, Greenspan gave a speech where
Speaker 1: he said, um, that you know, real estate markets are
Speaker 1: inherently local. Uh, you know, they're determined by local conditions.
Speaker 1: So and it was an argument around there being Froth
Speaker 1: and that remembers Frost speech, Frost speech in the housing market.
Speaker 1: But the argument was trying to make was that they
Speaker 1: won't all go up and down together, so they're not
Speaker 1: that risky, right because they've got moved in separate directions
Speaker 1: but you're not going to have Miami going straight up
Speaker 1: in California going straight down. No. Well, and and that
Speaker 1: was the problem is that we knew at the time
Speaker 1: already that the credit availability had overextended. So these markets
Speaker 1: were all joined together by by mortgage, by the mortgage
Speaker 1: mark of very generous mortgage market, and um, a lot
Speaker 1: of irrational exuberans. So so that idea that somehow we
Speaker 1: could kind of work our way through this without any
Speaker 1: any kind of problem for the FED chairman to say
Speaker 1: that I didn't think was right. What are you saying
Speaker 1: that was not very responsible? Is that what I'm here now,
Speaker 1: I'm saying that that, you know, um, it's kind of
Speaker 1: a job where if you don't you know, don't don't
Speaker 1: you don't want to at any time kind of be
Speaker 1: viewed as a cheerleader to the markets. And I think
Speaker 1: that he ended up sounding like that. I don't think
Speaker 1: he was intentional, I think that, but he ended up
Speaker 1: sounding like So, so what about the infamous green span
Speaker 1: put Was there really such a thing or was it
Speaker 1: just the belief by traders that every time the market
Speaker 1: throws a hissy fit, Uncle Allen is there to to rescue. Yeah, Well,
Speaker 1: I think that um, there is, you know, and if
Speaker 1: there are, there's always a put from a central bank.
Speaker 1: But the question is what's the strike price? So is it?
Speaker 1: Is it a deep out of the money emergency put
Speaker 1: or is it or is it ant? So green Span
Speaker 1: the complaint was, Hey, it's an at the money put
Speaker 1: and every time the market negative and that and that
Speaker 1: is a problem, right, that's a problem if you and
Speaker 1: I think that central bankers debate this all the time
Speaker 1: about when do you know? When do you step in?
Speaker 1: When do you react to the markets? Um? Do you?
Speaker 1: And And the answer is that put needs to be priced,
Speaker 1: you know, pretty out of the money, and so that
Speaker 1: people don't get this sense that the central banks always
Speaker 1: going to rescue them and that that was the so
Speaker 1: having too generous to put. I think you could argue
Speaker 1: at times that that was one of the problems. Greenspan
Speaker 1: head that that makes a lot of sense. So so
Speaker 1: we've talked about Bernanke, green Span, yelling, and volker Um.
Speaker 1: That's a pretty interesting run of people. I think folks
Speaker 1: are not nearly as familiar with the local district, federal
Speaker 1: reserve branch presidents. Um, who are these guys and how
Speaker 1: important are they to the system. Well, the FIT is
Speaker 1: a really uh, almost bizarre structure because remember is created
Speaker 1: way back at the beginning of the last century, a
Speaker 1: hundred years ago, and it was designed to have checks
Speaker 1: and balances in the sense of not putting all the
Speaker 1: power in Washington and spreading out these presidents across the country.
Speaker 1: So there's almost a deliberate decentralization. Um. I think that
Speaker 1: the system works. Okay, I think that you get you
Speaker 1: get very different views. You have some sent some of
Speaker 1: these reserve banks for the presidents of traditionally a hawk
Speaker 1: and very anti inflation. You know. The the obvious one
Speaker 1: might would be the Kansas City FED, where we've had
Speaker 1: a string of very hawkish presidents. Um. And then you
Speaker 1: have others who are are very dovish, you know, the
Speaker 1: Boston FED president has has been on the dovers side,
Speaker 1: Charlie Evans in Chicago on the dovers side. And so
Speaker 1: I think that you I think that that's a healthy
Speaker 1: debate and I and UM, I think that the the
Speaker 1: the good thing about the FED, I think in the
Speaker 1: way the policy process works is that there's a it's
Speaker 1: a respectful group, right the FED. The chairman doesn't totally
Speaker 1: dominate the committee, but there's a sense of respect and
Speaker 1: coordination among them. So even with dissents and disagreements and
Speaker 1: all that, you end up with a sensibly debated conclusion.
