WEBVTT - When Big Tech Tells You 'It's Impossible', That's Latin for 'It's Less Profitable', Galloway Says 0:00:09.720 --> 0:00:12.880 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keen with 0:00:13.560 --> 0:00:16.520 David Gura. Daily we bring you insight from the best 0:00:16.560 --> 0:00:22.279 of economics, finance, investment, and international relations. Find Bloomberg Surveillance 0:00:22.320 --> 0:00:27.000 on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course 0:00:27.320 --> 0:00:33.639 on the Bloomberg and beg to Steve Whiting today. He's 0:00:33.640 --> 0:00:35.800 the global chief strategist at City Private Bank and he's 0:00:35.840 --> 0:00:37.800 here in her Bloomberg Lemon three. Ste It feels like 0:00:37.800 --> 0:00:39.480 it's been an age, Steve, It's been a wow. Great 0:00:39.479 --> 0:00:41.360 to see you once again. Thank you. Let me ask 0:00:41.400 --> 0:00:43.280 you first of all about a tax reform. As we 0:00:43.320 --> 0:00:46.199 watched this process unfold, I mentioned the delay, the one 0:00:46.240 --> 0:00:47.800 day at least delay that we've gotten from the house 0:00:47.840 --> 0:00:50.120 ways and means, how closely are you watching this? How 0:00:50.159 --> 0:00:53.120 closely our markets watching what's unfolding here. It's an incredibly 0:00:53.120 --> 0:00:56.160 tight a timeline of very narrow calendar, very narrow window 0:00:56.240 --> 0:00:58.000 for lawmakers to get something done here by the end 0:00:58.000 --> 0:01:00.240 of the calendar year. Well, I'm watching it very close, Slee. 0:01:00.280 --> 0:01:04.520 I think that markets all year long have been tempted 0:01:04.560 --> 0:01:07.640 to think that something was imminent. It's going to happen quickly. 0:01:07.640 --> 0:01:09.920 It's this vote or that vote, and they don't really 0:01:09.920 --> 0:01:12.920 have the patients to stay on this particular issue in 0:01:12.920 --> 0:01:16.000 the legislative process. If it turns out to be early 0:01:16.040 --> 0:01:19.280 two thousand eighteen, I would think that the probability of 0:01:19.319 --> 0:01:23.760 something passing is quite high and markets can actually focus 0:01:23.800 --> 0:01:26.040 on other things if for some reason there's a delay 0:01:26.080 --> 0:01:28.680 for a couple of weeks. But it is material. I mean, 0:01:28.680 --> 0:01:30.800 there's a lot of devil in the details here. I 0:01:30.840 --> 0:01:32.679 just took a look. For example, if you were to 0:01:32.680 --> 0:01:35.840 take a look at the original Trump campaign headlines, you're 0:01:35.880 --> 0:01:38.160 gonna getting a lot of those, but they seem to 0:01:38.200 --> 0:01:41.280 be with a one point five trillion dollar price tag 0:01:41.680 --> 0:01:46.000 sevent or more offset by offsetting revenues, which is what 0:01:46.120 --> 0:01:48.840 the really interesting details. You know, we'll see where all 0:01:48.880 --> 0:01:50.880 those other taxes have to go up in order to 0:01:50.880 --> 0:01:54.480 pay for this. Uh, that part will I'll hopefully learn tomorrow. 0:01:54.680 --> 0:01:56.360 Devils and the details, of course you have. But on 0:01:56.360 --> 0:01:58.640 the issue of growth, we hear from members of this administration, 0:01:58.640 --> 0:02:02.080 from economic advisors to it, UH that tax reform would 0:02:02.120 --> 0:02:03.800 lead to more growth. We get to that three or 0:02:03.800 --> 0:02:06.800 four percent range that they've been talking about since the campaign, 0:02:07.040 --> 0:02:08.840 any indications of that as you look at the at 0:02:08.840 --> 0:02:11.760 the data, I think that there are subtle positives here. 0:02:11.840 --> 0:02:14.320 If you take a look at the corporate tax rate, 0:02:14.400 --> 0:02:17.960 just having a globally competitive corporate tax rate will mean 0:02:18.000 --> 0:02:20.520 a difference. Now, of course there's some revenue lost for that, 0:02:20.560 --> 0:02:24.760 but we only collect about ten of all federal UH 0:02:24.880 --> 0:02:28.920 taxes are come from the corporate sector. And so in essence, 0:02:28.960 --> 0:02:31.959 if you can have a more globally competitive tax rate, 0:02:32.600 --> 0:02:35.200 you can incentivize