1 00:00:11,080 --> 00:00:14,880 Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast. 2 00:00:14,960 --> 00:00:20,640 Speaker 1: I'm Joe Wisenthal and I'm Tracy Allaway. Tracy, obviously, one 3 00:00:20,720 --> 00:00:24,320 Speaker 1: of the big themes that we've been discussing for months, 4 00:00:24,680 --> 00:00:27,080 Speaker 1: for maybe years, is that we really are in a 5 00:00:27,840 --> 00:00:33,560 Speaker 1: era of policy experimentation, particularly with respect to our monetary policy. 6 00:00:34,680 --> 00:00:36,920 Speaker 1: I've been thinking about this, maybe we should change the 7 00:00:36,960 --> 00:00:41,960 Speaker 1: name of odd Looughts to odd Monetary Policy unconventional monetary policy. 8 00:00:42,200 --> 00:00:43,960 Speaker 1: It does feel like we've been talking about this over 9 00:00:44,040 --> 00:00:48,160 Speaker 1: and over and over and over. Let's uh, let's revisit 10 00:00:48,560 --> 00:00:52,880 Speaker 1: that name. That's fair enough. I don't have it quite 11 00:00:52,960 --> 00:00:57,040 Speaker 1: rolls off the time, you guys. I absolutely true. Just 12 00:00:57,080 --> 00:01:00,800 Speaker 1: like an extraordinary amount of sort of rethinking thinking going 13 00:01:00,880 --> 00:01:05,240 Speaker 1: on about the conventional wisdom that Leave talked about. I mean, 14 00:01:05,280 --> 00:01:07,520 Speaker 1: we do episode of their episode and just sort of 15 00:01:07,560 --> 00:01:10,679 Speaker 1: like what people are learning, and it really does feel 16 00:01:10,720 --> 00:01:13,080 Speaker 1: like the sort of this moment is, you know, the 17 00:01:13,120 --> 00:01:15,880 Speaker 1: intersection of two things. There's the long term trends and 18 00:01:16,000 --> 00:01:19,160 Speaker 1: already there was this sort of rethinking about the shape 19 00:01:19,160 --> 00:01:22,679 Speaker 1: of policy, and then this sort of acute need for 20 00:01:22,840 --> 00:01:29,760 Speaker 1: immediate innovation and experimentation and aggressive action on the fly. Yeah. 21 00:01:29,880 --> 00:01:32,360 Speaker 1: I think it's that thing that people have been saying, 22 00:01:32,400 --> 00:01:36,760 Speaker 1: which is that the coronavirus crisis has basically accelerated a 23 00:01:36,800 --> 00:01:39,920 Speaker 1: lot of the trends that we were seeing before this year. 24 00:01:40,120 --> 00:01:43,920 Speaker 1: So with central banking and with monetary policy. We had 25 00:01:43,959 --> 00:01:48,120 Speaker 1: seen a lot of criticism about monetary policies, ability to 26 00:01:48,440 --> 00:01:54,200 Speaker 1: generate inflation, its ability to generate reasonable levels of growth. 27 00:01:54,400 --> 00:01:59,960 Speaker 1: People were already talking about the need for fiscal stimulus 28 00:02:00,160 --> 00:02:03,680 Speaker 1: and the sort of handoff too governments from central banks, 29 00:02:03,760 --> 00:02:06,960 Speaker 1: and all of that has crystallized this year thanks to 30 00:02:07,000 --> 00:02:10,960 Speaker 1: the economic crisis. Now, the one the one thing I 31 00:02:10,960 --> 00:02:13,880 Speaker 1: should uh sort of heavy at this with is it's 32 00:02:13,919 --> 00:02:16,520 Speaker 1: almost always in the context of developed markets that we 33 00:02:16,600 --> 00:02:20,520 Speaker 1: talked about this. So as you mentioned the inability of 34 00:02:21,200 --> 00:02:25,399 Speaker 1: central banks to generate inflation, you know, as they say 35 00:02:25,480 --> 00:02:28,959 Speaker 1: that's a that's a first world problem of the high 36 00:02:29,680 --> 00:02:32,799 Speaker 1: like most of the world, Historically, for most countries, the 37 00:02:32,800 --> 00:02:37,280 Speaker 1: inability to generate inflation has not been the issue and 38 00:02:37,360 --> 00:02:41,600 Speaker 1: arguably still isn't it at all very much a first 39 00:02:41,639 --> 00:02:45,120 Speaker 1: world problem, And a lot of emerging markets they obviously 40 00:02:45,120 --> 00:02:47,600 Speaker 1: would have the opposite problem. I would say that we 41 00:02:47,680 --> 00:02:50,440 Speaker 1: have seen one of the really interesting things about this 42 00:02:50,520 --> 00:02:53,919 Speaker 1: year is we are seeing emerging markets start to do 43 00:02:54,240 --> 00:02:57,080 Speaker 1: things a little bit differently when it comes to monetary policy. So, 44 00:02:57,160 --> 00:03:01,920 Speaker 1: for instance, the Bank of Indonesia is doing debt monetization 45 00:03:02,080 --> 00:03:04,040 Speaker 1: and I think it's really one of the first ones, 46 00:03:04,080 --> 00:03:07,640 Speaker 1: certainly in e M to to do that. And that's 47 00:03:07,639 --> 00:03:11,600 Speaker 1: been interesting to watch to see emerging market economies take 48 00:03:11,639 --> 00:03:16,400 Speaker 1: on unconventional monetary policies that we associate more closely with 49 00:03:16,639 --> 00:03:20,160 Speaker 1: developed markets totally. And I think that actually something we 50 00:03:20,200 --> 00:03:24,600 Speaker 1: need to UH explore a lot more UH in the 51 00:03:24,720 --> 00:03:29,000 Speaker 1: future episodes, which is whether this UM, this crisis actually 52 00:03:29,040 --> 00:03:31,760 Speaker 1: revealed maybe in a good way that e ms have 53 00:03:31,919 --> 00:03:36,360 Speaker 1: more policy space than previously anticipated things like do we 54 00:03:37,440 --> 00:03:41,040 Speaker 1: maybe they have more ability to do that? But I 55 00:03:41,080 --> 00:03:43,760 Speaker 1: want to UM, you know, today's conversation. I'm very excited 56 00:03:43,760 --> 00:03:48,760 Speaker 1: about our guests because she's someone with a very distinct 57 00:03:48,800 --> 00:03:52,480 Speaker 1: background that's very different from most of the people we 58 00:03:52,840 --> 00:03:56,560 Speaker 1: speak to. Our guest today is a Ruth Privoy. She 59 00:03:56,680 --> 00:03:59,680 Speaker 1: is the founder and CEO of SINK. Thisis b NA Sierra, 60 00:04:00,440 --> 00:04:04,680 Speaker 1: which is a Caracas based consulting firm UH focusing in 61 00:04:04,760 --> 00:04:08,920 Speaker 1: large UH in large part on Venezuela and country risk there. 62 00:04:09,320 --> 00:04:12,160 Speaker 1: But also she was the president of the Central Bank 63 00:04:12,320 --> 00:04:18,919 Speaker 1: of Venezuela from to the first woman in that position, 64 00:04:19,520 --> 00:04:23,320 Speaker 1: and just someone who by dint of that perspective Venezuela, 65 00:04:23,360 --> 00:04:27,159 Speaker 1: of course we all currently associate with both the sort 66 00:04:27,200 --> 00:04:32,080 Speaker 1: of massive economic collapse and hyper inflation. Uh. Someone with 67 00:04:32,160 --> 00:04:36,320 Speaker 1: a sort of very interesting perch in perspective on the 68 00:04:36,320 --> 00:04:38,720 Speaker 1: state of the world should be plenty of interesting things 69 00:04:38,760 --> 00:04:42,360 Speaker 1: to discuss. So Ruth, thank you very much for joining us. 70 00:04:43,000 --> 00:04:45,880 Speaker 1: Thanks for having me. Ruth, just sort of give us 71 00:04:46,320 --> 00:04:50,000 Speaker 1: your story, you know, I did I get I mentioned 72 00:04:50,040 --> 00:04:53,640 Speaker 1: your title and your background. Um, but obviously you have 73 00:04:53,680 --> 00:04:57,200 Speaker 1: an extraordinary past, and so for people who aren't familiar 74 00:04:57,240 --> 00:05:01,000 Speaker 1: with the work that you've done and your experience over time, 75 00:05:01,080 --> 00:05:04,800 Speaker 1: sort of give us the short book jacket bios speak. 76 00:05:06,600 --> 00:05:11,159 Speaker 1: My professional career was shaped by the Central Bank of Venezuela. 