Speaker 1: I mean, the advantage of having a committee decision making
Speaker 1: is that committees make fewer mistakes than individuals. In this case,
Speaker 1: the committee maybe a little bigger than it would be
Speaker 1: optimally if you look at models of optimal sized committees.
Speaker 1: But having a committee is helpful because it avoids, um,
Speaker 1: you know, somebody who kind of just gets off on
Speaker 1: the wrong track and and and doesn't listen to enough voices.
Speaker 1: I recall, here's a little FED trivia. I recall at
Speaker 1: one point in time green Span actually had exercised the
Speaker 1: right to raise the lower interest rates on his own
Speaker 1: between meetings, and the FED ultimately rained that in. I
Speaker 1: want to say, there was an intromeding cut that seemed
Speaker 1: to really generate a lot of pushback amongst the Yeah,
Speaker 1: and I think if you look at the when Greenspan
Speaker 1: first came in, he was faced a pretty fractious committee,
Speaker 1: and I think over time, as his reputation built and
Speaker 1: he kind of took command of the committee, you probably
Speaker 1: had things go too far in the other direction with
Speaker 1: the chairman kind of dominating too much. And I think
Speaker 1: one of the things that Bernanki did when he came
Speaker 1: in is he deliberately I think, came in to reduce
Speaker 1: the cult of personality around the chairman. Um. I mean
Speaker 1: remembered it when when Bernanki retired, he did not have
Speaker 1: he didn't go to Jackson Hole for his last meeting
Speaker 1: there because Bernecki didn't want you know, they kind of
Speaker 1: sending off on a carpet kind of approach. He wanted
Speaker 1: to for the chairman is is obviously the most important
Speaker 1: member of the committee, and it's important of a strong
Speaker 1: person who can gather consensus together. But you don't want
Speaker 1: to have a structure decision making process where there's a
Speaker 1: complete control by one individual. And you know, he was
Speaker 1: chairman of the prince in Economics department. I am met gin.
Speaker 1: That's a fairly I don't know if genteel is the
Speaker 1: right word because of academic politics, but I would imagine
Speaker 1: that's a pretty good preparatory for for being a FED chairman,
Speaker 1: sort of wrangling all those cats together. There's some of that,
Speaker 1: and but I think that the the the big difference.
Speaker 1: I mean, obviously, the FED is making decisions that have
Speaker 1: to be made quickly and aggressively, and so you um,
Speaker 1: and I think that there's that sense there and that's
Speaker 1: why you need it. You need have a reasonably strong chairman.
Speaker 1: There are times in which you really have to move.
Speaker 1: So let's transition from government to private sector to Wall Street.
Speaker 1: You were at the New York FED for nine years
Speaker 1: and then you ended up at Barclays and JP Morgan
Speaker 1: and ultimately Lehman Brothers in Meryl. What was the transition
Speaker 1: like from being on the government side to the Wall
Speaker 1: Street private sector. Well, I mean one of the things,
Speaker 1: as you discover immediately is that everything moves at a
Speaker 1: hundred miles an hour if you work on the street, um,
Speaker 1: you know, and the the the in at the FED.
Speaker 1: You know, I would do briefings before the fom C meeting.
Speaker 1: So I would brief our local president in New York
Speaker 1: before you got down to Washington to vote a monetary policy.
Speaker 1: I'd have a three or four weeks to get my
Speaker 1: presentation together right, and that would be in full time
Speaker 1: right on Wall Street. You know, if something's happening you
Speaker 1: you you know, you got you know, two days to
Speaker 1: put it together. Not you know, if you're lucky and
Speaker 1: you have But the point is that, um, it's uh,
Speaker 1: it's the pacing of everything. It's the fact that you
Speaker 1: know you have to if you're gonna be successful on
Speaker 1: Wall Street is so especially on the South Side, you
Speaker 1: have to be um, we willing to change gears like that.
