Speaker 1: This is Bloomberg Wall Street Week. We turn our attention
Speaker 1: to the markets this week. USCPI, Nembor's reinforcing concerns about inflation,
Speaker 1: the financial stories that shape our worth, a really different
Speaker 1: reaction to market. Some more indications of just how hot
Speaker 1: the US economy really is.
Speaker 2: Through the eyes of the most influential voices.
Speaker 1: Katherine Keating, CEO of B and Y, Moan, Ryan Winhand
Speaker 1: a Bank of America, Sam Zell Sharman and founder of
Speaker 1: Equity Group Investments.
Speaker 2: Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Speaker 1: Don't blame me, whether it's risking a national default or
Speaker 1: driving banks to failure, It's got to be someone else's fault.
Speaker 1: This is Bloomberg Wall Street Week. I'm David Weston. This
Speaker 1: week Econa is Gled Hubbard on the damage being done
Speaker 1: by the fight over the federal deficit that were a
Speaker 1: layer of Edelman Global Advisory. On what China stands to
Speaker 1: gain from US turmoil.
Speaker 3: How do they build relations either with the United States
Speaker 3: to keep those markets open or can they find new markets?
Speaker 1: And Catherine Judge of Columbia and whether we need all
Speaker 1: of those regional banks after.
Speaker 4: All we're seeing very real questions about the regional bank
Speaker 4: business model.
Speaker 1: This week, Global Wall Street was looking for someone to
Speaker 1: step up and take some responsibility, like for the failure
Speaker 1: of three major regional banks, and the former head of
Speaker 1: Silicon Valley Bank was there to help as he found
Speaker 1: a host of culprits other than himself, like the FED
Speaker 1: and social media.
Speaker 5: I believe that svb's failure was brought about by a
Speaker 5: series of unprecedented events, but.
Speaker 1: The chair of the Senate Banking Committee had a decidedly
Speaker 1: different view. We know your banks were fatally mismanaged. The
Speaker 1: next obvious question is why.
Speaker 6: The simple answer the same answer we find to most
Speaker 6: questions about big bank failures.
Speaker 7: Because the executives were getting rich.
Speaker 1: And when it comes the debt ceiling, Republicans and Democrats
Speaker 1: picked up the theme of pointing fingers at everyone but
Speaker 1: themselves for the risk of the United States flirting with
Speaker 1: renigging on its debt for the first time in two
Speaker 1: hundred and thirty four years. As President Biden has put
Speaker 1: the onus on Republicans, and Speaker McCarthy continues to point
Speaker 1: his finger at President Biden.
Speaker 7: Do we have obstacles, Yes, we have a big obstacle
Speaker 7: in the White House.
Speaker 1: But even as the two sides blamed one another, they
Speaker 1: did find some room for optimism.
Speaker 5: Confident that will get the agreement on the budget that
Speaker 5: America will not gault.
Speaker 1: But despite all the disagreement and the urgency, President Biden
Speaker 1: thought things were going well enough that he could head
Speaker 1: over the G seven meetings in Horotiaa, Japan at the
Speaker 1: end of the week, though he did promise to get
Speaker 1: back by Sunday.
Speaker 5: The nature of the presidency is addressing many of the
Speaker 5: critical matters all at once, So I'm confident we're going
Speaker 5: to continue to make progress toward avoiding default. However, I'm
Speaker 5: cutting my trip short.
Speaker 1: Then. On Friday, Morgan Stanley ce James Gorman surprise Wall
Speaker 1: Street by announcing to shareholders that he would be stepping
Speaker 1: down at CEO within the next twelve months, raising questions
Speaker 1: about how he's yet to be named successor may change
Speaker 1: the direction of a firm Gorman led so successfully.
Speaker 8: He's built the firm through all kinds of acquisitions. He's
Speaker 8: been a brilliant acquirer. Much of it has been through
Speaker 8: through acquisition. And so maybe now you translate an act
Speaker 8: from an acquisitive CEO to a managing CEO. Puts all
Speaker 8: these disparate pieces together.
Speaker 1: Markets on the hold did pretty well this week, and
Speaker 1: the S and P five hundred added another one point
Speaker 1: sixty five percent, taking it to forty one ninety one,
Speaker 1: well above almost all of our Wall Street week elves
Speaker 1: who actually moved the other way in their median call
Speaker 1: for the year end, taking it down to an even
Speaker 1: four thousand. The NANZNAK did even better than the SMP,
Speaker 1: up over three percent for the week, while the yield
Speaker 1: on the ten year Treasury added twenty one basis points,
Speaker 1: ending the week at three point six eighty six. To
Speaker 1: take us through the week, we welcome now at Leash
Speaker 1: living Bny Mellon, head of Investment Strategy and Equity Advisory Solutions,
Speaker 1: and Gerard Cassidy, RBC Capital Markets, head of US bank
Speaker 1: Equity Strategy. Welcome to both of you. Great jy, have
Speaker 1: you at leash. Let's start with you. Do we have
Speaker 1: a rally going on in the SMP. They're up now
Speaker 1: flirting with forty two hundred again.