77 00:05:11,600 --> 00:05:14,520 Speaker 1: I started working there when I was a student at 78 00:05:14,520 --> 00:05:20,360 Speaker 1: the university. My mentor was a German economist who came 79 00:05:20,400 --> 00:05:26,240 Speaker 1: to Venezuela in nineteen thirty nine fleeing from Germany. His 80 00:05:26,320 --> 00:05:30,600 Speaker 1: wife was Jewish and he sought refuge in Venezuela at 81 00:05:30,600 --> 00:05:34,760 Speaker 1: a time when Latin America was establishing central banks all 82 00:05:34,800 --> 00:05:42,200 Speaker 1: over under the influence of the German economist called Herman Max, 83 00:05:42,839 --> 00:05:46,839 Speaker 1: who went to Chile and other countries and helped establish 84 00:05:46,880 --> 00:05:50,400 Speaker 1: a central bank. And our central bank was created in 85 00:05:50,480 --> 00:05:55,920 Speaker 1: nineteen forty. Mr Peltzer, my mentor, was my professor at 86 00:05:55,920 --> 00:05:59,159 Speaker 1: the university, invited me to work at the central bank, 87 00:05:59,560 --> 00:06:03,760 Speaker 1: and the to a bank became sort of my guiding start. 88 00:06:05,080 --> 00:06:07,600 Speaker 1: I had a career there. I then went to work 89 00:06:07,600 --> 00:06:12,040 Speaker 1: in the private sector, and in in the midst of 90 00:06:12,240 --> 00:06:17,200 Speaker 1: political turbulence, I was invited to become the governor of 91 00:06:17,200 --> 00:06:21,799 Speaker 1: the central Bank. I got to the central bank hoping 92 00:06:22,040 --> 00:06:28,320 Speaker 1: I could help establish the central bank's independence and stabilize inflation. 93 00:06:28,400 --> 00:06:34,000 Speaker 1: At the time, because um I strongly believe that central 94 00:06:34,000 --> 00:06:38,360 Speaker 1: bank independence adds value to a country, to its prosperity, 95 00:06:38,480 --> 00:06:43,360 Speaker 1: to its stability. I got to the central bank. That 96 00:06:43,560 --> 00:06:48,800 Speaker 1: was in itself an ambitious goal because a fiscal dominance, 97 00:06:49,240 --> 00:06:51,200 Speaker 1: if you have a country that is running a heavy 98 00:06:51,200 --> 00:06:55,600 Speaker 1: fiscal deficit, there's little room for monitoring policy. And in 99 00:06:55,640 --> 00:06:58,960 Speaker 1: a country that is oil based, where the money is 100 00:06:59,040 --> 00:07:03,799 Speaker 1: created by extraction of oil and spent by the government 101 00:07:04,000 --> 00:07:09,840 Speaker 1: and largely allocated by politicians on a very short term 102 00:07:09,880 --> 00:07:19,000 Speaker 1: miss perspective. Monetary stability is challenging. UH in the country 103 00:07:19,080 --> 00:07:25,720 Speaker 1: undertook a massive structural reform aimed at deregulating, rebuilding institutions, 104 00:07:26,400 --> 00:07:32,280 Speaker 1: getting rid of controls, and establishing stability. But we also 105 00:07:32,400 --> 00:07:35,960 Speaker 1: had a strong political backlash, and in February of nine 106 00:07:36,160 --> 00:07:40,000 Speaker 1: two we had the first military coup by Ugo Chaoist, 107 00:07:40,040 --> 00:07:44,000 Speaker 1: who then became the president of the country. In April two, 108 00:07:44,080 --> 00:07:46,080 Speaker 1: when I got to the Central Bank, we were in 109 00:07:46,160 --> 00:07:51,040 Speaker 1: the midst of political turbulence which lasted for over two 110 00:07:51,120 --> 00:07:55,760 Speaker 1: years and then got worse and worse, and so the 111 00:07:55,800 --> 00:08:03,080 Speaker 1: banking crisis was brewing and exploded. So I lived through 112 00:08:03,160 --> 00:08:07,280 Speaker 1: the banking crisis from the central back. Can I I 113 00:08:07,320 --> 00:08:09,520 Speaker 1: know you're you're bringing up us up to speed here, 114 00:08:09,560 --> 00:08:12,240 Speaker 1: but can I step back for for one second. I 115 00:08:12,280 --> 00:08:16,160 Speaker 1: think when a lot of people think about Venezuela now, 116 00:08:16,360 --> 00:08:20,080 Speaker 1: they think of sort of a basket case economy, very 117 00:08:20,160 --> 00:08:24,560 Speaker 1: high inflation, despite having all that oil wealth. Can you 118 00:08:24,600 --> 00:08:29,920 Speaker 1: talk about how Venezuela got into that position, Because my 119 00:08:30,040 --> 00:08:35,320 Speaker 1: understanding of Latin American economics is that a lot of 120 00:08:35,320 --> 00:08:40,959 Speaker 1: countries were pursuing import substitution and those types of development policies. 121 00:08:41,040 --> 00:08:46,439 Speaker 1: But something happened in Venezuela that sort of made everything 122 00:08:46,840 --> 00:08:52,559 Speaker 1: go off the rails. What was that. Venezuela never tackled 123 00:08:52,640 --> 00:08:57,400 Speaker 1: its vulnerability to oil and has therefore always been a 124 00:08:57,600 --> 00:09:05,680 Speaker 1: very unstable, volatile etonomy. It didn't create the stabilizing mechanisms 125 00:09:05,720 --> 00:09:10,720 Speaker 1: such as a sovereign wealth fund where you save for 126 00:09:10,880 --> 00:09:16,520 Speaker 1: the future generations. Diversification was not an issue. It was 127 00:09:16,600 --> 00:09:20,960 Speaker 1: lip service. You talk about diversification, but you never really 128 00:09:21,280 --> 00:09:25,920 Speaker 1: tackle it because oil is producing whatever you need to survive, 129 00:09:26,040 --> 00:09:30,760 Speaker 1: and politicians had a short term horizon, so they just 130 00:09:30,960 --> 00:09:34,880 Speaker 1: wandered from one five year election to the next. The 131 00:09:34,960 --> 00:09:39,680 Speaker 1: economy continued being highly dependent on oil, yet there was 132 00:09:39,720 --> 00:09:44,559 Speaker 1: a private sector. The private sector, the non oil private sector, 133 00:09:45,080 --> 00:09:48,120 Speaker 1: was in charge of generating the jobs and producing the 134 00:09:48,120 --> 00:09:51,920 Speaker 1: goods that fill the shelves in the markets. The oil 135 00:09:51,960 --> 00:09:56,200 Speaker 1: economy was generating the revenues that made the government rich 136 00:09:56,520 --> 00:10:03,920 Speaker 1: and made politicians powerful. In nineteen when Chais got to power, 137 00:10:04,920 --> 00:10:11,440 Speaker 1: he started undermining the rule of law, the trust in 138 00:10:11,480 --> 00:10:17,760 Speaker 1: the economy, the confidence in the currency, aggrandizing the government 139 00:10:18,360 --> 00:10:24,960 Speaker 1: and shrinking the private sector. Then companies were expropriated, taken 140 00:10:25,000 --> 00:10:29,960 Speaker 1: over by the government and essentially ruined. Along the way, 141 00:10:30,640 --> 00:10:37,920 Speaker 1: the government became more and more authoritarian. Oil prices remained volatile, 142 00:10:38,280 --> 00:10:41,120 Speaker 1: so we had ups and downs and ups and downs. 143 00:10:41,240 --> 00:10:45,720 Speaker 1: And when Chais died and Mr Magua took over the presidency, 144 00:10:45,880 --> 00:10:48,960 Speaker 1: he was hit by a sharp decline in oil prices. 145 00:10:49,040 --> 00:10:54,200 Speaker 1: And instead of moving in the right direction of an 146 00:10:54,240 --> 00:10:59,240 Speaker 1: economic policy that promotes private investment, that builds confidence and 147 00:10:59,559 --> 00:11:07,760 Speaker 1: real publishes growth, the path was towards lawlessness, destroying institutions, 148 00:11:07,840 --> 00:11:13,000 Speaker 1: destroying the rule of law, undermining the confidence in the currency, 149 00:11:13,200 --> 00:11:17,480 Speaker 1: and expanding the fiscal deficit to the point that led 150 00:11:17,520 --> 00:11:24,319 Speaker 1: to hyperinflation. So while the world moved towards stability, Venezuela 151 00:11:24,480 --> 00:11:30,000 Speaker 1: moved towards instability and authoritarianism. There used to be a 152 00:11:30,120 --> 00:11:36,080 Speaker 1: saying that God is Venezuelan because for decades when Venezuela 153 00:11:36,160 --> 00:11:40,000 Speaker 1: was in trouble, oil prices came up. There was something 154 00:11:40,000 --> 00:11:45,200 Speaker 1: in Saudi Arabia or Ira convated Kuwait, oil prices rose 155 00:11:45,679 --> 00:11:50,080 Speaker 1: and the need for sound economic policies was wiped out. 156 00:11:51,559 --> 00:11:57,280 Speaker 1: But as you weaken the economy and also allow for 157 00:11:57,480 --> 00:12:01,640 Speaker 1: the oil industry to be destroyed, wid then