Speaker 1: You know, something comes up, you're writing something, and suddenly
Speaker 1: you know it's interesting, but it's not really what everyone's
Speaker 1: focused on. Throw that out and start over again, because
Speaker 1: this is the question of the day and people want
Speaker 1: that need fast answers, and that that kind of ability
Speaker 1: to kind of first of all cover multiple topics and
Speaker 1: many different kinds of clients and switch gears quickly is
Speaker 1: extremely important. So you went from a number of cell
Speaker 1: side shops um and institutional shops to a big bank
Speaker 1: America Merrill Lynch is a giant really more of a
Speaker 1: retail firm. What was that transition? Well, I think that
Speaker 1: the the I don't think it's a huge difference. Remember
Speaker 1: when I when I worked at at Lehman Brothers, who
Speaker 1: was working in the Obviously it's an investment bank and
Speaker 1: a lot of my time spent dealing with the trading
Speaker 1: floors and with institutions and const institutional customers. Um, I'm
Speaker 1: primarily focused on the investment bank at b of A
Speaker 1: Merrill Lynch. The new part, which in some ways is fun,
Speaker 1: is the retail business. Right, So you do need to
Speaker 1: be able to go and give a dinner speech to
Speaker 1: high net worth individuals, you know, the big clients of
Speaker 1: our wealth management business. Um, you need to know how
Speaker 1: to de jargonize and kind of and have to two
Speaker 1: different speeches. You're giving one friendly one and a more
Speaker 1: technical one. So, um, that ability to kind of switch gears,
Speaker 1: I think is the one kind of new challenge of
Speaker 1: moving to a place where you have a big retail business.
Speaker 1: And you were at Lehman Brothers for a good number
Speaker 1: of years. When when did you start with them? So
Speaker 1: I was there from uh from nine to the sinking
Speaker 1: of the ships, so for twelve years. Um, how did
Speaker 1: how did the company change over that period? Well, you
Speaker 1: had to have like a front row sea eat for
Speaker 1: one of the most fascinating in hindsight at the time.
Speaker 1: It had to be absolutely well. Well, I mean so
Speaker 1: I god, you know, I've had the fortune and misfortune
Speaker 1: of being in front row for a number of wonderful things,
Speaker 1: pretty awful things. Well the nine eleven Um, you know,
Speaker 1: watching the planes fly into the building there, you know,
Speaker 1: so but um and uh and then being in the
Speaker 1: front row watching Lehman go under. Right. So Lehman was
Speaker 1: had been an investment bank, had had problems over the years.
Speaker 1: When fold took over, Uh, it was a company that
Speaker 1: that was work in progress, kind of reviving itself, and
Speaker 1: he did a tryanus job of getting the firm back. Uh.
Speaker 1: There's some early scares around the long term capital jarred
Speaker 1: where you know, funding markets were really tell you two
Speaker 1: very tight markets for a while there. But he kind
Speaker 1: of built this was his company that he built, and
Speaker 1: so you know, the bank went the Lehman went from
Speaker 1: being i would say, kind of a second tier to
Speaker 1: right up there just below the golden sacks of the world.