Speaker 9: Look, I think I think the market is expecting that
Speaker 9: forty two hundred ceiling to hold here if the s
Speaker 9: andp manages to get through it. There's a little bit
Speaker 9: of you know, blue sky out there simply because that's
Speaker 9: where all the hedges are so expectation that we're essentially
Speaker 9: fair valued here. Most of Wall Street says this is,
Speaker 9: you know, we're fairly valued here. You can't get much higher.
Speaker 9: And as you know, when all the bears say the
Speaker 9: same thing and all the strategists say the same thing,
Speaker 9: the market tends to go in the other direction. So
Speaker 9: in part, the market rallied so hard this week on
Speaker 9: the expectation that the debt ceiling was going to be
Speaker 9: taken care of by this weekend.
Speaker 1: By that's want to talk about it, not just this
Speaker 1: week but this year so far. Isn't the SMP up
Speaker 1: something like nine percent something along those lines? So what
Speaker 1: he is doing that is because the earnings came in
Speaker 1: better than the expectations which had been taken down. Or
Speaker 1: is it because of the Fed.
Speaker 9: So there's a couple of things going on. The first
Speaker 9: thing is there's actually a lot of liquidity in the
Speaker 9: system because johnet Yellen at Treasury has been adding liquidity
Speaker 9: to the system to pay the US bills, which is
Speaker 9: helping stock prices and specifically NAZAG prices as well.
Speaker 1: Gerard, let's turn to you on the question of the banks.
Speaker 1: Because that liquidity we're getting from the Fed to some extent,
Speaker 1: if I can call it, there reversal quantitative tightening because
Speaker 1: of what happened in the wake of Silicon Valley Bank
Speaker 1: and the other banks. Should we expect that to keep
Speaker 1: going out of the bank's going to keep drawing down
Speaker 1: in that liquidity.
Speaker 10: I really it's going to be interesting. It's a great
Speaker 10: question because the deposit flight is over. We know from
Speaker 10: what we saw in the middle of March when the
Speaker 10: Silicon Valley signature and the First Republic banks failed. Now
Speaker 10: First Republic technically failed obviously not in March, but at
Speaker 10: the end of April early May. And I would say
Speaker 10: that the deposits that we saw today they came out
Speaker 10: set afternoon with the H eight data, and what you
Speaker 10: saw with the H eight data was depositor down slightly
Speaker 10: for the larger banks. Smaller banks generally flatted down, and
Speaker 10: so there's really no need to have to pull down liquidity,
Speaker 10: even though we still have, of course discount window borrowings
Speaker 10: and the backstop borrowings with the bond portfolios from the FED.
Speaker 10: So there's plenty of liquidity, is Lesha pointed out, and
Speaker 10: I think that the banks are certainly going to benefit
Speaker 10: from that as we go forward.
Speaker 1: The failure of three major regional banks may be in
Speaker 1: the rear view mirror, but the questions and the effects linger.
Speaker 1: As Chryston Slock of Apollo points out this week with
Speaker 1: one of his charts, this one on what it has
Speaker 1: meant for the borrowing costs of all regional banks.
Speaker 11: What's noteworthy is what has happened to bank funding costs
Speaker 11: since Cdiconvelly Bank collapsed. Most importantly, when you look at
Speaker 11: the bank IG index for oes credit spreads, which you
Speaker 11: can split into regional banks and into diversified banks meaning
Speaker 11: large money center banks, it shows you that funding costs
Speaker 11: further out meaning five to ten years, have increased about
Speaker 11: two hundred basis points for regional banks, whereas they have
Speaker 11: only increased about fifty basis points for diversified banks. It
Speaker 11: does signal that the market is still asking some questions
Speaker 11: about what will happen in the longer run, but the
Speaker 11: fact that funding costs further out are still permanently higher
Speaker 11: is raising some questions about how long time will it
Speaker 11: take before this banking crisis that we're going through is
Speaker 11: going to be.
Speaker 1: Over, and to take us through what has happened to
Speaker 1: regional banks in the wake of those three failures. We
Speaker 1: welcome now Professor Catherine Judge. She's professor at the Columbia
Speaker 1: Law School, where she's also a vice dean. So professor,
Speaker 1: thank you so much for being with us. We understand
Speaker 1: we have these three major regional bank failures. We're looking
Speaker 1: sort of in the review mirror to learn what went
Speaker 1: wrong and what can we do to avoid it next time.
Speaker 1: So what's your take basically on what went wrong?
Speaker 4: A number of things went wrong. First, we made meaningful
Speaker 4: changes in the regulatory scheme governing large regional banks with
Speaker 4: the benefit of hindsight, that was clearly in error. We've
Speaker 4: had three large regional banks fail, all in ways and
Speaker 4: imposed significant hits to the deposit Insurance Fund. So clearly
Speaker 4: the deregulation was a problem. The banks themselves were a problem.
Speaker 4: It looks like they were taking a lot of risks
Speaker 4: without understanding those risks, without appropriately hedging those risks and
Speaker 4: managing those risks, and there were also shortcomings in supervision.
Speaker 4: It does look like some of this should have been identifiable.