you you 158 00:12:01,960 --> 00:12:06,720 Speaker 1: killed the head of the golden eggs and the emperor 159 00:12:06,800 --> 00:12:14,120 Speaker 1: is naked. So that's a short explanation of why Venezuela, 160 00:12:14,640 --> 00:12:18,640 Speaker 1: which used to produce three million barrels of oil a day, 161 00:12:19,160 --> 00:12:23,400 Speaker 1: is now producing two hundred thousand and has lost about 162 00:12:23,800 --> 00:12:29,959 Speaker 1: sevent of GDP in the last five years. Inflation got 163 00:12:30,040 --> 00:12:34,000 Speaker 1: up to two million per year in it's now in 164 00:12:34,160 --> 00:12:39,920 Speaker 1: the thousands per year, which may sound as much lower 165 00:12:40,440 --> 00:12:44,400 Speaker 1: than two million, but it's still extremely painful if you 166 00:12:44,520 --> 00:12:47,839 Speaker 1: think of inflation being two percent or three percent or 167 00:12:47,920 --> 00:13:06,960 Speaker 1: eight percent at the most. So I want to get 168 00:13:07,000 --> 00:13:10,840 Speaker 1: back to um the sort of the hyper inflation and 169 00:13:10,880 --> 00:13:14,800 Speaker 1: the lessons from the Maduro era and also oil. But 170 00:13:15,120 --> 00:13:18,680 Speaker 1: before that, I mean, you mentioned your tenure as the 171 00:13:18,679 --> 00:13:22,000 Speaker 1: head of the central bank, and particularly mentioned the banking 172 00:13:22,040 --> 00:13:26,400 Speaker 1: crisis that you experienced. What was the sort of um 173 00:13:26,400 --> 00:13:29,400 Speaker 1: What was what were the underlying factors that even before 174 00:13:29,559 --> 00:13:33,320 Speaker 1: things really started going downhill in the country, there was 175 00:13:33,600 --> 00:13:38,360 Speaker 1: a banking crisis, And obviously banking crisis are a recurring 176 00:13:38,400 --> 00:13:41,240 Speaker 1: phenomenon all over the world, but also particularly in the 177 00:13:41,280 --> 00:13:44,040 Speaker 1: developed world. What we're what are what do you see 178 00:13:44,040 --> 00:13:46,720 Speaker 1: as the sort of commonalities and lessons from that period. 179 00:13:48,000 --> 00:13:55,000 Speaker 1: The Venezuelan banking crisis came as a result of bad policies, 180 00:13:55,920 --> 00:14:03,319 Speaker 1: bad banking and bad luck. Bad policies, both macro economic 181 00:14:03,360 --> 00:14:08,760 Speaker 1: policies which were not promoting stability, as I said, but 182 00:14:09,000 --> 00:14:16,800 Speaker 1: also banking regulation and supervision. Banking regulation and supervision was 183 00:14:17,120 --> 00:14:23,120 Speaker 1: a weak spot. It was largely dominated by politics. There 184 00:14:23,240 --> 00:14:27,880 Speaker 1: was a cozy relationship between bankers and politicians over the years, 185 00:14:28,080 --> 00:14:33,880 Speaker 1: so there was little concern for having banks being well capitalized, 186 00:14:34,400 --> 00:14:41,480 Speaker 1: lending prudently, being concerned about the long term health of 187 00:14:41,600 --> 00:14:49,960 Speaker 1: the banking system and the securities industry. And this led 188 00:14:50,200 --> 00:14:56,480 Speaker 1: to bad banking because many bankers saw this as the 189 00:14:56,640 --> 00:15:05,440 Speaker 1: path to riches too wealth, and that made the banks weak, 190 00:15:06,000 --> 00:15:10,120 Speaker 1: and we had some very important bank failures in the 191 00:15:10,160 --> 00:15:15,800 Speaker 1: seventies and eighties. Those were all large banks and went 192 00:15:15,960 --> 00:15:22,280 Speaker 1: under because of bad lending connected loans, loans to shareholders, 193 00:15:22,320 --> 00:15:25,840 Speaker 1: to friends and family and so forth, and they were 194 00:15:25,880 --> 00:15:31,520 Speaker 1: bailed out by the government, so neither the bankers nor 195 00:15:31,760 --> 00:15:38,120 Speaker 1: the depositors ever had a loss. The depositors were bailed 196 00:15:38,120 --> 00:15:43,440 Speaker 1: out and the bankers were bailed out. So we ended 197 00:15:43,520 --> 00:15:49,200 Speaker 1: up having a moral hazard problem where everybody was trusting 198 00:15:49,880 --> 00:15:53,480 Speaker 1: that the government would come in and bail everybody out. 199 00:15:53,560 --> 00:15:56,080 Speaker 1: And it doesn't really matter if a bank goes under 200 00:15:56,200 --> 00:16:00,080 Speaker 1: because in the end, you don't lose access to your 201 00:16:00,120 --> 00:16:04,560 Speaker 1: deposits and you can continue your day to day life. 202 00:16:05,320 --> 00:16:10,720 Speaker 1: And then bad luck. Why bad luck, because the lead 203 00:16:10,840 --> 00:16:16,800 Speaker 1: up to the crisis really began in when the reforms 204 00:16:17,240 --> 00:16:23,560 Speaker 1: program were initiated, and it meant increasing prices, increasing the 205 00:16:23,600 --> 00:16:28,640 Speaker 1: price of gasoline, de really deregulating interest rates. Interest rates 206 00:16:28,640 --> 00:16:35,000 Speaker 1: went up, people felt scared um and that was in 207 00:16:36,840 --> 00:16:44,120 Speaker 1: and in Iraq invaded Kuwait and oil prices shot up again, 208 00:16:45,720 --> 00:16:53,400 Speaker 1: and the reform program lost political support. So even accident Ratica, 209 00:16:53,560 --> 00:16:59,680 Speaker 1: which was the president's party, distance itself from the program 210 00:16:59,760 --> 00:17:06,000 Speaker 1: and and the reforms got stuck. And it was really 211 00:17:06,880 --> 00:17:12,639 Speaker 1: a very bad spot because after going up in oil 212 00:17:12,680 --> 00:17:17,760 Speaker 1: prices fell in nine three, and when oil prices fall 213 00:17:18,359 --> 00:17:23,640 Speaker 1: on an oil based economy suffers loss of confidence, capital 214 00:17:23,720 --> 00:17:29,679 Speaker 1: flight and so forth. And in two is when the 215 00:17:29,760 --> 00:17:35,720 Speaker 1: military coups that were brewing came into the open. So 216 00:17:35,920 --> 00:17:40,679 Speaker 1: the country goes from a relatively long term stability with 217 00:17:40,880 --> 00:17:45,960 Speaker 1: prudent fiscal and monetary policies inherited from the post war 218 00:17:47,160 --> 00:17:55,879 Speaker 1: years to a short term, shock prone situation, and the 219 00:17:56,000 --> 00:18:03,800 Speaker 1: military coup in shattered the country's confidence in its democracy, 220 00:18:04,040 --> 00:18:07,119 Speaker 1: and we had a first coup in February, and we 221 00:18:07,200 --> 00:18:10,840 Speaker 1: had a second coup attempt in November, and then the 222 00:18:10,880 --> 00:18:17,399 Speaker 1: president was impeached and in we had four governments until 223 00:18:17,440 --> 00:18:20,840 Speaker 1: we had elections in December. I as a president of 224 00:18:20,880 --> 00:18:24,919 Speaker 1: the Central Bank, had to deal with four presidents and 225 00:18:25,040 --> 00:18:29,480 Speaker 1: four ministers of finance until we had elections in December, 226 00:18:29,840 --> 00:18:34,960 Speaker 1: and the winner was an anti reform candidate, so it 227 00:18:35,040 --> 00:18:38,520 Speaker 1: was clear to everybody that the reforms will get derailed. 