Speaker 1: So and so that was a tremendous accomplishment. And then
Speaker 1: of course I think that Lehman fell victim to something
Speaker 1: that all the investment banks were victim to. We just
Speaker 1: happened to be kind of at the wrong wrong place,
Speaker 1: at the wrong tunel. Mortgage back bonds was them and
Speaker 1: bear Stearns. We were sectors. So you were right in
Speaker 1: the soup. We were in the soup, and you could
Speaker 1: argue that, you know, I'm sure their mistakes made all right,
Speaker 1: that could have avoided some of the pain. Uh. Well,
Speaker 1: the big one was turning Warren Buffett down, which I
Speaker 1: think a lot of people forget. Buffett came along and
Speaker 1: made an offer to fund Lehman at terms that turned
Speaker 1: out to be more generous than what he gave Goldman
Speaker 1: later on when everything was much much for and Fold
Speaker 1: turned him down. And that was really, if you want
Speaker 1: to pick a fatal that might have snatched a defeat
Speaker 1: from the Joseph victory. Yeah, I mean I wonder whether
Speaker 1: you know, he just didn't want You know, this is
Speaker 1: kind of like a parent who doesn't want to admit
Speaker 1: their kids not getting into Harvard, you know. I mean
Speaker 1: it's you know, the firm had big problems, as he
Speaker 1: said it, because of not just the residential but commercial
Speaker 1: real estate that was there and so and so the
Speaker 1: idea of cutting a deal where you sell assets at
Speaker 1: a huge discount probably was too much for him to stomach,
Speaker 1: But in hindsight it was a massive mistake. He also
Speaker 1: strikes Now, I've never met the man. I've only read
Speaker 1: and seen what he said, but he strikes me as
Speaker 1: a guy that doesn't like to be told no. And
Speaker 1: I can't imagine his inner circle where it was coming
Speaker 1: up to him with papers and saying, hey, Dick, this
Speaker 1: is a mess. You have to do something about this.
Speaker 1: He doesn't doesn't strike me of having the temperament that
Speaker 1: he wants to be told, Hey, you have a real
Speaker 1: problem here, fix it. Yeah, I don't. I don't know
Speaker 1: what happened in meetings in there, but uh, you know,
Speaker 1: Dick Fold was definitely a tough dude. And you know,
Speaker 1: and I'd say there are two things that stood out
Speaker 1: about one it was a tough dude, and the other
Speaker 1: was he you know, lived and breathed you know, Lehman Brothers.
Speaker 1: And that was he was in love with his company.
Speaker 1: This was his baby. And so of all the things
Speaker 1: you can say about him, it certainly, uh that that
Speaker 1: stood out, um, when you were there. Last question on Lehman,
Speaker 1: because I really don't want to re revisit this over
Speaker 1: and over again. A year or so before everything hit
Speaker 1: the fan, were there any internal signs of anything or
Speaker 1: was it just hey, listen, the whole sector is emptying
Speaker 1: entering a challenging period and we just have to fight
Speaker 1: a way through this. I think that, UM, I mean
Speaker 1: the lead up to the crisis, it was pretty obvious,
Speaker 1: I think two people in the business that there was
Speaker 1: a domino effect going clearly when bear Stones went down,
Speaker 1: everybody looked around and said, who's most similar to bare
Speaker 1: only answer was Lehman. Yeah, and so uh, anyway, you know,
Speaker 1: if you were if you were tuned into it, uh,
Speaker 1: you knew that every end of quarter earnings announcement was
Speaker 1: dangerous for all the investment banks and UM and it
Speaker 1: was a domino thing. It was like all of the
Speaker 1: investment banks had big problems. UM. But you know it's
Speaker 1: kind of like where was the market focus at the time,
Speaker 1: and so Lehman was in the crosshairs and um and UM.
Speaker 1: So you could feel it. Um that the weekend before
Speaker 1: Lehman went under, UM, I was sitting down with my
Speaker 1: boss at the time. I was the chief he was
Speaker 1: economist and he was the global chiefs named Paul Shared
Speaker 1: and uh, Paulson had just announced that uh that there
Speaker 1: would be no government money for Paul Yeah, yeah, for Lehman,
Speaker 1: and so so uh, you know, m Paul says to me,
Speaker 1: well that they you know, they can't let Lehman go
Speaker 1: under the financial markets collapse. And I said, but Paul,
Speaker 1: you know we may not be in our office on Monday.
Speaker 1: And uh in sure enough. I mean, um, it was.
Speaker 1: You could feel, you could feel the the the the
Speaker 1: how dangerous it was in real time. It was not
Speaker 1: at all surprised when the the the over the weekend,
Speaker 1: if they didn't have a deal, they were done. They
Speaker 1: were done. Yeah, that's amazing. So you mentioned, um, Paul,
Speaker 1: who was your bosson Lehman. Let me shift gears completely
Speaker 1: and go to some of my favorite questions. Who were
Speaker 1: some of your early mentors? Yeah, I mean the people
Speaker 1: who kind of influenced me. I picked three names. You know,
Speaker 1: I read your questions ahead of time, so I've I've
Speaker 1: had to think through it. I think my oldest brother,
Speaker 1: because he's the guy in Chicago. I mean he and
Speaker 1: you know he he's uh, he's a He really embraced
Speaker 1: and loved economics. He was inspired by some of the
Speaker 1: best professors ever. You know, people like Milton Friedman were
Speaker 1: there and stuff that was a seven Yankees at they did.