domestic production. Now that will be a 0:02:35.240 --> 0:02:38.720 subtle but positive shift up. And then you have the 0:02:38.840 --> 0:02:41.200 other issues here that are we really cutting down on 0:02:41.240 --> 0:02:44.440 all the complexity? Are we really raising enough revenue on 0:02:44.480 --> 0:02:46.440 these other issues if it's really just a tax cutter 0:02:46.560 --> 0:02:50.119 or reform. But you know, I would not expect suddenly 0:02:50.200 --> 0:02:54.360 the economy has this tremendous new technological potential to grow, 0:02:54.440 --> 0:02:57.360 the population will grow more rapidly. You know, it's subtle, 0:02:57.360 --> 0:02:58.959 but it could be. It could be in the direction 0:02:58.960 --> 0:03:01.280 of a more positive direction. You've learned about bowl market 0:03:01.320 --> 0:03:03.680 psychology and the degree to which it's spreading around the world. 0:03:03.680 --> 0:03:07.600 What are you seeing there? How how unwilling are investors 0:03:07.639 --> 0:03:11.520 to reckon with central bank policy, political risk? Are they 0:03:11.560 --> 0:03:14.440 squarely focused here? What we're seeing is a rising still 0:03:14.520 --> 0:03:17.480 rising stock market. We'll just think about Catalonia versus Greece 0:03:17.520 --> 0:03:21.360 some years ago, and again, you know, the financial ramifications 0:03:21.360 --> 0:03:23.919 are very, very different, but the impact and market is 0:03:23.960 --> 0:03:27.239 so tremendously different. You know, we worried in two thousand 0:03:27.280 --> 0:03:29.920 and ten whether the you know, the horrible earthquake in 0:03:29.919 --> 0:03:32.600 Fukushima was going to derail the world economy. That's how 0:03:32.960 --> 0:03:36.880 how everyone felt so incredibly fragile about everything. And now 0:03:37.000 --> 0:03:38.800 what you see with North Korea has had no more 0:03:38.840 --> 0:03:42.960 impact than flammable smartphones. Right. So, these these types of 0:03:43.000 --> 0:03:47.360 things show that markets feel as if there's adorability, and 0:03:47.400 --> 0:03:49.920 that means that they're taking more risk and that future 0:03:49.960 --> 0:03:52.400 returns will be reduced because we're taking more risk right now. 0:03:52.680 --> 0:03:55.760 But I think it is more correct than incorrect that 0:03:55.800 --> 0:03:58.320 when we have problems, they tend to be regional, and 0:03:58.400 --> 0:04:01.640 that most recessions aren't act regional. And if you diversify 0:04:01.680 --> 0:04:05.320 across the world, you can uh you can actually take 0:04:05.320 --> 0:04:06.640 down rest. It's one of the few things we can 0:04:06.640 --> 0:04:09.720 do to mitigate risk. Stephen Wading with this city private 0:04:09.760 --> 0:04:12.720 bank getting and started here in this hour FED day, 0:04:12.920 --> 0:04:15.320 David grew up providing wisdom in the one hour on 0:04:15.320 --> 0:04:18.360 Bloomberg Television. Then I'll wander in on radio and television 0:04:19.000 --> 0:04:21.520 with the FED show, Scarlet Food leading our coverage with 0:04:22.120 --> 0:04:25.160 Alan Blinder and Bill Gross and Jeff Rosenberg with us 0:04:25.680 --> 0:04:29.120 as well. All the tax reform dynamic runs up against 0:04:29.200 --> 0:04:33.359 all the mail I get from listeners, which is about 0:04:33.360 --> 0:04:39.159 the fiscal deficit. I believe tax reform is really about 0:04:39.200 --> 0:04:43.080 cutting taxes. So far in the discussion I've heard when 0:04:43.120 --> 0:04:47.599 does the deficit impinge on the markets? Impinge on the markets? 0:04:47.960 --> 0:04:50.400 These are another thing that could be quite subtle, because 0:04:50.400 --> 0:04:54.000 the deficit does indeed matter to independently of the interest 0:04:54.040 --> 0:04:57.039 rate level. But this is how we use savings now. 0:04:57.040 --> 0:04:59.680 In the future, you know, what will we pay for? 0:05:00.080 --> 0:05:02.520 What will we give up? You know? Right now we 0:05:02.640 --> 0:05:05.520 certainly have a surplus of savings. Where you can see 0:05:05.560 --> 0:05:08.080 interest rates your pointing earlier on the air to the 0:05:08.120 --> 0:05:10.640 cost of capital for Apple in the debt market, for 0:05:11.760 --> 0:05:15.120 rate is three point or something. The personal savings rates 0:05:15.120 --> 0:05:19.760 in the neighborhood of five. Yeah, the national savings is higher. 