228 00:18:38,920 --> 00:18:42,199 Speaker 1: And furthermore, he didn't want to get involved in the 229 00:18:42,200 --> 00:18:46,479 Speaker 1: banking crisis that was around the corner. So that was 230 00:18:46,560 --> 00:18:50,520 Speaker 1: bad luck because we had a combination of oil price 231 00:18:50,760 --> 00:18:56,639 Speaker 1: spikes in the wrong moment that in influence our political 232 00:18:57,320 --> 00:19:02,600 Speaker 1: support for reforms. And after the coups everything went down 233 00:19:02,640 --> 00:19:08,800 Speaker 1: the hill. So essentially, when you have all these combinations, 234 00:19:09,119 --> 00:19:14,399 Speaker 1: it's uh, it's a disaster waiting to happen. Can you 235 00:19:14,560 --> 00:19:19,080 Speaker 1: talk about the impact that the banking crisis had on 236 00:19:19,200 --> 00:19:24,159 Speaker 1: monetary policy at the time, because I think nowadays, in 237 00:19:24,359 --> 00:19:26,639 Speaker 1: most parts of the world, if you think about a 238 00:19:26,640 --> 00:19:30,640 Speaker 1: banking crisis and the central bank response. You would probably 239 00:19:30,680 --> 00:19:34,919 Speaker 1: be thinking of a central bank immediately dropping interest rates 240 00:19:35,000 --> 00:19:38,959 Speaker 1: to stimulate growth, But I think in the case of Venezuela, 241 00:19:39,040 --> 00:19:41,639 Speaker 1: when you were heading the central bank, you did something 242 00:19:42,280 --> 00:19:46,080 Speaker 1: very different. Could you talk about your policy response in 243 00:19:46,119 --> 00:19:52,879 Speaker 1: a banking crisis? The central banks initial fundamental concern is 244 00:19:53,359 --> 00:19:58,320 Speaker 1: the stability of the payment system, which means you cannot 245 00:19:58,359 --> 00:20:05,840 Speaker 1: allow payment not to be settled efficiently and securely, because 246 00:20:05,960 --> 00:20:09,200 Speaker 1: that really put sands in the gears of the economy 247 00:20:09,240 --> 00:20:13,480 Speaker 1: and stops the economy. So when we had the banking crisis, 248 00:20:13,680 --> 00:20:17,680 Speaker 1: my first concern was to keep the payment system running. 249 00:20:18,960 --> 00:20:23,600 Speaker 1: That is why you see central banks being concerned about 250 00:20:23,640 --> 00:20:28,520 Speaker 1: the money market and trying to sustain the flow of 251 00:20:28,600 --> 00:20:33,280 Speaker 1: transactions all over. My concern at the central bank was 252 00:20:33,920 --> 00:20:38,480 Speaker 1: the payment system because when I was faced with the 253 00:20:38,480 --> 00:20:45,119 Speaker 1: banking crisis, of our banks where about to be closed 254 00:20:45,240 --> 00:20:49,600 Speaker 1: or taken over. And um, I would like to clarify 255 00:20:49,800 --> 00:20:52,920 Speaker 1: that in my case, the central bank did not have 256 00:20:53,720 --> 00:21:00,359 Speaker 1: supervisory responsibilities and could only lend to solvent banks, and 257 00:21:00,400 --> 00:21:05,359 Speaker 1: we had an insolvent deposit insurance institution, so all I 258 00:21:05,400 --> 00:21:08,400 Speaker 1: could do from the central bank was lend money to banks. 259 00:21:09,600 --> 00:21:12,800 Speaker 1: I did it through the deposit insurance and in fact 260 00:21:13,119 --> 00:21:17,840 Speaker 1: we kept the payment system running. Of course, as you 261 00:21:17,920 --> 00:21:22,520 Speaker 1: mentioned initially, you when you have this unorthodox monetary policy. 262 00:21:22,600 --> 00:21:27,199 Speaker 1: In a way, there's a parallelism between monetary policy in 263 00:21:27,200 --> 00:21:31,439 Speaker 1: a banking crisis and monetary policy in a pandemic in 264 00:21:31,480 --> 00:21:35,280 Speaker 1: the sense that you have to help the economy keep moving. 265 00:21:36,480 --> 00:21:40,240 Speaker 1: That means you're pumping money into the system. If there's 266 00:21:40,359 --> 00:21:44,320 Speaker 1: confidence in the currency and confidence in the long term 267 00:21:44,359 --> 00:21:49,360 Speaker 1: stability of the country, there is no major damage because 268 00:21:49,880 --> 00:21:54,840 Speaker 1: the demand for money that is their means that people 269 00:21:55,640 --> 00:22:00,760 Speaker 1: keep the local currency and use it legitimately for transactions. 270 00:22:01,520 --> 00:22:05,040 Speaker 1: When you don't have confidence in the currency, or in 271 00:22:05,080 --> 00:22:09,240 Speaker 1: the country or in the government, this increase in money 272 00:22:09,240 --> 00:22:15,080 Speaker 1: supply translates into capital flight, and when there's capital flight, 273 00:22:15,880 --> 00:22:21,080 Speaker 1: the country loses its international reserves, and that means it 274 00:22:21,200 --> 00:22:24,280 Speaker 1: may not be able to import what it needs to 275 00:22:24,440 --> 00:22:29,480 Speaker 1: feed its people. So in Venezuela that was a big challenge, 276 00:22:29,880 --> 00:22:33,359 Speaker 1: and that is why one of the things that was 277 00:22:33,400 --> 00:22:36,919 Speaker 1: important to me at the time was that the government 278 00:22:37,200 --> 00:22:43,480 Speaker 1: should tackle the insolvency of the banking system. While the 279 00:22:43,560 --> 00:22:48,440 Speaker 1: central bank was tackling the illiquidity. So you may have 280 00:22:48,920 --> 00:22:53,359 Speaker 1: a liquid banks you lend to them, but if you 281 00:22:53,400 --> 00:22:56,160 Speaker 1: are at the same time trying to make them solvent 282 00:22:56,760 --> 00:22:59,600 Speaker 1: and keep the confidence of the people in the banking 283 00:22:59,680 --> 00:23:04,119 Speaker 1: system them, then you can muddle through and after an 284 00:23:04,160 --> 00:23:08,639 Speaker 1: interim period of instability, you get the economy back on 285 00:23:08,720 --> 00:23:12,639 Speaker 1: track and you clean up the banking system and you 286 00:23:12,720 --> 00:23:17,120 Speaker 1: move out of the crisis. So in a way, this 287 00:23:17,240 --> 00:23:20,959 Speaker 1: is something that you can connect to the current challenges 288 00:23:21,200 --> 00:23:28,160 Speaker 1: of monetary policy. When monetary policy experimentation and the move 289 00:23:28,240 --> 00:23:33,399 Speaker 1: to unconventional monetary policy or two heterodox monetary policy is 290 00:23:33,520 --> 00:23:38,440 Speaker 1: nowadays more acceptable than it was ten or fifteen years ago, 291 00:23:39,240 --> 00:23:43,399 Speaker 1: and new instruments are being developed. The key for success 292 00:23:43,920 --> 00:23:47,560 Speaker 1: is to keep the trust in the central bank and 293 00:23:47,640 --> 00:23:54,199 Speaker 1: the currency, otherwise these policies get derailed. I'm glad you 294 00:23:54,240 --> 00:23:57,080 Speaker 1: said that, because that is exactly sort of what I 295 00:23:57,320 --> 00:23:59,400 Speaker 1: where I was going to go next with this question. 296 00:23:59,440 --> 00:24:03,800 Speaker 1: Because people tell this story and it's like, Okay, there's 297 00:24:03,800 --> 00:24:06,199 Speaker 1: a bunch of money printing, whether it's at the central 298 00:24:06,240 --> 00:24:10,040 Speaker 1: bank or maybe through the treasury or whatever, and they say, okay, 299 00:24:10,040 --> 00:24:15,159 Speaker 1: that leads historically to inflation or hyper inflation. It sounds 300 00:24:15,240 --> 00:24:18,480 Speaker 1: like what you're identifying here is that you can do 301 00:24:18,520 --> 00:24:21,760 Speaker 1: a lot of different things. It's really the sort of 302 00:24:21,960 --> 00:24:25,760 Speaker 1: trust in the institutions of government that really sort of 303 00:24:25,800 --> 00:24:30,280 Speaker 1: perceived that and that the flexibility works belong is um 304 00:24:30,520 --> 00:24:33,760 Speaker 1: you know, have this trust and as such, in the 305 00:24:33,840 --> 00:24:39,760 Speaker 1: Venezuelan context, what you describe under the Chavez uh presidency 306 00:24:39,840 --> 00:24:43,520 Speaker 1: and then Maduro, it's not perhaps it's not so much 307 00:24:43,560 --> 00:24:46,960 Speaker 1: about the money printing or the deficits per se, but 308 00:24:47,080 --> 00:24:50,720 Speaker 1: the destruction of the rule of law and civil society 309 00:24:50,800 --> 00:24:55,479 Speaker 1: which catalyzed the law the confidence collapse. Yes, it mean 310 00:24:55,560 --> 00:24:57,520 Speaker 1: is that it's sort of is that sort of how 311 00:24:57,560 --> 00:25:02,200 Speaker 1: we should think about what really cattle the Venezuelan hyperinflation 312 00:25:02,320 --> 00:25:06,679 Speaker 1: more so than the money printing per se. Money printing 313 00:25:06,800 --> 00:25:12,680 Speaker 1: has been one of the ingredients of Venezuela's hyperinflation, but 314 00:25:12,920 --> 00:25:18,439 Speaker 1: it's not the total explanation. Uh. The fiscal deficit, the 315 00:25:18,600 --> 00:25:25,119 Speaker 1: lack of fiscal rules and transparency has been very, very damaging. 