Speaker 1: And you look at all the Nobel Prizes that came
Speaker 1: out there. That was a great department. What did he
Speaker 1: end up doing well? He want to ended up getting
Speaker 1: an m b A and being uh in the in
Speaker 1: the hospital Finanza business so so he but he said
Speaker 1: didn't continue in economics. UM. My thesis advisor was a
Speaker 1: guy named Phil Keagan. Coincidentally, he's also a Chicago guy.
Speaker 1: And the thing I like with Kagan is that he
Speaker 1: was at at a time where I, you know, a
Speaker 1: lot of professors didn't seem to kind of want to
Speaker 1: put out for their graduate student. He was there at
Speaker 1: Columbia kind of a guy who was quite willing to
Speaker 1: work with you. He was also somebody who kind of
Speaker 1: had a very sober, unbiased way of looking at at
Speaker 1: issues and things. So he was quite an inspiration. But
Speaker 1: the guy who really was what I find the most
Speaker 1: interesting is the guy who I think was best for
Speaker 1: my career. It was a history professor I had in college.
Speaker 1: This history. He's a Russian history professor, and he hated
Speaker 1: the writing he was getting out of his students. Um
Speaker 1: and he so he decides to teach a writing class.
Speaker 1: UM and I took the writing class, and that class,
Speaker 1: i'd say of any I've never had a class that
Speaker 1: that did just made such a big difference in my
Speaker 1: ability to do I learned to write. It was a
Speaker 1: practical it's a practical hands on every day, somebody gets
Speaker 1: their paper ripped apart in class, right down to the
Speaker 1: gory details. And you you know, it's kind of like
Speaker 1: you know you either you know you either you know
Speaker 1: you either survive you know. If you what doesn't kill
Speaker 1: you makes you strong kind of world. And so I
Speaker 1: came out of that knowing how to write, and that
Speaker 1: that I think is a very important part of what
Speaker 1: we do. It's amazing what a significant skill set it is,
Speaker 1: and how often I encounter people who have either developed
Speaker 1: that skill or or have not. It could not agree
Speaker 1: more how significant that is. But it's it's one of
Speaker 1: the hardest things to teach. You know, it's really hard
Speaker 1: to teach because I mean and and uh, there's no
Speaker 1: way around it except to get It's kind of like
Speaker 1: the language immersion. You know, you can't learn a foreign
Speaker 1: language unless you immerse yourself from taking it once a
Speaker 1: week doesn't work. I learned a long time ago. If
Speaker 1: you want to be a good writer, there are two
Speaker 1: things you have to do one right every day and
Speaker 1: to read really good writing, and that's you. It's just
Speaker 1: a it's a ground war. You have to grind it
Speaker 1: out and that's the only way to get I agree
Speaker 1: with that. Um. So let's talk about some investors. What
Speaker 1: investors may have influenced your thinking about the relationship between
Speaker 1: the economy and markets. Well, I mean it's not I'm
Speaker 1: not really a guy who gets an instormation from from
Speaker 1: it gets his inspiration from investors. I mean they're there.
Speaker 1: What I have done over the years is that I
Speaker 1: find that, Um. It turns out in this job that
Speaker 1: being a macro economist is only part of it. You
Speaker 1: have to understand financial markets and how they work. And
Speaker 1: so over the years kind of working really closely with
Speaker 1: people who cover credit, uh, the equity analysts. Um. Even today,
Speaker 1: you know we we in my own work work now
Speaker 1: we collaborate all the time with the analysts and the
Speaker 1: other parts of research. Um, because there's always some an
Speaker 1: angle that you didn't get. And uh So it's not
Speaker 1: so much it's it's that part. It's it's kind of
Speaker 1: combining the strategy because you know, being in one of
Speaker 1: the things you that's I think very important to clients
Speaker 1: is they don't want economists that where the there's this
Speaker 1: kind of strict boundary line where you you make your
Speaker 1: FED call, your inflation calling, your growth call, but you
Speaker 1: never make the next step into what is So you
Speaker 1: need to be able to do that and that and
Speaker 1: and so there needs to actually be some overlap between
Speaker 1: what the economists is doing, what the strategists are doing.