0:05:20.080 --> 0:05:22.760 Federal obviously have dis savings and in the long run, 0:05:22.800 --> 0:05:26.360 it will get worse. And you know what will we do, Well, 0:05:26.360 --> 0:05:31.800 we will finance a good deal of healthcare consumption, or 0:05:31.880 --> 0:05:34.440 will we finance plant and equipment. And that's a question 0:05:34.960 --> 0:05:37.000 of what the deficit is doing, and that it is 0:05:37.279 --> 0:05:40.159 the treasury will get financed that we will be able 0:05:40.200 --> 0:05:43.440 to borrow and spend. But what will we be giving 0:05:43.560 --> 0:05:46.400 up if we don't have an endless supply of savings 0:05:46.440 --> 0:05:50.520 in real savings UH inflation adjusted saving. And that's the 0:05:50.600 --> 0:05:53.800 question is to how we use capital, Steve, you talked 0:05:53.800 --> 0:05:56.000 about the need to to diverse f internationally. How how 0:05:56.040 --> 0:05:57.839 broadly does one do that? Or how broadly would you 0:05:57.839 --> 0:05:59.800 counsel one one to do that? Is it targeting one 0:05:59.800 --> 0:06:02.320 mark in particular, one sector in one market? How how 0:06:02.360 --> 0:06:03.720 broad a brush to you use when you when you 0:06:03.800 --> 0:06:06.880 talk about the international versification. Well, I'm a little worried 0:06:06.920 --> 0:06:10.160 when you know, for example, we're now overweight all emerging 0:06:10.200 --> 0:06:13.920 markets regionally, and that's in both equities and fixed income. 0:06:14.080 --> 0:06:16.479 We spent most of the last five years underweight. Instead, 0:06:17.320 --> 0:06:19.920 Now when we do that, people will say, well, I 0:06:19.960 --> 0:06:22.480 bought this one emerging market country E t F or 0:06:22.560 --> 0:06:25.600 something like that, and it didn't work well. The reality 0:06:25.720 --> 0:06:28.400 is is that there's a lot of idiosyncratic country level 0:06:28.480 --> 0:06:30.920 risk and you need to be careful. Things that look 0:06:31.279 --> 0:06:34.880 quite good have idiosyncratic risks. If you take a look 0:06:34.920 --> 0:06:38.160 at fixed income in Brazil, for example, give us give 0:06:38.240 --> 0:06:41.560 us a plus and a minus adios syncretic risk. We'll 0:06:41.560 --> 0:06:44.599 think about the elections of two thousand eighteen that are coming. 0:06:44.640 --> 0:06:47.240 In the case of Mexico and Brazil. These are markets 0:06:47.279 --> 0:06:51.159 where yields are tremendous compared to what you see and 0:06:51.160 --> 0:06:54.080 developed markets. In the case of Brazil, you also have 0:06:54.120 --> 0:06:57.720 a good equity valuation. But could you say that I 0:06:57.960 --> 0:07:00.520 put those into a portfolio of other emerging markets and 0:07:00.560 --> 0:07:04.359 I will probably have a good high expected return. Yes. 0:07:04.600 --> 0:07:06.760 Can you say that if I concentrate solely in that 0:07:06.839 --> 0:07:10.160 country and something goes wrong on the political front, then 0:07:10.360 --> 0:07:12.720 you have a problem. So that's why we need broadly 0:07:12.760 --> 0:07:16.800 diversified global portfolios. UH. And if we have an emerging 0:07:16.840 --> 0:07:21.320 market's overweight, it's not the entire portfolio. When when you 0:07:21.320 --> 0:07:23.600 when you look at Asia in particular, and we've heard 0:07:23.600 --> 0:07:25.760 so much about trade UH, and we're looking to the 0:07:25.800 --> 0:07:27.760 president heading over to Asia at the end of this 0:07:27.760 --> 0:07:31.200 this week, has that risk ebbed or subsided a bit? Uh? 0:07:31.600 --> 0:07:33.360 Do you have a better sense here what trade policy 0:07:33.440 --> 0:07:35.280 is likely to be. It is as big a risk 0:07:35.280 --> 0:07:39.320 factory as it was. Well. I think the notion that 0:07:39.840 --> 0:07:42.800 some had at the beginning of two thousand seventeen that 0:07:42.840 --> 0:07:44.800 if you can't make it in the United States, you 0:07:44.840 --> 0:07:48.760 can't buy it, that whole risk has diminished now it 0:07:49.080 --> 0:07:52.320 has fallen. Uh in terms of how the markets rate 0:07:52.520 --> 0:07:54.680 that political risk. You can see how the Mexican pay 0:07:54.800 --> 0:07:57.640 so has risen pretty tremendously and suddenly there's a little 0:07:57.640 --> 0:08:00.160 bit more risk there. So I think that market are 0:08:00.200 --> 0:08:03.080 coming around and could could face another relapse and concern 0:08:03.120 --> 0:08:05.680 about that. I think the issue of Asia, though, is 0:08:05.720 --> 0:08:09.080 that there's a greater adorability in Asia than many investors believe. 