Speaker 4: Some that was identified, but supervisors didn't act quickly enough
Speaker 4: and aggressive enough in escalating the concerns in ways that
Speaker 4: actually would have resolved the situations before we had such
Speaker 4: messy failures.
Speaker 1: We've heard a lot about interest rate risk, which is
Speaker 1: a terrible thing to have. Obviously we've just seen. At
Speaker 1: the same time, given what the FED was doing, it
Speaker 1: shouldn't have come to as a surprise to the banks
Speaker 1: or to the supervisors that those were interest rate risks.
Speaker 1: I mean, we were raising interest rates like at an
Speaker 1: unprecedented pace.
Speaker 4: We were, and the FED really did signal that. And
Speaker 4: again there was a long period of low for long
Speaker 4: and a period where ways were going up more slowly.
Speaker 4: But first of all, interest rate risk is a classic
Speaker 4: bank risk. I mean, in my very basic banking classes,
Speaker 4: I go back to the SNL debacle and I show
Speaker 4: how a changing interestrate environment affects the value of.
Speaker 1: All assets that banks hold. So this is what banks.
Speaker 4: Are in the business of doing. And as you just
Speaker 4: pointed out, the FED really did signal this. They said, look,
Speaker 4: we're really worried about inflation. They're concerns about inflation, and
Speaker 4: we're going to tighten as long as we need to
Speaker 4: to really get that inflation under control. So both the
Speaker 4: amount of interestrate risk the lack of hedging around that
Speaker 4: risk looks like a really inappropriate way of.
Speaker 1: Managing those risks. Is there also a potential flaw in
Speaker 1: the business model? That is to say, you're taking deposits
Speaker 1: that by definition people can have whenever they want, so
Speaker 1: you're getting funding that is very very short term, and
Speaker 1: you are necessarily putting in longer term investments such as
Speaker 1: thirty year mortgages. But also, as we learn treasuries, it
Speaker 1: does that inherently put a lot of banks at risk.
Speaker 1: Yes and no.
Speaker 4: So I mean the business of banking is to engage
Speaker 4: in maturity transformation.
Speaker 1: So there is a.
Speaker 4: Fragility that exists. On the other hand, it's been pretty
Speaker 4: well managed for a very long time, but then we
Speaker 4: have these periods of significant disruption. One of the things
Speaker 4: that's really striking right now is you look at the
Speaker 4: small community banks and they've actually been remarkably stable. Even
Speaker 4: before the March turmoil, we saw our depositors were leaving
Speaker 4: regional banks, they were leaving the largest banks because they
Speaker 4: just wanted to get a higher rate of interest than
Speaker 4: they were getting on their deposits. But the small community
Speaker 4: banks were really holding on to those deposits and they
Speaker 4: managed to continue to provide meaningful credit. So it's not
Speaker 4: the entire bank business model. I do think we're seeing
Speaker 4: very real questions about the regional bank business model.
Speaker 1: Professor, thank you so much for being on Wall streetetes
Speaker 1: Professor Catherine Judge of the Columbia Law School coming up
Speaker 1: with the fight over the debt ceiling is really costing
Speaker 1: us and what good may still come out of it.
Speaker 1: We'll talk with former Chair of the Council of Economic Advisors,
Speaker 1: Glenn Hubbard of Columbia. That's next on Wall Street League
Speaker 1: on Bloomberg.
Speaker 2: This is Bloomberg Wall Street Week with David Weston from
Speaker 2: Bloomberg Radio.
Speaker 1: China and the United States, what was an afterthought when
Speaker 1: President Nixon went to China in nineteen seventy two has
Speaker 1: now been catapulted to be the most important economic relationship
Speaker 1: in the world, as the Chinese economy has grown more
Speaker 1: than sixfold, trailing behind only the United States, and the
Speaker 1: US helped it get there, leading the move to admit
Speaker 1: China into the WTO.
Speaker 6: Bringing China into the WTO is a win win this station.
Speaker 1: And there's no doubt that US trade with China has
Speaker 1: grown dramatically since the end of two thousand and one
Speaker 1: when China officially joined the WTO. But now the Chinese
Speaker 1: economic juggernaut is showing signs of slowing as the COVID
Speaker 1: lockdown creates uncertainty about what comes next and demographics way
Speaker 1: on growth, not to mention continued tensions with the United States,
Speaker 1: which the wtos O kunja Awala warrants could damage global growth.
Speaker 12: The costs of the world frad went in into two
Speaker 12: trading blocks very high. We've actually done some simulations of
Speaker 12: this at the WQ and we've seen that if we
Speaker 12: break into two tradium blocks, the world global GDP is
Speaker 12: going to decrease like five percent in the longer term.
Speaker 1: And JP Morgan's Jamie Diamond insists we can avoid.
Speaker 13: American shinea of a lot of common interest climate, nuclear pliferation,
Speaker 13: anti terrorism, global stability, you know, and we have differences.
Speaker 13: You know, we're capitalists, they're not, you know, and it's okay,
Speaker 13: but we could sort that out. But we need to
Speaker 13: keep the Western alliances together, not just around war and Ukraine,
Speaker 13: but the ram strategic economic relationships, including trade.