Speaker 1: Otherwise the clients not getting a full story. So that
Speaker 1: that that's what I have been very important. I've heard
Speaker 1: the same thing from Byron Ween and from Ed Hyman,
Speaker 1: all of whom said the classic mistake is that he
Speaker 1: was in an economic thesis but no applicability to markets. Yeah,
Speaker 1: and and what you write about and what you the
Speaker 1: questions you address, they have to be dictated by what
Speaker 1: the market cares about at the moment. They can't be
Speaker 1: This is an interesting topic and I'd like to write
Speaker 1: about It has to be all driven by. What I
Speaker 1: want to do is say that clients or have a
Speaker 1: wrong idea about X. They're all obsessed about it. That's wrong.
Speaker 1: I'm going to explain why that's what I want to
Speaker 1: write about makes sense. Um, let's talk about books. I
Speaker 1: find myself fascinated by the reading list of people you know,
Speaker 1: our business. What what are some of your favorite fiction
Speaker 1: or nonfiction? Finance or nonfinance. I don't care well for me.
Speaker 1: One of the things is that well written history I love.
Speaker 1: I mean, I just write, wrote, I just wrote. I
Speaker 1: just read um Lawrence in Arabia, hum and um a
Speaker 1: couple of years. No, No, this is the recent recent
Speaker 1: who's the author, actually, I can't remember at the top
Speaker 1: of my head. Lawrence in Arabia, not Lawrence of Arabia.
Speaker 1: And the reason he calls it Lawrence and Arabias because
Speaker 1: you know, he's an how Sider coming into Um and
Speaker 1: the book is fascinating because it gives you this sense
Speaker 1: of the the underlying history of the Middle East and
Speaker 1: you start to understand, um, why the region is such
Speaker 1: a mess, right because he came in there in the
Speaker 1: middle of this it's a tribal place and the end
Speaker 1: and the and some of the things that the the
Speaker 1: imperial powers did there were quite bad. You know. The
Speaker 1: title is Lawrence in Arabia, Ward, Deceit, Imperial Folly and
Speaker 1: the Making of the Modern Middle East by Scott Anderson.
Speaker 1: Scott Anderson was really interesting. It's a good book. The
Speaker 1: book I'm familiar with in that space is uh, Seven
Speaker 1: Pillars of Wisdom, Right, that's you know College, that's way
Speaker 1: way back when, right that I think that was what
Speaker 1: he wrote was what his version of events, which is
Speaker 1: interesting to kind of see the uh see the way
Speaker 1: the Anderson kind of evaluates that. But so I love history. Uh,
Speaker 1: I've been reading since I was a kid. And give
Speaker 1: me another title? What else? What else stands out? Um?
Speaker 1: So I'm really terrible at remember your authors. So Atkinson's
Speaker 1: uh trilogy book on World War Two, the US in
Speaker 1: in Europe Um, Army at Don um um. Quite a
Speaker 1: quite a powerful story. It's it tells you a lot
Speaker 1: about how what a what a mess, Uh, it was
Speaker 1: when the US entered Europe and you had a bunch
Speaker 1: of amateur generals basically trying to fight the West point
Speaker 1: history of World War Two. No, it would be Army
Speaker 1: at Don did Jolly Roger guns at night? What what
Speaker 1: are the other ones? The day of battle? The Door
Speaker 1: in Sicily and Italy. Yeah, that's one of the three
Speaker 1: the greats who changed the course of British history. Oh,
Speaker 1: here it is the Liberation Trilogy triogy and then there's
Speaker 1: also UM, oh no, that's just isn't he just did
Speaker 1: the intro. I'll take a look at that. People always ask, uh,
Speaker 1: your guests mentioned a book, but I can't find it.