316 00:25:26,280 --> 00:25:30,920 Speaker 1: And when you think of a country that loses its 317 00:25:31,000 --> 00:25:36,719 Speaker 1: anchors because it doesn't have sound fiscal policy, it doesn't 318 00:25:36,760 --> 00:25:40,159 Speaker 1: know where the government is going. The government runs a 319 00:25:40,240 --> 00:25:44,959 Speaker 1: deficit and the central bank funds the deficit by printing money. 320 00:25:46,040 --> 00:25:49,360 Speaker 1: And even if the law says that the central bank 321 00:25:49,440 --> 00:25:53,560 Speaker 1: cannot lend to the government, it says it can lend 322 00:25:53,680 --> 00:25:57,840 Speaker 1: to government owned entities. So what the central bank is 323 00:25:57,880 --> 00:26:01,240 Speaker 1: doing is lending to pay the west UH, the oil company, 324 00:26:01,560 --> 00:26:05,760 Speaker 1: and BAA transfers the money to the government, which is 325 00:26:05,760 --> 00:26:10,080 Speaker 1: simply is one step along the way. So you do 326 00:26:10,200 --> 00:26:15,880 Speaker 1: have monetary expansion and you have a fiscal deficit. That 327 00:26:15,960 --> 00:26:20,879 Speaker 1: creates the so called fiscal dominance of monetary policy, and 328 00:26:21,160 --> 00:26:39,240 Speaker 1: that that's the worst of both evils. So how can 329 00:26:39,640 --> 00:26:47,720 Speaker 1: central banks avoid that intertwining of government and independent monetary policy? 330 00:26:47,800 --> 00:26:51,119 Speaker 1: Because you know, especially in the current climate, there is 331 00:26:51,160 --> 00:26:54,920 Speaker 1: a lot of talk about the need for unconventional monetary 332 00:26:54,960 --> 00:26:59,479 Speaker 1: policy to be augmented with government spending. As I mentioned, 333 00:26:59,480 --> 00:27:02,680 Speaker 1: we've seen some new ways of doing this, for instance 334 00:27:02,720 --> 00:27:07,040 Speaker 1: the debt monetization program in Indonesia, where the central bank 335 00:27:07,160 --> 00:27:12,800 Speaker 1: is effectively directly financing the government deficit. How do central 336 00:27:12,800 --> 00:27:19,280 Speaker 1: banks maintain independence while still working together with governments to 337 00:27:19,600 --> 00:27:25,240 Speaker 1: augment physical spending. Part of the answer to your question 338 00:27:25,800 --> 00:27:31,879 Speaker 1: is on the word independence. What what do we really 339 00:27:31,920 --> 00:27:36,600 Speaker 1: mean by central bank independence? What we mean is the 340 00:27:36,680 --> 00:27:42,120 Speaker 1: central banks ability to say no to a government that 341 00:27:42,240 --> 00:27:50,000 Speaker 1: wants to derail the basics of economic stability. So there 342 00:27:50,119 --> 00:27:56,040 Speaker 1: may be times at which the central bank agrees to 343 00:27:56,720 --> 00:28:03,000 Speaker 1: fund in an unorthodox way the needs of the economy 344 00:28:03,080 --> 00:28:06,359 Speaker 1: for a while, but it has to have a clear 345 00:28:06,560 --> 00:28:10,640 Speaker 1: stance on what it means and how you will exit 346 00:28:10,800 --> 00:28:14,640 Speaker 1: from this policy and why the economy needs it. So 347 00:28:15,000 --> 00:28:19,560 Speaker 1: the economy needs the monetary stimulus to prevent a strong recession, 348 00:28:20,280 --> 00:28:25,879 Speaker 1: and at some point the central bank expects or demands, 349 00:28:25,920 --> 00:28:29,439 Speaker 1: like Mr Powell has done in recent days, that the 350 00:28:29,520 --> 00:28:33,600 Speaker 1: government and fiscal policy take its role in in the 351 00:28:33,680 --> 00:28:39,840 Speaker 1: stimulus and money supply can then take a backstage. That's 352 00:28:39,880 --> 00:28:43,600 Speaker 1: fine as long as people trust what the central bank 353 00:28:43,680 --> 00:28:49,560 Speaker 1: is doing and UM is willing to accept this increase 354 00:28:49,720 --> 00:28:54,360 Speaker 1: in money supply. Independence for a central bank doesn't mean 355 00:28:54,400 --> 00:28:57,400 Speaker 1: that the central bank is a state within a state 356 00:28:57,560 --> 00:29:01,840 Speaker 1: and won't listen to anybody. Monetary policy is part of 357 00:29:01,880 --> 00:29:07,160 Speaker 1: the economic policy mix, and by definition it has to 358 00:29:07,200 --> 00:29:12,880 Speaker 1: be consistent with the country's growth and inflation goals. The 359 00:29:12,920 --> 00:29:17,680 Speaker 1: other thing is that you need anchors to anchor expectations 360 00:29:17,720 --> 00:29:22,720 Speaker 1: of the people, and here you have inflation targeting, for example, 361 00:29:23,320 --> 00:29:28,240 Speaker 1: where people know that if inclation goes beyond a certain 362 00:29:28,280 --> 00:29:32,240 Speaker 1: limit or folds below a certain limit, the central bank 363 00:29:32,320 --> 00:29:36,360 Speaker 1: will step in and will keep things on track. The 364 00:29:36,440 --> 00:29:40,200 Speaker 1: same thing happens with a fiscal deficit target. People know 365 00:29:40,800 --> 00:29:44,440 Speaker 1: that if the fiscal deficit goes beyond a certain percentage 366 00:29:44,440 --> 00:29:49,800 Speaker 1: of GDP, the government will cut expenditures or raise revenues 367 00:29:49,960 --> 00:29:54,600 Speaker 1: in order to not put undue pressure on the central bank. 368 00:29:55,080 --> 00:29:59,680 Speaker 1: And there's also a foreign exchange anchor when countries have 369 00:30:01,000 --> 00:30:06,760 Speaker 1: a clearly stated exchange rate policy. In the case of Venezuela, 370 00:30:07,560 --> 00:30:11,160 Speaker 1: we lost all anchors. We have no anchors. There's no 371 00:30:11,280 --> 00:30:15,200 Speaker 1: fiscal anchor, there's no monetary anchor, there's no foreign exchange anchor. 372 00:30:15,360 --> 00:30:19,880 Speaker 1: So what do people do. They look for dollars, and 373 00:30:20,000 --> 00:30:24,080 Speaker 1: any additional believer that comes into the money supply goes 374 00:30:24,120 --> 00:30:27,800 Speaker 1: to the foreign exchange market and ends up triggering the 375 00:30:27,920 --> 00:30:34,480 Speaker 1: need for exchange controls. And exchange controls are the representation 376 00:30:35,040 --> 00:30:38,800 Speaker 1: of the lack of confidence. You can't keep the money 377 00:30:38,800 --> 00:30:42,400 Speaker 1: in the country unless you fence it in, and that 378 00:30:42,560 --> 00:30:45,880 Speaker 1: is a sign per se that things are not going well. 379 00:30:46,480 --> 00:30:53,000 Speaker 1: When a government, like the Indonesian example, undertakes debt monetization 380 00:30:53,280 --> 00:30:58,800 Speaker 1: and establishes a stimulus to the economy. The basis for 381 00:30:58,920 --> 00:31:03,040 Speaker 1: the Central Bank of Indonesia is to retain the people's 382 00:31:03,120 --> 00:31:08,680 Speaker 1: trust and that is a subtle combination of science and 383 00:31:08,880 --> 00:31:13,240 Speaker 1: art that goes through the central banks law, what it 384 00:31:13,320 --> 00:31:17,080 Speaker 1: can do, what it should not do, how it communicates 385 00:31:17,080 --> 00:31:21,720 Speaker 1: with the people, and in fact, central bank communications are 386 00:31:22,040 --> 00:31:27,680 Speaker 1: a very important tool to build confidence and are especially 387 00:31:27,720 --> 00:31:31,640 Speaker 1: important also in times of crisis when you need a 388 00:31:31,680 --> 00:31:36,680 Speaker 1: single voice to re establish confidence of the people. So 389 00:31:37,240 --> 00:31:42,000 Speaker 1: at the beginning in our introduction, I joked that, uh, 390 00:31:42,160 --> 00:31:46,200 Speaker 1: you know, in the developed market context that inability to 391 00:31:46,320 --> 00:31:49,600 Speaker 1: generate inflation is kind of the ultimate First world problem. 