Speaker 1: And to get an accurate and up to date picture
Speaker 1: of where China is right now. We welcome now a
Speaker 1: true expert in the area is Deborah Lair. She is
Speaker 1: both the vice chair of the Pulse Institute as well
Speaker 1: as the CEO of Edelman Global Advisory. Deborah, thank you
Speaker 1: for coming back to Wall Street. We really appreciate it.
Speaker 1: We now have the G seven meetings that are happening
Speaker 1: this week. China is not physically there, but certainly they
Speaker 1: are an important part of the audience. What is the
Speaker 1: message of the United States and other members of the
Speaker 1: G seven want China to take away from these meetings
Speaker 1: this week?
Speaker 4: David, You're so right.
Speaker 3: They may not be present physically, but certainly China is
Speaker 3: one of the main topics. And it appears that the
Speaker 3: administration is going to work with its allies to try
Speaker 3: and get a united and very strong statement about being
Speaker 3: tough on China, both from a national security perspective, but
Speaker 3: also to coordinate economically.
Speaker 1: This president, she takes a look at his economy right now,
Speaker 1: does he have any doubts do you think at all
Speaker 1: about its growth pattern? Because it was a true economic
Speaker 1: miracle in the history of the world. I don't think
Speaker 1: we've seen anything like it. At the same time, we're
Speaker 1: getting some numbers, including this week we've gotten some of
Speaker 1: our China indicating that growth is really slowing down, and
Speaker 1: some people are even saying maybe China will not after
Speaker 1: all pass the United States in the size of its economy.
Speaker 3: It's been clear for a long time that Chi Jinping
Speaker 3: has been worried about the economy, and one of the
Speaker 3: reasons behind the whole corruption campaign that he started when
Speaker 3: he first came into office is because they couldn't govern
Speaker 3: and they were concerned about the state of the economy.
Speaker 3: And even until today, he's still sending out policy enforcement
Speaker 3: teams to ensure that mayors and governors are actually implementing
Speaker 3: the policies that he has dictated from Beijing. They have
Speaker 3: a lot of reason to be concerned about the economy.
Speaker 3: As we've seen in reports just recently, youth unemployment is
Speaker 3: at an all time high at about twenty percent. Even
Speaker 3: though they've dealt with a lot of the systemic risk
Speaker 3: coming out of the real estate market for the small
Speaker 3: and medium size real estate companies, a number of them
Speaker 3: are going to go bank. This has an impact then
Speaker 3: on the banking system, and while they're not concerned about
Speaker 3: the large banks, they do believe that a number of
Speaker 3: the mid sized banks who are operating in the provinces
Speaker 3: are in facing very difficult challenges.
Speaker 1: If, as you say, Prisionji is concerned about his economy,
Speaker 1: does the West I mean to include both the United
Speaker 1: States and Europe and Japan. Does it represent a potential
Speaker 1: help to him or is it part of the problem
Speaker 1: for him.
Speaker 3: I think this is going to depend on Si jumping himself,
Speaker 3: and if he decides that he wants to be engaged
Speaker 3: with the West, then he needs to take the kind
Speaker 3: of steps to provide market access for companies, to provide
Speaker 3: more consistency. Regulatory risk is one of the biggest challenges
Speaker 3: that we see today because we're not quite sure what
Speaker 3: policies are going to come from the new she administration.
Speaker 3: By the same token, he's very concerned about the export
Speaker 3: markets right now. Exports are really what's driving the Chinese economy,
Speaker 3: and we see weakness in those markets. Certainly is there
Speaker 3: is concerns about a recession ahead and weakness in some
Speaker 3: of their export markets, combined with the politics of trade
Speaker 3: with the United States and trade with the European Union.
Speaker 3: I think that's a real concern that they have to have,
Speaker 3: and so part of it is how do they create
Speaker 3: the confidence at home to unlock consumer demand? And they
Speaker 3: haven't been able to do that yet. They haven't been
Speaker 3: able to get consumers out spending their money in any
Speaker 3: significant way. And at the same token, how do they
Speaker 3: build relations either with the United States to keep those
Speaker 3: markets open or can they find new markets? And part
Speaker 3: of what we're seeing with this more active foreign policy
Speaker 3: by Si Jimping and his new team is how they
Speaker 3: build relations to compensate for some of the challenges that
Speaker 3: they're seeing in their trade with the United States.
Speaker 1: Do you read very much into the increased pattern apparently
Speaker 1: of meetings with US representative with Jake Sullivan meeting in
Speaker 1: Vienna this counterpart we had Nick Burns, US ambassador going
Speaker 1: in to meet with the foreign minister. Do you read
Speaker 1: anything into that because there's talking, Maybe Tony Blinkinn, the
Speaker 1: Secretary of State, would go over, maybe Jennet Yellen.
Speaker 10: Well.
Speaker 3: I hope that this is a recognition that there's concerned
Speaker 3: about the free fall of the bilateral relationship, and both
Speaker 3: sides seem concerned about that. We run the risk of
Speaker 3: being slightly isolated, as we talked about in the G
Speaker 3: seven context. Certainly the Biden administration would like to ensure
Speaker 3: that our allies are moving and lockstep with us on China,
Speaker 3: but we haven't been seeing that necessarily.