Speaker 1: So I always wanna always want to track that down. UM.
Speaker 1: The last couple of questions we have, so you've been
Speaker 1: in this industry for a good couple of years. What
Speaker 1: has most notably changed since you began in this kind
Speaker 1: in this field? Um? I I would I would say
Speaker 1: that the big changes has been the regulation of financial
Speaker 1: markets and so it's been for remember that in reaction
Speaker 1: to a lot of scandals in the business, UM back
Speaker 1: in two thousand and all the stuff with the people
Speaker 1: writing emails that that did contradicted with their official publication.
Speaker 1: On the show, talked quite bluntly and openly about Yeah,
Speaker 1: that all that stuff has uh turned it into a
Speaker 1: very heavily regulated business and uh um and uh you know,
Speaker 1: the good news is that you know it's working, um,
Speaker 1: and you don't get that kind of behavior. The bad
Speaker 1: news is that it's the level of paperwork and and
Speaker 1: that you have to go through is tremendous. And so
Speaker 1: from a day to day point of view, that's been
Speaker 1: a big change. I don't think that the business of
Speaker 1: being an economists changed. It's always been in my mind,
Speaker 1: what I do is always about new questions come up
Speaker 1: and just being flexible about the way you address them
Speaker 1: and being ready to find new angles. It's not that
Speaker 1: I a particular model that I used for years it's
Speaker 1: not working. I've had to change my models. What's what's
Speaker 1: happened is you always have to change your models because
Speaker 1: the models are never adequate. There's always something going on
Speaker 1: that that requires a more a more judgmental and subtle
Speaker 1: analysis than just putting a bunch of equations on a paper.
Speaker 1: So so, speaking of economics and an economists, if you
Speaker 1: had a millennial or someone coming right out of college
Speaker 1: now with an economics background and they came to you
Speaker 1: and said, I'm interesting in in I'm interested in pursuing
Speaker 1: a career in as an economist on Wall Street, what
Speaker 1: sort of advice would you give that person? Well, I mean,
Speaker 1: first of all, you there, you did you have to
Speaker 1: be a cautionary note about the this is a shrinking
Speaker 1: business rank frankly, right, so you've had count going down
Speaker 1: and yeah, and and um you know kind of uh,
Speaker 1: you know, just a cost conscious world that we live in. Uh.
Speaker 1: Um And so it's a tough road. Um. And I
Speaker 1: think one thing I would say to people who've had
Speaker 1: economics training is that there are a lot of things
Speaker 1: you can do with it. You don't have to become
Speaker 1: what I am, which is an economist working in an
Speaker 1: economics team. You could be a strategist, you can be
Speaker 1: portfolio manager. There are many things you can do economic.
Speaker 1: The great thing about economics is it's a discipline of
Speaker 1: the way you think about the world that makes it
Speaker 1: applicable to many things. So I when I tell people,
Speaker 1: I often have UM. Uh, you know, kids send me
Speaker 1: emails asking advice about you know, who are coming out
Speaker 1: of college and stuff, and I always give them that advice.
Speaker 1: If if you if you are absolutely in love with economics,
Speaker 1: go get a PhD. Suffer through that. Um. If you're
Speaker 1: not absolutely in love with it, though PhD is a
Speaker 1: tough road to go, UM, then you probably want to,
Speaker 1: you know, to take more of a business school approach
Speaker 1: or something n unless you love economics. NBA is a better,
Speaker 1: better round. I think it's a better route. I think
Speaker 1: it's more flexible. UM. But I think that um, you know,
Speaker 1: there's a lot of things you can do with an
Speaker 1: economics degree. I I've always wanted to just be an economist,
Speaker 1: and so to me, that was never an option. I
Speaker 1: major in economics, and I got to college, I went
Speaker 1: straight to my PhD program. I Uh, you know, UM
Speaker 1: went straight into working at the FED. There's never any
Speaker 1: kind of I mean, I'm pretty boring personal, let's face it. Uh,
Speaker 1: I wouldn't say that, but you knew what you wanted
Speaker 1: to do, and I did. That's you know, there are
Speaker 1: lots of people who come out of college and say,
Speaker 1: now what you know? You never had that issue now
Speaker 1: and I And I'm pretty lucky too, because I think
Speaker 1: that the share I mean, when I arrived at college,
Speaker 1: you had about three hundred premed majors and two hundred
Speaker 1: pre law mages. And of course by the end of
Speaker 1: college there are a lot fewer premed and pre law
Speaker 1: people because that was the easy path, was what you
Speaker 1: did when you didn't know what you want. Alright, I'm
Speaker 1: gonna go to law school and right, and and so
Speaker 1: I think that there's a lot of a lot of
Speaker 1: people had a big learning process, and you know, when
Speaker 1: you find a lot of kids come out of couege.