0:08:09.360 --> 0:08:11.720 I just spent a week in Shanghai a couple of 0:08:11.720 --> 0:08:15.720 weeks back, and it is amazing how differently investors there 0:08:15.720 --> 0:08:19.240 feel about China than Western investors. Do you know we've 0:08:19.280 --> 0:08:21.960 had declines on corporate debt in China since two thousand 0:08:22.000 --> 0:08:24.000 and sixteen? Where where do you read about that? You 0:08:24.080 --> 0:08:28.679 see large declines in capacity in industries that have problems 0:08:28.720 --> 0:08:31.040 with overcapacity. You know where do you read about that? 0:08:31.080 --> 0:08:33.400 Those are the things that I think are underappreciated right now, 0:08:33.400 --> 0:08:36.400 particularly about China. Do we treasure our guests, and we 0:08:36.480 --> 0:08:42.199 particularly treasure them for their proclivities, their oddities, their focus 0:08:42.200 --> 0:08:47.080 and weirdness. Within the game of economics, fans investment. So 0:08:47.120 --> 0:08:50.120 if you're speaking with Stephen Whiting and City Private Bank, 0:08:50.600 --> 0:08:53.319 and he has an intellectual skill to talk on eight 0:08:53.440 --> 0:08:58.319 nine things at once, it always comes back to corporate 0:08:58.360 --> 0:09:01.839 profits and their link in to the economy, and that 0:09:01.920 --> 0:09:07.400 means investment, dynamics, consumption sixty nine point five percent now 0:09:07.559 --> 0:09:09.360 of g DP. Do you do you know, by the way, 0:09:09.520 --> 0:09:13.280 the whole Medicare system is consumption is consumer spending that 0:09:13.559 --> 0:09:17.960 essentially all government healthcare benefits anything that goes Yeah, you know, 0:09:18.040 --> 0:09:19.920 it's one of these things that sort of folks don't 0:09:19.920 --> 0:09:22.520 want to always, you know, trot out sevent I'm going 0:09:22.559 --> 0:09:24.600 to put a chart out here on Twitter for Bloomberg 0:09:24.720 --> 0:09:27.440 Radio which will feature over the next coming days, that 0:09:27.679 --> 0:09:31.800 goes to that investment is the partial differential, It's the 0:09:31.920 --> 0:09:35.480 dynamics of g d P. Are we at a subpart 0:09:35.600 --> 0:09:39.760 g DP simply because we can't get investment going over 0:09:39.800 --> 0:09:43.679 the last several years, it's been across the board moderation 0:09:43.760 --> 0:09:45.560 in terms of the pace of ground. When I say moderation, 0:09:45.559 --> 0:09:47.720 I don't want to say, you know, lacks volatility. That 0:09:47.720 --> 0:09:51.599 would lead to another conversation. But consumption has not been powerful, 0:09:52.080 --> 0:09:55.800 income dynamics have not been powerful, and investment I've all 0:09:55.880 --> 0:09:58.280 been on the slow side. We're seeing a bit of 0:09:58.280 --> 0:10:00.480 a pickup now and I think the question I should 0:10:00.600 --> 0:10:02.559 probably spend a bit more time on this myself, is 0:10:02.760 --> 0:10:05.320 to the extent that the energy boom and bust. The 0:10:05.360 --> 0:10:07.920 one thing that boomed in the U. S economy last 0:10:07.960 --> 0:10:10.120 several years, it's a bit energy related investment. Then it 0:10:10.200 --> 0:10:13.680 went bust. And now it's coming back to what extent 0:10:13.800 --> 0:10:16.559 is that contributing to the rebound that we're seeing investment. 