Speaker 1: One of the stories has gotten a lot of attension
Speaker 1: in the United States press release is set of the
Speaker 1: curtailment of operations and so of the consulting organizations over
Speaker 1: in China. The cutting off of data. Is there a
Speaker 1: risk that we're going to know even less than we
Speaker 1: did before about what's really going on in the country.
Speaker 3: I think there's a large concern about data in many
Speaker 3: different ways. One is China definitely has been limiting access
Speaker 3: by foreigners to data, whether it's economic data, whether it's
Speaker 3: data that they're concerned about on national security purposes. We
Speaker 3: saw the whole issue when ddlisted overseas and they were
Speaker 3: forced to dlist then from the United States. That was
Speaker 3: an issue over national security concerns about the kind of
Speaker 3: data that DD would be sharing. The other thing, obviously,
Speaker 3: one part of that is the access that American or
Speaker 3: foreign consulting firms get to data. But another part of
Speaker 3: it is also what the Chinese are planning to do
Speaker 3: with data.
Speaker 1: Never Finally, what about capital markets? Because there is a
Speaker 1: reposers I understand executive order at the White House to
Speaker 1: limit US investment in Chine, particularly in technology areas. How
Speaker 1: big a threat would that be perceived to be by prison.
Speaker 3: G Well, initially, I think it's very clear that the
Speaker 3: outbound some kind of outbound investment restrictions are going to
Speaker 3: be put in place by the administration. And the big
Speaker 3: question is how broad they're going to be and whether
Speaker 3: they're voluntary initially or if you have to have pre approval.
Speaker 9: And so.
Speaker 3: It's going to be a big test, and it's going
Speaker 3: to be much bigger than just capital markets. It's going
Speaker 3: to actually impact anyone who's looking to invest, even companies
Speaker 3: who might be looking to make acquisitions or invest in
Speaker 3: different sectors in China. Initially the administration is say it's
Speaker 3: going to be limited to just a few categories, but
Speaker 3: subsequent administrations can broaden that. It's going to set an
Speaker 3: interesting precedent, and it, of course is of concern to
Speaker 3: the Chinese in part they've been able to benefit, certainly
Speaker 3: from capital flowing into China these days. There's actually a
Speaker 3: lot of capital in China, and one of the interesting
Speaker 3: statistics that we've seen recently is China has almost one
Speaker 3: thousand billionaires. There's a lot of money in China, and
Speaker 3: more and more money from other countries, particularly from the
Speaker 3: Middle East, is now flowing into China. So it's yet
Speaker 3: to be seen what the impact is going to be
Speaker 3: of these outbound investment. But hopefully when the administration does
Speaker 3: put it in it's not putting it in place in
Speaker 3: a way that disadvantages American companies.
Speaker 1: Deborah, thank you so much. It's always such a treat
Speaker 1: to have you with Wall Street Week. That's debau Lair
Speaker 1: of the Paulson Institute as well as Edelman Global Advisory
Speaker 1: coming up with the fight over the debt ceiling is
Speaker 1: really costing us and what good may still come out
Speaker 1: of it. We'll talk with former chair of the Council
Speaker 1: of Economic Advisors, Glenn Hubbard of Columbia. That's next on
Speaker 1: Wall Street Week on Bloomberg.
Speaker 2: This is Bloomberg Wall Street Week with David Weston from
Speaker 2: Bloomberg Radio.
Speaker 6: I've had a lot of affair in the last year,
Speaker 6: right in this book with Thomas Jefferson, who reminded us
Speaker 6: I think that he thought the Constitution should prevent us
Speaker 6: from passing debt on to our kids, because, as he said,
Speaker 6: you'd swindle futerity and the earth would belong to the
Speaker 6: dead and not the living. I think at some point,
Speaker 6: what's going to happen as our kids are going to
Speaker 6: understand what fourteen trillion dollars of unfunded liabilities mean.
Speaker 1: That, of course, was the late Great Pete Peterson talking
Speaker 1: about the growing crisis he saw in the federal debt
Speaker 1: back in October of nineteen ninety three, and at that
Speaker 1: point the debt total to four point five trillion dollars,
Speaker 1: which was then forty eight percent of the nation's GDP.
Speaker 1: Today it stands at thirty one point five trillion dollars
Speaker 1: and is a whopping ninety seven percent of GDP. To
Speaker 1: give us a broader perspective on the current crisis over
Speaker 1: the debt ceiling and what lies behind it, welcome Glenn
Speaker 1: Hubbard of the Columbia Business School, where he was dean
Speaker 1: after serving as chair of President George W. Bush's Council
Speaker 1: of Economic Advisors. Doctor Hubbard is the author, most recently
Speaker 1: of The Wall and the Bridge, Fear and Opportunity in Disruptions,
Speaker 1: Wake so Glenn, thank you so much for bringing back
Speaker 1: with great to have you this. So we have a
Speaker 1: lot of talk about the default every degrees. We can't
Speaker 1: have a default be terrible. We don't spend it quite
Speaker 1: as much time talking about what lies behind this crisis,
Speaker 1: which is addressing the debt problem. There is a real
Speaker 1: debt problem, is there not?