Speaker 1: You're not sure what they do. So a lot of
Speaker 1: people don't realize that to get a gig in radio
Speaker 1: you actually need a legal degree. So that's why I
Speaker 1: want that route. Um. Our last question, and I asked
Speaker 1: this of everybody, and the answer is very dramatically. What
Speaker 1: is it that you know today about markets, about investing,
Speaker 1: about the economy that you wish you knew when you
Speaker 1: began thirty years or so ago. M hmm, that's a
Speaker 1: that's a yeah, I thought, will pauses, he freezes up. Um,
Speaker 1: what what have I learned that I wish? It's not
Speaker 1: just what you learned, it's what would have been of
Speaker 1: huge help at the start of your career that ten
Speaker 1: or twenty years later you said, if only I knew
Speaker 1: twenty years ago. I think that the the I think
Speaker 1: that what you learn is about learning to kind of
Speaker 1: work in very high levels of uncertainty about exactly what
Speaker 1: you're looking at and knowing it's it's okay to be
Speaker 1: kind of lost for periods of time and to figure
Speaker 1: it out. Um. I've always felt that what happens in
Speaker 1: the in the economy is that something you get, you
Speaker 1: get an event you figure out the right angle. And
Speaker 1: if you get it right, if you figure out what's
Speaker 1: really the issue and how it's going to play out,
Speaker 1: your forecast just follows and you become smart for a year.
Speaker 1: And so it's that finding that it's finding the right
Speaker 1: angle in things that to me was the thing that
Speaker 1: that makes you a good economist. And the other thing
Speaker 1: is knowing when to capitulate. Oh, I didn't get the
Speaker 1: right admitting error and I got and and and the
Speaker 1: and maybe the lesson is that that I did learn
Speaker 1: was admitting errors is fine, sticking to wrong views in
Speaker 1: the face of the evidence that is wrong. But in
Speaker 1: minting airs, people respect that, especially if you're open and
Speaker 1: honest about it. You don't need to be right all
Speaker 1: the time. We all know that it's an art more
Speaker 1: than a science, and we get a lot of bad forecasts.
Speaker 1: So it's it's knowing when to capitulate is another kind
Speaker 1: of key life lesson there even thank you so much
Speaker 1: for being so generous with your time. This is this
Speaker 1: has really been quite fascinating, and I'm really glad we
Speaker 1: had a chance to uh sit down and go over
Speaker 1: the stuff. We'll have to drag you to another one
Speaker 1: of those dinners with less people, um this time. If
Speaker 1: you enjoyed this conversation, be sure and look up an
Speaker 1: Inch or down an inch on it tunes and you
Speaker 1: could see the full run of previous conversations we've had.
Speaker 1: Or or go to the blog and and click podcasts
Speaker 1: and you'll see the full run of all. I think
Speaker 1: we're up to eighty two or so of of these conversations.
Speaker 1: I would be remiss if I did not thank my
Speaker 1: head of research, Mike Batnick, and my producer, uh Charlie Bohmer,
Speaker 1: and uh Taylor Riggs, my booker, and today Charlie is
Speaker 1: also my engineer. UH So thanks everybody for for helping
Speaker 1: put this together. I'm Barry Ridholts. You've been listening to
Speaker 1: Masters in Business on Bloomberg Radio.