392 00:31:49,800 --> 00:31:53,360 Speaker 1: And you know, if you obviously inflation in the US 393 00:31:53,480 --> 00:31:56,160 Speaker 1: and Europe UK hasn't really been an issue for a while, 394 00:31:56,200 --> 00:32:01,600 Speaker 1: but persistently high unemployment has been then for almost uh 395 00:32:01,640 --> 00:32:05,320 Speaker 1: you know, for several decades now. The unemployment rate in 396 00:32:05,360 --> 00:32:08,360 Speaker 1: the US has been above what economists perceived to be 397 00:32:08,720 --> 00:32:12,360 Speaker 1: full employment. So this is a consistent issue. Do the 398 00:32:12,480 --> 00:32:16,920 Speaker 1: lessons that you identify um apply and so when we 399 00:32:16,960 --> 00:32:22,080 Speaker 1: think about questions like confidence in the currency, the exchange rate, 400 00:32:22,160 --> 00:32:26,040 Speaker 1: and so forth, do the issues that sort of face 401 00:32:26,120 --> 00:32:30,600 Speaker 1: a developing market central banks such as Venezuela or others. 402 00:32:31,320 --> 00:32:34,920 Speaker 1: Should these lessons apply to, say, the FED, or should 403 00:32:35,000 --> 00:32:37,760 Speaker 1: they be thinking about solving other problems? And as such, 404 00:32:38,200 --> 00:32:43,520 Speaker 1: perhaps notions about central bank independence earner is important. Central 405 00:32:43,520 --> 00:32:50,880 Speaker 1: bank independence is an important issue everywhere, and there's a 406 00:32:50,960 --> 00:32:55,600 Speaker 1: lot of studies and discussions and measurements on how you 407 00:32:55,640 --> 00:32:58,640 Speaker 1: measure central bank independence and how you make it work 408 00:32:59,560 --> 00:33:05,040 Speaker 1: prison irving the value the institutional value of an independent 409 00:33:05,080 --> 00:33:11,600 Speaker 1: central bank is important everywhere. The central the United States 410 00:33:11,640 --> 00:33:15,560 Speaker 1: have less restrictions because they issue the currency that the 411 00:33:15,600 --> 00:33:21,200 Speaker 1: world uses, so you don't have the connection that you 412 00:33:21,400 --> 00:33:24,720 Speaker 1: may find in the rest of the world, and especially 413 00:33:24,800 --> 00:33:31,200 Speaker 1: in emerging market where the countries depend on their revenue 414 00:33:31,200 --> 00:33:35,280 Speaker 1: on their foreign exchange revenues through imports or capital influence 415 00:33:35,600 --> 00:33:39,160 Speaker 1: in order to keep the country running. And that is 416 00:33:39,200 --> 00:33:45,800 Speaker 1: why countries need healthy foreign reserves to build long term stability, 417 00:33:46,960 --> 00:33:50,520 Speaker 1: and that is why you are so much more vulnerable 418 00:33:50,920 --> 00:33:58,200 Speaker 1: to the confidence problem in emerging markets. And confidence in 419 00:33:58,240 --> 00:34:03,840 Speaker 1: the currency is built by confidence in the government, the 420 00:34:03,880 --> 00:34:08,040 Speaker 1: government's policies, and the central banks ability to reign in 421 00:34:08,440 --> 00:34:14,440 Speaker 1: excesses not to hinder growth, but to avoid excesses. So 422 00:34:14,600 --> 00:34:18,000 Speaker 1: there's there's a simple way of putting things. When you 423 00:34:18,080 --> 00:34:23,680 Speaker 1: have a strong banking system and you have a strong economy, 424 00:34:23,880 --> 00:34:31,400 Speaker 1: you tend to have stability because your system can withstand shocks. 425 00:34:32,800 --> 00:34:36,520 Speaker 1: When you have a weak banking system and you have 426 00:34:36,600 --> 00:34:41,040 Speaker 1: a strong economy, you can solve the banking systems problems 427 00:34:41,120 --> 00:34:45,360 Speaker 1: with less disruption on the economy. But when you have 428 00:34:45,719 --> 00:34:51,759 Speaker 1: weak banks, a weak economy, and a weak institutional framework, 429 00:34:52,560 --> 00:34:57,120 Speaker 1: that is a recipe for disaster. And that's why you 430 00:34:57,200 --> 00:35:00,440 Speaker 1: have to try to fix the three legs of this stool, 431 00:35:00,960 --> 00:35:05,280 Speaker 1: the health of the banking system, the health of the economy, 432 00:35:05,400 --> 00:35:11,719 Speaker 1: and a good policy mix. I'm curious as you survey 433 00:35:11,840 --> 00:35:18,640 Speaker 1: the impact of the pandemic on monetary policy and on economies, 434 00:35:19,440 --> 00:35:24,120 Speaker 1: is there one major lesson that you think we've sort 435 00:35:24,120 --> 00:35:27,319 Speaker 1: of seen demonstrated over the past few months, or one 436 00:35:27,360 --> 00:35:32,080 Speaker 1: big takeaway um in terms of the way economies work 437 00:35:32,160 --> 00:35:34,920 Speaker 1: and the way they interact with monetary policy that you've 438 00:35:34,960 --> 00:35:42,320 Speaker 1: seen recently. As I see the consequences emerging from the 439 00:35:42,360 --> 00:35:47,320 Speaker 1: effects of the pandemic, it becomes clear that the basic 440 00:35:47,440 --> 00:35:54,360 Speaker 1: principles to prevent the recessionary impact of pandemics and lockdowns 441 00:35:54,440 --> 00:36:00,480 Speaker 1: and so forth is again the basic combination of confidence, trust, 442 00:36:00,719 --> 00:36:07,920 Speaker 1: and consistent policies. The central banks are called to provide support. 443 00:36:08,920 --> 00:36:14,000 Speaker 1: Companies big and small need loans, and unless you relax 444 00:36:14,080 --> 00:36:20,759 Speaker 1: the monetaries policy, monetary policy stands, you can't provide this 445 00:36:21,000 --> 00:36:27,120 Speaker 1: increase in lending that the economy needs. And the room 446 00:36:27,480 --> 00:36:33,319 Speaker 1: for this expansionary policy is the fiscal space that the 447 00:36:33,400 --> 00:36:38,560 Speaker 1: countries need to have in order to produce this stimulus. 448 00:36:38,640 --> 00:36:43,400 Speaker 1: And fiscal space is a term for the help of 449 00:36:43,440 --> 00:36:48,520 Speaker 1: the public finances and how much deficit can you run 450 00:36:49,320 --> 00:36:53,520 Speaker 1: before derailing the economy, So the central banks have to 451 00:36:53,600 --> 00:36:58,080 Speaker 1: step in. They have to provide the stimulus. And again 452 00:36:58,200 --> 00:37:02,560 Speaker 1: going back to an example where there's little room for 453 00:37:02,600 --> 00:37:09,440 Speaker 1: this stimulus is again Venezuela. Venezuela needs the fiscal stimulus 454 00:37:09,480 --> 00:37:14,360 Speaker 1: and the monetary stimulus to prevent the recession from getting worse, 455 00:37:15,120 --> 00:37:18,680 Speaker 1: but there's no room for it because every believer that 456 00:37:18,840 --> 00:37:22,280 Speaker 1: gets into the system goes to the foreign exchange market, 457 00:37:23,160 --> 00:37:27,080 Speaker 1: pushes the price of the dollar up. The currency loses 458 00:37:27,200 --> 00:37:32,040 Speaker 1: value and inflation goes up, so there's no room for 459 00:37:32,120 --> 00:37:39,160 Speaker 1: any kind of mitigating policy. Two, avoid the pains of 460 00:37:39,200 --> 00:37:45,080 Speaker 1: the pandemic compounding with more economic pain, and instead of 461 00:37:45,120 --> 00:37:51,280 Speaker 1: moving towards reforms, the government moves towards more authoritarianism, which 462 00:37:51,320 --> 00:37:57,879 Speaker 1: makes things worse. I I would want to share with 463 00:37:57,960 --> 00:38:03,080 Speaker 1: you UH some aspects of what we learned without from 464 00:38:03,080 --> 00:38:08,200 Speaker 1: our banking crisis, which are overarching lessons for the world, 465 00:38:08,360 --> 00:38:13,239 Speaker 1: both in emerging markets and developed markets, and they are 466 00:38:13,280 --> 00:38:18,879 Speaker 1: relevant in times of a pandemic, because a pandemic may 467 00:38:19,120 --> 00:38:26,640 Speaker 1: raise systemic risks when banks are not strong, when governments 468 00:38:26,680 --> 00:38:33,239 Speaker 1: don't have more sufficient fiscal space, and when there's a 469 00:38:33,480 --> 00:38:36,280 Speaker 1: there's a crisis that may be brewing. And in fact, 470 00:38:36,680 --> 00:38:40,440 Speaker 1: there's a lot of work being done now on how 471 00:38:40,560 --> 00:38:46,240 Speaker 1: to better equip banking supervisors with the tools, the knowledge, 472 00:38:46,360 --> 00:38:51,400 Speaker 1: and the wisdom to deal with the financial instability risks 473 00:38:51,440 --> 00:38:57,719 Speaker 1: that come with COVID, and the lessons are essentially the 474 00:38:57,800 --> 00:39:04,920 Speaker 1: same that we face in our banking crisis twenty years ago. First, 475 00:39:05,600 --> 00:39:12,319 Speaker 1: get politics out of banking regulation and supervision. That is 476 00:39:12,719 --> 00:39:18,239 Speaker 1: a mantra and that is true everywhere, because when you 477 00:39:18,360 --> 00:39:25,919 Speaker 1: have politics and politicians fiddling with banking regulation and supervision, 478 00:39:26,000 --> 00:39:29,880 Speaker 1: you end up having a weak financial system that is 479 00:39:29,920 --> 00:39:35,560 Speaker 1: not able to withstand the shocks. The second is not 480 00:39:35,760 --> 00:39:40,399 Speaker 1: to underestimate systemic risks, and that means that you need 481 00:39:40,440 --> 00:39:47,120 Speaker 1: to be proactive and have early actions before things get worse. 