Speaker 7: Well, there is.
Speaker 14: I mean Pete was right, and I think the way
Speaker 14: to think about the debt sealing crisis is to break
Speaker 14: it into two pieces.
Speaker 7: What do we have to do right now?
Speaker 14: And that's going to be some near term spending restraint
Speaker 14: like returning unspent COVID funds, some of the spending caps
Speaker 14: for example that Senator Manchin has talked about. But longer term,
Speaker 14: we've got to go to a different model, and we
Speaker 14: have to have either a spending limitation as I've argued
Speaker 14: in the past, or are some kind of model for
Speaker 14: example like the Swedes do of a fiscal policy commission.
Speaker 7: It takes a.
Speaker 1: Look at the budget.
Speaker 14: But we need that longer term discussion. Dare I say,
Speaker 14: maybe even another commission to take.
Speaker 1: A look at it.
Speaker 7: But it has to be separate from the short term,
Speaker 7: which we have to do first.
Speaker 1: But I wonder we'll come back if we could possible
Speaker 1: solutions to the immediate crisis with the default or would
Speaker 1: be default. But are the Republicans some other crises? Right,
Speaker 1: We'll never get to the second part if we don't
Speaker 1: hold hostage on the first. That's basically, as I understanding
Speaker 1: a lot of position. If we go along with you
Speaker 1: on the debt ceiling, we'll never do the second part,
Speaker 1: which is so important.
Speaker 14: Well, that's right, But when you catch the car, you
Speaker 14: have to know what to do, and you also have
Speaker 14: to have a plan.
Speaker 7: And since neither side.
Speaker 14: Has what I would call a reasonable long term fiscal
Speaker 14: plan at the moment, the right thing to do would
Speaker 14: be to take a deep breath. The problem is the
Speaker 14: same problem actually when Pete talked in nineteen ninety three.
Speaker 14: It has to do with runaway social spending. This is
Speaker 14: at a time where we need to spend more on defense,
Speaker 14: we need to spend more on preparing Americans for the future.
Speaker 14: So we're going to have to make some fiscal adjustments.
Speaker 14: Some of those maybe tax increases, some maybe spending adjustments.
Speaker 7: But we have to pivot to that world.
Speaker 1: So let's talk about getting past the immediate crisis for
Speaker 1: the moment, you know, Washington, Well, put aside from a
Speaker 1: moment what you think is the right answer, Let's talk
Speaker 1: about what is the doable answer, because that's the important
Speaker 1: There are some red lines here, such as, for example,
Speaker 1: the publients say we cannot increase revenue full stop, can't
Speaker 1: do it? Is that right? Does a White House have
Speaker 1: to give on that point We're not going to do
Speaker 1: anything in terms of raising revenue.
Speaker 14: Well, I think in a negotiation you have to let
Speaker 14: the other side tell you a bit about what it
Speaker 14: takes to have victory. And I think if Republicans have
Speaker 14: said there's no revenue increases in the near term, I
Speaker 14: wouldn't put that in a negotiation. I think a near
Speaker 14: term is the spending restraint, So something like returning the
Speaker 14: youn spent COVID funds and a two year spending cap.
Speaker 14: Even there's something that can be done so Republicans have
Speaker 14: a victory. Biden, I think knows independent voters also agree
Speaker 14: with Republicans on many of these points, and he could
Speaker 14: come to the middle on that. That's where I think
Speaker 14: the solution has to be.
Speaker 1: What about the work requirement? Because I suspect a lot
Speaker 1: of Americans do look at them and say, it's not
Speaker 1: too outrageous to day you should have to try to work.
Speaker 1: If you're really getting a lot of.
Speaker 7: Funds, it's definitely not too outrageous.
Speaker 14: And if you look at polls independence in the middle, about.
Speaker 7: Two thirds support the work requirements. The only risk in
Speaker 7: the negotiation.
Speaker 14: Is when you start adding things that aren't central to
Speaker 14: the discussion i e. Taxus spending, you make it difficult
Speaker 14: to get the resolution. So each side has to look
Speaker 14: the other in the eye and say, well, what is
Speaker 14: he or she need to win or at least think
Speaker 14: they've won and move on.
Speaker 1: So this week we saw the hopes go up, we
Speaker 1: saw the hopes go down. I mean we heard they
Speaker 1: were making real progress, and then on Friday they stormed
Speaker 1: out of the meeting, which is not unheard of in Washington. You,
Speaker 1: Glenn Hubbard, knowing Washington the way you do, knowing the
Speaker 1: situation the way you do, how worried are you about
Speaker 1: an actual default? I'm not terribly worried.
Speaker 14: That said, the probability isn't zero, and so the two
Speaker 14: sides have to be significantly working harder to come together.
Speaker 14: In the past, I always knew this was theater, it
Speaker 14: would simply work.
Speaker 7: Out and we just have to endure it. This time
Speaker 7: is a little bit more uncertainty.