0:10:16.559 --> 0:10:19.120 But we are seeing stronger investment now that we've seen 0:10:19.160 --> 0:10:21.600 for a very long period of time. Ideally it's more 0:10:21.600 --> 0:10:24.800 broad based than interest energy. We're looking at the conclusion 0:10:24.840 --> 0:10:26.600 of the FED meeting today Tomorrow we're likely to hear 0:10:26.640 --> 0:10:28.320 from the President, who has picked to head the FEED 0:10:28.480 --> 0:10:30.760 is going to to be tell us a bit about 0:10:30.920 --> 0:10:33.959 how you from investing perspective. See Jerome Powell, the gentleman 0:10:34.000 --> 0:10:36.720 who's reportedly in the running to get that job. You've 0:10:36.760 --> 0:10:40.000 written about him being sort of a benign, predictable UH. 0:10:40.040 --> 0:10:42.680 Maybe not guy, But in terms of policy choice, what 0:10:42.720 --> 0:10:44.280 do we know about him and what might that mean 0:10:44.320 --> 0:10:46.800 for markets? I think we said something about, you know, 0:10:46.840 --> 0:10:49.560 the principal teaching an art class, you get these people 0:10:49.600 --> 0:10:53.800 are really passionate about monetary policy, and and you know 0:10:53.840 --> 0:10:58.440 you obviously the carrot Kevin Warsh for example. So this 0:10:58.520 --> 0:11:02.559 is UH an environment where the marketplace probably overreacts some 0:11:02.800 --> 0:11:05.320 to the practical impact of the choice of FED share 0:11:05.559 --> 0:11:09.600 that it is a committee, that the institution is very powerful. UM. 0:11:09.600 --> 0:11:12.760 I've never served in the Federal Reserve system, so you know, 0:11:12.800 --> 0:11:15.480 others can speak to this much better. But the idea 0:11:15.559 --> 0:11:18.400 here is that in the very short term, when it 0:11:18.440 --> 0:11:22.679 comes to confidence and clarity about monetary policy, how market 0:11:22.720 --> 0:11:26.800 participants feel they can forecast the FED staying with someone 0:11:26.880 --> 0:11:29.679 who is part of the yelling FED. UH, and it's 0:11:29.760 --> 0:11:35.120 laid out conditions for unwinding monetary accommodation the way Jerome 0:11:35.160 --> 0:11:38.880 Powell has it seems much more predictable, UH than going 0:11:38.920 --> 0:11:41.360 to an outsider. Right now, a great value of horizon investments, 0:11:41.360 --> 0:11:43.640 writing this morning in his note about Janet Yellen likely 0:11:43.640 --> 0:11:45.520 not to be a FED chair for another term, saying 0:11:45.640 --> 0:11:47.720 should go out on top widely praise for engineering an 0:11:47.720 --> 0:11:50.880 economic recovery and presiding over a historic stock market rally. 0:11:51.080 --> 0:11:53.960 Lucky Janet Yellen getting out just in time. How much 0:11:54.000 --> 0:11:55.640 your thing is going to change here when you look 0:11:55.679 --> 0:11:57.520 at what she's set up with this committee has has 0:11:57.559 --> 0:11:59.360 set up. How likely is it to change under the 0:11:59.440 --> 0:12:02.480 leadership of some buty else, Well, if it is J Powell. 0:12:03.000 --> 0:12:06.160 I do think that monetary policy is not going to be, 0:12:06.760 --> 0:12:10.960 you know, the driving force that changes the whole economic outlook. 0:12:11.280 --> 0:12:13.400 You know, I think there are many economists who go 0:12:13.480 --> 0:12:15.480 out and say, well, you know, the federal reserve and 0:12:15.520 --> 0:12:18.280 monetary tightening, all the recessions are about that. Only if 0:12:18.280 --> 0:12:20.280 we just it would almost give you the notion that 0:12:20.320 --> 0:12:22.760 if you stayed easy forever, you'd never have a downturn. 0:12:23.000 --> 0:12:25.400 And I think that that, you know, is a real mistake. 0:12:25.840 --> 0:12:28.680 That the imbalances that you can build in an economy 0:12:28.720 --> 0:12:33.160 by having monetary policy off sides or otherwise um irrational exuberance, 0:12:33.160 --> 0:12:35.200 these sorts of things, whether but it has to be 0:12:35.440 --> 0:12:37.800 I think real side as well as financial When you 0:12:37.840 --> 0:12:40.840 get that, I think you can have downturns, and clearly 0:12:40.840 --> 0:12:42.400 what you saw I know eight, which I don't think 0:12:42.559 --> 0:12:45.040 has to happen again in any by any means. You know, 0:12:45.120 --> 0:12:47.400 these are things that were not well predicted by the 0:12:47.400 --> 0:12:50.800 stance of monetary policy alone. I just came up with 0:12:50.840 --> 0:12:54.040 a phrase. I'm not saying it's original, but it goes 0:12:54.080 --> 0:12:57.599 back to the military industrial complex of the fifties. Is 0:12:57.640 --> 0:13:01.240 there such a thing as the medical industrial complex? When 0:13:01.240 --> 0:13:05.319 you look at the hybridization of government investment, combine them 0:13:05.320 --> 0:13:08.360 all in a where medicine is just become the beast 0:13:08.559 --> 0:13:12.520 of all of our dynamics. Are GDP dynamics, well, that is, 0:13:12.600 --> 0:13:16.079 it is the secular grower. And the United States just 0:13:16.280 --> 0:13:18.480 stands out though. I mean, this is this is a 0:13:18.520 --> 0:13:21.760 problem for us because you know, a good deal of 0:13:21.760 --> 0:13:23.880 our health care is sort of like a stock option 0:13:23.920 --> 0:13:26.160 going into the money when you turn sixty five. You know, 0:13:26.200 --> 0:13:29.680 the Medicare system covers those and outside the United States, 0:13:29.720 --> 0:13:32.920 people if they have government healthcare programs, you know, they're 0:13:32.920 --> 0:13:34.600 covered for the entire of their life. So there's not 0:13:34.640 --> 0:13:37.640 this massive kink up and expenditures that occur like that. 0:13:38.080 --> 0:13:40.360 But you know, around the world, one of the interesting 0:13:40.400 --> 0:13:43.640 things to to note is that healthcare expenditures are less 0:13:43.640 --> 0:13:46.040 cyclical in income. Most you know, things go up and 0:13:46.040 --> 0:13:49.760 down even more than income, and healthcare only goes brilliant. 0:13:49.800 --> 0:13:52.360 Thank you so much. He is with City Private thank 0:13:52.480 --> 0:13:57.000 or Global chief investment strategist. Futures Up eleven del Futures 0:13:57.040 --> 0:13:59.880 Up a big one five the vix nine point eight six. 0:14:00.640 --> 0:14:15.959 This is Bloomberg. This is an honor. What we are 0:14:16.120 --> 0:14:19.480 humbled by the guests we have in their perspective. Frederick 0:14:19.560 --> 0:14:22.920 Michigan is at Colombia. You've heard me rave about his textbook, 0:14:22.920 --> 0:14:26.480 which is policy driven, particularly back half of it. He 0:14:26.520 --> 0:14:28.920 holds court at Colombian Dark in the door of the 0:14:28.920 --> 0:14:32.640 Echoes Building. Years ago as a Fed governor. Rick in 0:14:33.720 --> 0:14:37.560 few years ago you wrote a chapter in Crashes and 0:14:37.640 --> 0:14:42.080 Panics and Historical Perspective comment on who put the mania 0:14:42.840 --> 0:14:46.800 and tulip mania? And this goes to the This goes 0:14:46.840 --> 0:14:50.480 to the idea of asset bubbles. Are we bubblicious now? 0:14:50.640 --> 0:14:54.680 If we skewed things to such a manner that we 0:14:54.840 --> 0:14:59.880 have a mania within our financial systems, well, I think 0:15:00.280 --> 0:15:02.040 you have to be very careful in terms of thinking 0:15:02.040 --> 0:15:04.400 about two different kinds of bubbles, and one is very 0:15:04.480 --> 0:15:07.320 dangerous and one much less so. So as at prices 0:15:07.360 --> 0:15:10.440 do wild and crazy things. And who knows whether in 0:15:10.480 --> 0:15:13.080 fact the stock market is too high right now. This 0:15:13.160 --> 0:15:15.880 is something that economists have a really hard time uh 0:15:15.960 --> 0:15:20.080 predicting or even explaining even after the fact. But uh, 0:15:20.320 --> 0:15:23.480 currently the stock market may be very high, but we're 0:15:23.520 --> 0:15:29.520 not seeing excessive risk taking on in terms of credit markets, 0:15:29.560 --> 0:15:32.080 and that's really very very different. We get many bubbles, 0:15:32.160 --> 0:15:34.240 which are the ones that are very dangerous. We like 0:15:34.360 --> 0:15:38.280 when we had preceding these global financial crisis we had recently, 0:15:39.000 --> 0:15:42.360 where in fact there's a huge incluse and asset prices, 0:15:42.400 --> 0:15:45.400 but they're fueled by credit. And if the fueled by credit, 0:15:45.520 --> 0:15:48.800 when they've ascid, bubble births, now you have a contraction 0:15:48.800 --> 0:15:51.160 of credit and that destroys the economy. And that's what 0:15:51.280 --> 0:15:54.520 happened in this in this recent episode. That's not what 0:15:54.560 --> 0:15:57.120 we see going on now. And we've had many cases 0:15:57.120 --> 0:16:00.000 where stock market has gone way up, it's sometimes crashed. 