482 00:39:47,520 --> 00:39:51,200 Speaker 1: And that means having well defined roles for each government 483 00:39:51,280 --> 00:39:55,320 Speaker 1: agency involved, be at the central bank, the supervisors that 484 00:39:55,400 --> 00:40:01,640 Speaker 1: deposit insurance, managing a crisis, having contingency lanning as an 485 00:40:01,760 --> 00:40:06,400 Speaker 1: essential tool, and in the central banks independence and the 486 00:40:06,760 --> 00:40:10,640 Speaker 1: and the independence of bank supervisors. And there are two 487 00:40:10,719 --> 00:40:15,360 Speaker 1: things that are normally overseen because in some countries, especially 488 00:40:15,360 --> 00:40:19,799 Speaker 1: in developed countries, they don't seem to be a big problem. 489 00:40:19,920 --> 00:40:25,520 Speaker 1: One is legal protection for regulators. Being a regulator and 490 00:40:25,600 --> 00:40:30,600 Speaker 1: supervisor is a lonely job, and being a supervisor in 491 00:40:30,640 --> 00:40:37,000 Speaker 1: an emerging market is also a dangerous job because supervisors 492 00:40:37,080 --> 00:40:43,240 Speaker 1: don't have the necessary legal protection that makes them comfortable 493 00:40:43,800 --> 00:40:50,279 Speaker 1: in make them making decisions with incomplete information, which is 494 00:40:50,320 --> 00:40:52,480 Speaker 1: what you have to do when you face a crisis, 495 00:40:53,080 --> 00:40:58,759 Speaker 1: So they risk being sued by depositors, by shareholders of 496 00:40:58,920 --> 00:41:05,239 Speaker 1: banks or companies, and even by the government. And when 497 00:41:05,280 --> 00:41:12,000 Speaker 1: supervisors feel insecure, they tend not to act and not 498 00:41:12,120 --> 00:41:15,640 Speaker 1: to make decisions and hope that things will get solved. 499 00:41:16,400 --> 00:41:21,600 Speaker 1: So legal protection for regulators and supervisors is in my view, 500 00:41:22,160 --> 00:41:28,040 Speaker 1: a key element of stability in the financial sector, and 501 00:41:28,160 --> 00:41:35,480 Speaker 1: the fourth is international rules. International rules became important in 502 00:41:35,520 --> 00:41:44,880 Speaker 1: the ninety nineties and for banks in emerging markets international rules. 503 00:41:45,800 --> 00:41:50,839 Speaker 1: Compliance with international rules is a way to ensure their 504 00:41:50,920 --> 00:41:56,799 Speaker 1: ability to do business in the global markets. If the 505 00:41:56,840 --> 00:42:01,680 Speaker 1: country doesn't comply with international rules, be it in banking, 506 00:42:01,760 --> 00:42:08,000 Speaker 1: securities or insurance, the domestic players are restricted, and in 507 00:42:08,040 --> 00:42:14,640 Speaker 1: an increasingly interconnected world, that means you're condemned to poverty. 508 00:42:14,880 --> 00:42:18,600 Speaker 1: You can't do anything. We lived a very interesting experience 509 00:42:18,719 --> 00:42:22,960 Speaker 1: in Venezuela when we were trying to implement the Basil 510 00:42:23,440 --> 00:42:29,040 Speaker 1: rules in a country that never had it. The bankers 511 00:42:29,080 --> 00:42:36,880 Speaker 1: that initially opposed reforms, when they understood that unless the 512 00:42:37,000 --> 00:42:43,080 Speaker 1: country moved towards compliance with Basil regulations, they would not 513 00:42:43,320 --> 00:42:47,280 Speaker 1: be able to continue doing business in the United States, 514 00:42:48,200 --> 00:42:54,640 Speaker 1: they switched gears and they became more accepting and they 515 00:42:54,719 --> 00:43:01,960 Speaker 1: finally agreed to have the reforms in the banking law 516 00:43:02,120 --> 00:43:06,520 Speaker 1: and to comply with the Basil rules in exchange for 517 00:43:07,440 --> 00:43:11,279 Speaker 1: being able to continue to have their business in the 518 00:43:11,400 --> 00:43:15,719 Speaker 1: major markets of the world. And that is why the 519 00:43:15,760 --> 00:43:23,120 Speaker 1: international rule setting bodies play an important rule in overall 520 00:43:23,400 --> 00:43:28,319 Speaker 1: stability in the financial system, and those four lessons I 521 00:43:28,320 --> 00:43:33,080 Speaker 1: think apply everywhere and should be forefront in our menu 522 00:43:33,400 --> 00:43:38,600 Speaker 1: for financial stability. And in times of a pandemic, when 523 00:43:38,640 --> 00:43:44,640 Speaker 1: you're trying to prevent the collapse of a financial system, uh, 524 00:43:44,920 --> 00:43:47,040 Speaker 1: you have to think of these things. And let me 525 00:43:47,080 --> 00:43:50,840 Speaker 1: add one more idea I would like to share with you. 526 00:43:51,480 --> 00:43:56,840 Speaker 1: Banking crisis are very harmful to the poor. And whenever 527 00:43:57,040 --> 00:44:00,560 Speaker 1: an emerging market or a low income countries offers a 528 00:44:00,560 --> 00:44:05,680 Speaker 1: banking crisis, it is the poor that are more strongly hurt. 529 00:44:06,280 --> 00:44:09,959 Speaker 1: And it's the women and girls among the poor who 530 00:44:10,000 --> 00:44:16,680 Speaker 1: get more strongly hurt. And financial crisis have a regressive 531 00:44:17,040 --> 00:44:21,520 Speaker 1: effect on income distribution and make society is more unequal, 532 00:44:22,120 --> 00:44:25,480 Speaker 1: and we are seeing it with the pandemic. We're seeing 533 00:44:25,480 --> 00:44:31,239 Speaker 1: how countries, including the United States, are seeing that the 534 00:44:31,400 --> 00:44:36,520 Speaker 1: poor and the underserved communities are being hurt or strongly 535 00:44:36,880 --> 00:44:42,000 Speaker 1: by the pandemic. Imagine what happens if the pandemic also 536 00:44:42,440 --> 00:44:46,719 Speaker 1: adds up to a financial crisis, and then you get 537 00:44:46,719 --> 00:44:52,320 Speaker 1: a double warming. And that is why this whole idea 538 00:44:52,480 --> 00:44:58,799 Speaker 1: of working towards financial stability and preserving the confidence in 539 00:44:58,840 --> 00:45:06,600 Speaker 1: the currency is so important. Ruth. That was fantastic discussion. 540 00:45:06,719 --> 00:45:10,040 Speaker 1: Really appreciate your perspective, and thank you so much for 541 00:45:10,080 --> 00:45:12,719 Speaker 1: coming out on odd lot. Thank you for inviting me. 542 00:45:13,239 --> 00:45:41,480 Speaker 1: It's been a pleasure. Thank you, Tracy. I loved ruth perspective. 