Speaker 14: So I do think pressure needs to be brought to
Speaker 14: bear on both sides to come to a near term
Speaker 14: agreement and then pivot, as you say, to the longer
Speaker 14: term discussion that we've really got to have as a nation.
Speaker 1: So let's turn to that. Let's make that pivot actually
Speaker 1: the longer term discussion. Let's get so we get past
Speaker 1: the default issue. Now we're going to address it. Suggested
Speaker 1: for example, a commission might be one. We've done that
Speaker 1: with social security, We've done that with base closings. Is
Speaker 1: there political will on the two sides, at least enough
Speaker 1: political will to actually do something about this instead of
Speaker 1: just talk about it.
Speaker 7: There has to be The math will catch up.
Speaker 14: We're already in fiscal year twenty twenty three for the
Speaker 14: government will have interest payments exceeding the money that we
Speaker 14: spend on children.
Speaker 7: That's crazy.
Speaker 14: We need to be spending more on defense. We need
Speaker 14: to be writing a number of ships in the country.
Speaker 14: We have to take a look at the composition of
Speaker 14: spending and revenue. A commission gives both sides a chance
Speaker 14: to have that discussion, and I think it's absolutely essential.
Speaker 1: I want to come back to your book The Wall
Speaker 1: of Bridge for a moment because one of the issues
Speaker 1: is how can we grow the pie by investing and
Speaker 1: spending the money, however much it is, in a way
Speaker 1: that grows the pie. Is there an appetite for that
Speaker 1: because Republicans certainly say it's all got to be about growth.
Speaker 14: Well, but you also have the social support and the
Speaker 14: political support for growth. If we had pro that supported
Speaker 14: work that prepared more Americans for the future that they
Speaker 14: will have as opposed to a nostalgia for the past,
Speaker 14: we could do that fairly modestly.
Speaker 1: With new spending.
Speaker 14: We would need to pay for that by cutting other
Speaker 14: spending or raising taxes, but it's doable. In my book,
Speaker 14: I suggested programs that together costs less than President Biden's
Speaker 14: student loan forgiveness. We know how to do this, we
Speaker 14: know how to find the money. We need to do
Speaker 14: it for something useful.
Speaker 1: I let to come back to here and now and
Speaker 1: where we are with the economy right at the moment,
Speaker 1: and what the FED needs to do. Where we're looking
Speaker 1: at economy. Let's assume we get past the default for
Speaker 1: just a moment we hear that, in fact, maybe the
Speaker 1: neutral rate will go back down. What do you think,
Speaker 1: Where do you think we are right now with the economy,
Speaker 1: and what does the Fed need to do.
Speaker 14: I don't think this is a time for the Fed
Speaker 14: to do what markets are suggesting is start cutting rates
Speaker 14: in the very near future. The Fed at a minimum
Speaker 14: would have to keep the funds rate where it is.
Speaker 14: I would argue if there's a change in the funds
Speaker 14: rate in the next several months, it's probably up, not down.
Speaker 14: Inflation is still very, very sticky. So despite what markets think,
Speaker 14: I think the Fed still has an awful lot of
Speaker 14: work too.
Speaker 1: There was a report of the Bloomberg actually that in fact,
Speaker 1: if we get past the DeVault problem, there will be
Speaker 1: a tightening necessarily in liquidity. Because the Fed has been
Speaker 1: spending the treasure ram, sorry, it has been spending down
Speaker 1: what's in the coffers. They're gonna have to replenish that
Speaker 1: by issuing a lot of tea bills over the course
Speaker 1: of the summer as a pregnant. That will soak a
Speaker 1: lot of liquidy out of the system. Will that tighten
Speaker 1: enough in itself? Some people say it's at least twenty
Speaker 1: five basis points.
Speaker 7: I don't think so. It's a modest effect.
Speaker 14: As you suggest, there are two ways in which those
Speaker 14: tea bills can be bought. One is through bank reserves,
Speaker 14: the other through money market funds. But I think it's
Speaker 14: a modest effect. The bigger concern, it strikes me, would
Speaker 14: be a credit crunch that's in the offing from the
Speaker 14: banking problems. If you're thinking about effective monetary tightening, there's
Speaker 14: probably another one hundred basis points of effective federal funds
Speaker 14: rate increases in that credit crunch.
Speaker 1: That's the one to watch. When will we have a
Speaker 1: sense of fun fact whether we have that one hundred
Speaker 1: basis points, because I've heard that before, but I'm not
Speaker 1: sure if we know yet whether we have it well.
Speaker 14: That number is a blend between effects on small and
Speaker 14: mid sized banks where it would be much larger, and
Speaker 14: then of course the very large banks where it would
Speaker 14: be very small. I think the FED in the next
Speaker 14: several months will be watching that very closely, which is
Speaker 14: an argument for the kind.
Speaker 7: Of pause that share Powell has signaled.
Speaker 1: So many of us are not particularly pleased with what
Speaker 1: we're seeing going on in this negotiation. Of a default.
Speaker 1: The notion that we would even think about nigga on
Speaker 1: the full faith and credit is really embarrassing. What does
Speaker 1: it do to us globally? Does it affect the value
Speaker 1: of the US currency as reserve currency? What is the
Speaker 1: rest of the world thinking right now? Will there be
Speaker 1: longer term effects?