0:16:00.040 --> 0:16:02.400 Just think about the tech bubble um in in the 0:16:02.400 --> 0:16:05.520 early two thousand's that crashed and the economy had very 0:16:05.520 --> 0:16:08.080 little impacts from it. So I think the key issue 0:16:08.200 --> 0:16:10.320 is not that we need need to predict what's going 0:16:10.320 --> 0:16:12.640 to happen asset prices. If I could do that, I 0:16:12.880 --> 0:16:17.040 would own Bloomberg. On the other hand, uh, not that 0:16:17.160 --> 0:16:20.680 good and so. But in the other hand, we can 0:16:20.800 --> 0:16:24.120 tell whether a very high asset price are associated with 0:16:24.160 --> 0:16:27.000 a lot of risky credit taking, and in that case 0:16:27.040 --> 0:16:28.760 we've got to get very nervous and we have to 0:16:28.800 --> 0:16:31.440 do something about it. That's not the situation now, but 0:16:31.520 --> 0:16:34.360 that's one of the lessons we learned from the last crisis. Rick, 0:16:34.440 --> 0:16:36.479 let me ask you about the evolution of rules basedness. 0:16:36.720 --> 0:16:39.240 I gather you were at the Boston FED conference a 0:16:39.240 --> 0:16:41.160 couple of weeks back when John Taylor spoke about his 0:16:41.240 --> 0:16:43.680 rule in a new broader context of you know, not 0:16:45.000 --> 0:16:46.680 go ahead. In fact, by the way he let he 0:16:47.080 --> 0:16:51.360 led off the conference, and I was the count or conference. Well, 0:16:51.400 --> 0:16:52.920 I just I wonder what you made of what he 0:16:52.960 --> 0:16:55.640 had to say, the fact that he suggested there could 0:16:55.640 --> 0:16:57.480 be some discretion infused with that rule that could be 0:16:57.560 --> 0:16:59.440 used in tannem are we're seeing an evolution in the 0:16:59.480 --> 0:17:02.240 way that we have roach rules based monetary policy. You know, 0:17:02.280 --> 0:17:05.240 it's hard to say, uh that I think if John 0:17:05.400 --> 0:17:08.239 was actually put in the position of being FED chair, uh, 0:17:08.320 --> 0:17:11.320 he'd be more flexible. But that's nearly not what what 0:17:11.320 --> 0:17:15.480 what he said. He he actually talked about that the 0:17:15.520 --> 0:17:19.880 fact that that the kind of discretion that Ben Bernanky 0:17:19.920 --> 0:17:23.480 in the FED used was way weight too much, and 0:17:23.520 --> 0:17:27.080 in fact, I think he mischaracterized what happened during that period. 0:17:27.960 --> 0:17:31.000 I would describe the the operation under the Banancy FED 0:17:31.080 --> 0:17:34.520 as very rulelike. The key thing that Ben Banankey emphasized 0:17:35.040 --> 0:17:37.600 was that he wanted to anchor inflation expectations. One of 0:17:37.600 --> 0:17:40.840 the huge successes of that period is in this case, 0:17:40.880 --> 0:17:44.119 he anchored inflation expectations so they didn't fall. So remember 0:17:44.160 --> 0:17:46.680 at one point we actually had a huge negative shock. 0:17:46.920 --> 0:17:49.160 We actually had deflation for a very brief period of time, 0:17:49.160 --> 0:17:51.399 but it was very temporary. The fact it was so 0:17:51.480 --> 0:17:56.080 temporary that inflation expectations stayed around two percent. That's very ruleike, 0:17:56.200 --> 0:17:59.360 that's looking to the future. That's exactly the great success 0:17:59.400 --> 0:18:01.720 of the to reserve. And I think that that that 0:18:01.880 --> 0:18:04.080 John just doesn't get that, and in fact I called 0:18:04.119 --> 0:18:07.080 him out on that in the conference And how did 0:18:07.119 --> 0:18:11.920 you d you respond? Well, you responded that he disagreed 0:18:11.960 --> 0:18:14.600 with me, but that's you know, Uh, one thing about 0:18:14.600 --> 0:18:17.239 economist John is a wonderful person, by the way. One 0:18:17.280 --> 0:18:20.239 thing about economist is we love to disagree. But I 0:18:20.280 --> 0:18:24.439 do have a very formal, very strong disagreements with views, 0:18:24.800 --> 0:18:27.080 very strong disagreements with the bill that he has helped, 0:18:27.240 --> 0:18:32.919 uh encouraged through Congress, which actually requires to have a 0:18:32.920 --> 0:18:35.920 directed policy. I think this is incredibly important because of time, 0:18:35.960 --> 0:18:38.840 Professor Michigan, we got to cut to the chase. Are 0:18:38.960 --> 0:18:43.320 we gonna have these debates and discussions if we have 0:18:43.400 --> 0:18:48.320 a non PhD economists running the FED? Well? I think 0:18:48.359 --> 0:18:51.280 the answer is these debates and discussions will always take place. 