543 00:45:41,520 --> 00:45:44,680 Speaker 1: That is not a sort of angle that a lot 544 00:45:44,719 --> 00:45:47,160 Speaker 1: of our guests have had in the past, and I 545 00:45:47,160 --> 00:45:51,040 Speaker 1: thought that was really enjoyable. Yeah. I think one thing 546 00:45:51,360 --> 00:45:54,480 Speaker 1: that comes out a lot in that discussion is the 547 00:45:54,520 --> 00:45:59,760 Speaker 1: importance of strength of institutions when it comes to emerging markets, 548 00:45:59,800 --> 00:46:03,319 Speaker 1: and I mean Roof made an excellent case of how 549 00:46:03,400 --> 00:46:07,440 Speaker 1: that didn't necessarily happen in Venezuela, and we've seen the 550 00:46:07,480 --> 00:46:10,640 Speaker 1: result of that, which was massive capital flight and lots 551 00:46:10,640 --> 00:46:14,799 Speaker 1: of inflation. Yeah. I think, I mean that was my 552 00:46:15,040 --> 00:46:19,840 Speaker 1: big takeaway too, and I think it shows um this 553 00:46:19,960 --> 00:46:24,560 Speaker 1: sort of the limits to mathematical approaches to understanding inflation 554 00:46:24,680 --> 00:46:26,960 Speaker 1: is sort of what I take away from that, because 555 00:46:27,200 --> 00:46:30,280 Speaker 1: you know, you could always chart deficits to the central 556 00:46:30,280 --> 00:46:34,560 Speaker 1: banks monetary supply or the amount of foreign reserves that 557 00:46:34,719 --> 00:46:37,400 Speaker 1: a central bank holds at any given point, but you 558 00:46:37,480 --> 00:46:43,400 Speaker 1: can't really chart um credibility of institutions, rule of law, 559 00:46:43,680 --> 00:46:46,080 Speaker 1: things like that. And when that kind of thing is 560 00:46:46,120 --> 00:46:50,000 Speaker 1: so important for confidence in the currency, confidence in the 561 00:46:50,000 --> 00:46:53,560 Speaker 1: banking system, the maintenance of the exchange rate, and thus 562 00:46:53,560 --> 00:46:56,760 Speaker 1: the ability to import food and other things for a country. 563 00:46:57,080 --> 00:46:59,560 Speaker 1: It kind of really speaks to how hard it is 564 00:46:59,600 --> 00:47:04,120 Speaker 1: to model some of these things. Yeah, I think that's 565 00:47:04,160 --> 00:47:07,560 Speaker 1: exactly right. And the other thing that really struck me 566 00:47:07,840 --> 00:47:12,560 Speaker 1: was her definition of central bank independence, because I think 567 00:47:12,560 --> 00:47:14,879 Speaker 1: it is true that there's a knee jerk reaction out 568 00:47:14,920 --> 00:47:19,520 Speaker 1: there that central bank independence means that the policymakers are 569 00:47:19,560 --> 00:47:23,239 Speaker 1: sort of off doing their own thing and not necessarily 570 00:47:23,239 --> 00:47:26,120 Speaker 1: paying attention to what the government is doing at the 571 00:47:26,160 --> 00:47:28,359 Speaker 1: same time. And she put it really well that it's 572 00:47:28,480 --> 00:47:31,960 Speaker 1: it's about the ability to say no, but not actually 573 00:47:32,320 --> 00:47:36,120 Speaker 1: necessarily saying no every single time you might be asked 574 00:47:36,200 --> 00:47:40,640 Speaker 1: to do something. Yeah, I mean, I really do think 575 00:47:41,239 --> 00:47:45,239 Speaker 1: this is just going to increasingly, especially in the developed 576 00:47:45,280 --> 00:47:49,920 Speaker 1: market contact this is just going to be an increasingly 577 00:47:50,520 --> 00:47:54,320 Speaker 1: contested question because it doesn't it's such a fine line, 578 00:47:54,400 --> 00:47:59,279 Speaker 1: isn't it. Yeah. And you know, obviously, uh, we had 579 00:47:59,320 --> 00:48:01,480 Speaker 1: these sort of series of I mean, one of the 580 00:48:01,480 --> 00:48:03,279 Speaker 1: whole things, you know, going back to the FED is 581 00:48:03,360 --> 00:48:06,600 Speaker 1: these framework review because part of the problem was, like 582 00:48:06,920 --> 00:48:09,359 Speaker 1: they identify it. It's like, wait, we keep hiking rates 583 00:48:09,360 --> 00:48:12,759 Speaker 1: too early, we keep tapping the brakes on the expansion, 584 00:48:12,880 --> 00:48:16,480 Speaker 1: we never really hit our inflation goals. What exactly does 585 00:48:16,520 --> 00:48:19,040 Speaker 1: it serve? And you know, something I was thinking about 586 00:48:19,080 --> 00:48:22,919 Speaker 1: during this crisis is that our conception of central bank 587 00:48:22,920 --> 00:48:26,200 Speaker 1: independence has changed, maybe in a good way, and it's 588 00:48:26,280 --> 00:48:31,000 Speaker 1: less about helping the government know and more about just 589 00:48:31,040 --> 00:48:34,880 Speaker 1: sort of being an independent, competent actor when elected officials 590 00:48:34,920 --> 00:48:38,680 Speaker 1: can't agree on anything, which is a slightly different framework. 591 00:48:39,200 --> 00:48:42,640 Speaker 1: But arguably it was kind of nice to have this 592 00:48:42,719 --> 00:48:46,160 Speaker 1: time round. I mean, I think that might be true 593 00:48:46,600 --> 00:48:51,880 Speaker 1: of one economy in particular. I'm not sure that that 594 00:48:51,920 --> 00:48:54,520 Speaker 1: will always be the case, especially when it comes to 595 00:48:54,800 --> 00:48:58,600 Speaker 1: emerging markets, but it is. It is going to be 596 00:48:58,640 --> 00:49:02,040 Speaker 1: a fascinating thing to watch because it is really hard to, 597 00:49:03,320 --> 00:49:07,680 Speaker 1: I guess, disentangle a central bank that is trying to 598 00:49:07,719 --> 00:49:11,360 Speaker 1: help the economy by augmenting whatever it is that the 599 00:49:11,400 --> 00:49:15,680 Speaker 1: government is actually doing an amplifying fiscal stimulus when it can, 600 00:49:16,320 --> 00:49:20,960 Speaker 1: and a central bank that is basically in the pockets 601 00:49:21,000 --> 00:49:24,440 Speaker 1: of the government for whatever reason. I think that's going 602 00:49:24,480 --> 00:49:27,440 Speaker 1: to be hard, um, but a fascinating thing to watch 603 00:49:28,600 --> 00:49:30,880 Speaker 1: you know. One other thing I just before you go 604 00:49:31,000 --> 00:49:33,200 Speaker 1: that I thought was interesting was her description of the 605 00:49:33,280 --> 00:49:36,360 Speaker 1: sort of resource curse of Venezuela and you hear that 606 00:49:36,440 --> 00:49:39,400 Speaker 1: a lot and a lot of different emerging markets that 607 00:49:39,480 --> 00:49:43,680 Speaker 1: happen to have some big natural resources, typically oil, and 608 00:49:43,880 --> 00:49:46,480 Speaker 1: how it ends up being a net negative. Sort of 609 00:49:46,480 --> 00:49:49,879 Speaker 1: funny the description, and you know, they're multiple ways. One 610 00:49:49,960 --> 00:49:54,120 Speaker 1: is it allows governments to paper over other problems. It 611 00:49:54,200 --> 00:49:57,360 Speaker 1: also raises the value of the currency, making other domestic 612 00:49:57,440 --> 00:50:02,520 Speaker 1: manufacture perhaps less competitive, causing atrophy. But her description of 613 00:50:02,600 --> 00:50:06,440 Speaker 1: every time Venezuela gotten to any sort of trouble historically, 614 00:50:06,920 --> 00:50:10,200 Speaker 1: we just happened to be some oil price bike. Uh. 615 00:50:10,239 --> 00:50:11,879 Speaker 1: I got to kick out of the idea that God 616 00:50:11,920 --> 00:50:17,200 Speaker 1: being Venezuelan with oil always coming to the rescue each time. Yeah. 617 00:50:17,600 --> 00:50:20,720 Speaker 1: I hadn't heard that one before. Um, but pretty amusing 618 00:50:20,800 --> 00:50:24,680 Speaker 1: and kind of ironicum in retrospect when we're talking about 619 00:50:24,680 --> 00:50:28,600 Speaker 1: it now. Um, okay, shall we leave it there? Yeah? 620 00:50:28,920 --> 00:50:32,160 Speaker 1: All right. This has been another episode of the All 621 00:50:32,160 --> 00:50:34,960 Speaker 1: Thoughts Podcast. I'm Tracy Alloway. You can follow me on 622 00:50:35,000 --> 00:50:38,759 Speaker 1: Twitter at Tracy Alloway and I'm Joe wisn't Thal. You 623 00:50:38,800 --> 00:50:42,440 Speaker 1: can follow me on Twitter at the Stalwart. Follow our 624 00:50:42,480 --> 00:50:46,560 Speaker 1: producer Laura Carlston. She's at Laura M. Carlston. Followed the 625 00:50:46,560 --> 00:50:50,799 Speaker 1: Bloomberg head of podcast, Francesco leaving at Francesco Today and 626 00:50:50,880 --> 00:50:54,280 Speaker 1: check out all of our podcasts under the handle at podcast. 627 00:50:54,560 --> 00:51:12,520 Speaker 1: Thanks for listening to