Speaker 14: Well, I think they think we're crazy, and of course
Speaker 14: we are in this kind of process. But the point
Speaker 14: is we need a new spending process. We have had
Speaker 14: a series of budget resolutions and budget performs over the years.
Speaker 14: I mentioned Sweden before. I think using something like the
Speaker 14: Swedish Plan and the Swedish Fiscal Policy Council. It's hard
Speaker 14: to advise conservatives to look at Sweden as an example.
Speaker 7: But that I do, that I think is our roadmap.
Speaker 1: Are there people Washington talking about these things right now?
Speaker 14: There are, But I think at the moment the negotiation.
Speaker 7: Is so mired in each side thrashing the other it's
Speaker 7: hard to get out.
Speaker 1: What about think tanks are they helping?
Speaker 12: I think so.
Speaker 14: I think they're trying to get information to both sides
Speaker 14: of the aisle on the costs of what is happening
Speaker 14: and on things that might be proposed in the medium
Speaker 14: or long run as opposed to the action we have
Speaker 14: to take before June first.
Speaker 1: So you're concerned, but hopeful always always. That's Glenn Embert,
Speaker 1: I should say, in a nutshell, that's Glen Hubbard. Many
Speaker 1: thanks Glen Hubbard of Columbia Business School. Coming up, China
Speaker 1: tries to get its economy back on track after the
Speaker 1: COVID shutdown. Devrolair of Edelman Global Advisory. It takes us
Speaker 1: through what's become of the Chinese economic miracle. This is
Speaker 1: Wall Street Week on Bloomberg.
Speaker 2: This is Bloomberg Wall Street Week with David Weston from
Speaker 2: Bloomberg Radio Global.
Speaker 1: Wall Street the leading light this week. When Sam Zell
Speaker 1: passed away at the age of eighty one, he went
Speaker 1: from managing student apartments in his dorm room at the
Speaker 1: University of Michigan to being a legendary investor in real
Speaker 1: estate and energy, making billions of dollars along the way.
Speaker 1: Zell was known first and foremost for his real estate investing,
Speaker 1: acquiring office space over many years in his Equity Office
Speaker 1: Properties Trust, and then selling it all to Blackstone in
Speaker 1: two thousand and seven for thirty nine billion dollars. At
Speaker 1: just the right time, we.
Speaker 15: Made a deal, and that deal was significantly higher than
Speaker 15: the Navy, and consequently it was an easy decision for me,
Speaker 15: even though it was my baby with something might started
Speaker 15: from scratch.
Speaker 1: Though in later years valuations made Zell think twice before
Speaker 1: becoming a real estate buyer again for all practical purposes.
Speaker 15: I haven't bought anything in ten years, and where the
Speaker 15: opportunity has created, I've sold a.
Speaker 1: Lot, Zell and energy of all sorts.
Speaker 15: I've always believed that diversification is your friend, and I've
Speaker 15: always attempted to have some kind of energy diversification and
Speaker 15: continue to do.
Speaker 1: So, and recognize that the world needs to move away
Speaker 1: from fossil fuels, while warning that it is going to
Speaker 1: take time.
Speaker 15: William Got to reduce their energy exposure. The transition from
Speaker 15: fossil fuels to renewables is going to be a very
Speaker 15: long process.
Speaker 1: Zell was called the grave Dancer, taken from an article
Speaker 1: he wrote about resurrecting dead properties. But he always warned
Speaker 1: about the risks involved.
Speaker 15: And you know, and as you're dancing around the graves,
Speaker 15: you have to we really care for your own fall, in.
Speaker 1: Which he very nearly did in his leveraged buyout of
Speaker 1: the Tribune Company, for which he was roundly criticized and
Speaker 1: on which he lost three hundred million dollars. Sam Zel
Speaker 1: was deeply concerned about the fiscal health of the United States,
Speaker 1: alarmed about the growing debt and concern for what it
Speaker 1: could mean for the country's economic health.
Speaker 15: We added seven trillion to our debt in three years.
Speaker 7: This is this is you know, this is.
Speaker 15: The Viemar Republic. And if the United States isn't careful,
Speaker 15: they're going to find themselves in the Viemar Republic.
Speaker 1: His memoir was titled am I Being Too Subtle? The
Speaker 1: Adventures of a Business Maverick. Whatever Samzel was, he was
Speaker 1: never subtle. He was a true original as an investor
Speaker 1: and as a person, always preferring to follow his own,
Speaker 1: sometimes idiosyncratic instincts.
Speaker 15: I was very, very successful at listening to my own song.
Speaker 15: I was very capable of ignoring the noise. Number of
Speaker 15: times people have told me you don't understand.
Speaker 1: Is legendary.
Speaker 15: And yet I was comfortable and had the level of
Speaker 15: self confidence that allowed me to make the right decisions
Speaker 15: at the right time.
Speaker 1: That does it. For this episode of Wall Street Week,
Speaker 1: I'm David Weston. This is Bloomberg. See you next week,