0:18:51.800 --> 0:18:55.320 That there are some very strong reason why rules have advantages, 0:18:55.800 --> 0:18:58.600 and also some strong reasons why pure discretion, which is 0:18:58.640 --> 0:19:00.720 not with Ben Bernaki was doing at the FED and 0:19:00.840 --> 0:19:03.760 not what Janet Yellen is doing at the FED. That Uh, 0:19:03.960 --> 0:19:06.359 that that can have real problems too. So we do 0:19:06.480 --> 0:19:09.000 need to think about how we if we do exactly that. 0:19:09.080 --> 0:19:11.720 In fact, the paper I presented the conference was actually 0:19:12.000 --> 0:19:14.280 directed as saying, how do we get the use of 0:19:14.320 --> 0:19:17.640 discretion the use of rules? Just right? You didn't answer 0:19:17.720 --> 0:19:21.879 my question will we have these discussions if we have 0:19:22.040 --> 0:19:26.919 a mckesley Martin, William G. Miller J Powell type running 0:19:26.920 --> 0:19:29.800 the FED. Well, first of all, let's not talk about 0:19:30.080 --> 0:19:32.960 William and Miller. He was a disaster, but Besnie Martin 0:19:33.080 --> 0:19:35.520 was actually very capable, and I think J. Powell is 0:19:35.640 --> 0:19:40.240 very capable. Uh So I think that that, uh that 0:19:41.280 --> 0:19:43.560 my view is, I think Jay will do a terrific job. 0:19:43.720 --> 0:19:46.600 I think the Janet would be even better because Janet 0:19:46.600 --> 0:19:50.720 really uh has shown great performance and it's a terrific, 0:19:50.800 --> 0:19:54.560 terrific economist. But Jay is extremely capable. I interacted with 0:19:54.640 --> 0:19:58.800 him a lot over time. Uh. He's extremely sensible. He 0:19:58.880 --> 0:20:01.760 understands how to listen. He also understands how they actually 0:20:01.840 --> 0:20:04.720 use the staff in the where it should be used. 0:20:05.720 --> 0:20:07.199 Should be a very good choice. This has been a 0:20:07.280 --> 0:20:09.800 great briefing Rick Michigan as a Columbia and I'll say 0:20:09.800 --> 0:20:12.040 it again, folks, he did a wonderful econ one on 0:20:12.040 --> 0:20:14.720 one macro text a couple of years ago, which is 0:20:14.760 --> 0:20:18.400 an act of God because it's a little less Matthew 0:20:18.480 --> 0:20:22.040 than some of them and a lot more policy driven. 0:20:22.119 --> 0:20:39.160 Rick Michigan is at Football Power Columbia. Columbia University. Let's 0:20:39.160 --> 0:20:41.520 turn out to a friend of the show, Austin Gulsby, 0:20:41.600 --> 0:20:42.800 who was for a long time the Chairman of the 0:20:42.800 --> 0:20:45.239 Council Economic Advisors in the Obama White House. He's now 0:20:45.440 --> 0:20:47.720 back at the Booth School for Business at the University 0:20:47.760 --> 0:20:49.639 of Chicago. He joins us now as we continue to 0:20:49.680 --> 0:20:52.200 look at the prospects for taxio for him, talk a 0:20:52.200 --> 0:20:54.680 little bit about the prospects for for further growth as well. 0:20:54.760 --> 0:20:56.680 Professor Goolsby, great to have you with us, and I 0:20:56.680 --> 0:20:58.240 want to just get you to react, first of all, 0:20:58.280 --> 0:21:01.360 to the delay that we learned about yesterday, that there's 0:21:01.359 --> 0:21:03.480 gonna be another day until we get this legislation from 0:21:03.480 --> 0:21:06.199 the House Ways and Means Committee, and maybe just react, 0:21:06.240 --> 0:21:08.879 if you could, to the timetable for all of this happening. 0:21:08.880 --> 0:21:11.199 Give us your sense of of how possible it is 0:21:11.280 --> 0:21:13.520 to get some sort of comprehensive reform done here over 0:21:13.520 --> 0:21:18.280