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Speaker 1: I'm here because it's the Homer Jones Memorial Lecture, the

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Speaker 1: big event for the St. Louis fed. Homer Jones is

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Speaker 1: noted for the way he took to a whole other

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Speaker 1: level the kind of research that was being done at

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Speaker 1: federalserve banks around the country. Carlos Kariga then in a

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Speaker 1: very important seat here as the director of research, and

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Speaker 1: I'm glad you had some time. It's a big day

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Speaker 1: for the bank. Where's this happy to be here. It's

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Speaker 1: a big day for the bank. And Homer George started

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Speaker 1: about sixty plays years ago what nowadays you know, became FRED,

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Speaker 1: our main data tool. Anybody can come to FRED and

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Speaker 1: look at their data. We have more than a hundred

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Speaker 1: thousand seats. And that started as an innovation thing back

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Speaker 1: in the nineteen sixties by Hommer Johnes. So it's great

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Speaker 1: to honor his memory. Okay, Well, one of your areas

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Speaker 1: of research is housing, the housing market, mortgage rates, how

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Speaker 1: it all feeds through the economy. And given what's going

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Speaker 1: on in the US housing market, I want to start

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Speaker 1: with that. Uh, particularly this this turn in the housing

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Speaker 1: market three on the thirty year fixed roughly up to

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Speaker 1: about seven percent. It feels like it happened in a

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Speaker 1: matter of weeks. It hit the market so hard. When

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Speaker 1: have mortgage rates done this in the past. Is this

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Speaker 1: almost unprecedented? Are we seen something like this? Well, we

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Speaker 1: had hybrid is raised in the past, you don't have

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Speaker 1: to go that far. In nearly two thousands and even

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Speaker 1: in the late nineties we had mortgage rates at digit level.

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Speaker 1: But such a rapid turn in a matter of you know,

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Speaker 1: two quarters, it's kind of unprecedented. We had, you know,

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Speaker 1: a sizeable increase in the early two thousand and five

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Speaker 1: or so, but it has been ratily dramatic. But we

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Speaker 1: also had a very rapid increasing inflation in the second

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Speaker 1: half of one so we have to be mindful about

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Speaker 1: how quick inflation escalated. And I think that's just, you know,

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Speaker 1: the appropriate reaction given how quick inflation moved. Sure well,

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Speaker 1: And one of the axioms in monetary theory people say

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Speaker 1: it over monetary policy has long and variable lags. There

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Speaker 1: was not much of a lag between the way progressive

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Speaker 1: rate hikes, particularly once the FED picked up the pace,

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Speaker 1: and what happened to mortgage rates. Uh As transmission of

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Speaker 1: monetary policy in some fundamental way changed, well, I mean,

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Speaker 1: this is kind of the same from the nineteen sixties

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Speaker 1: and nineteen seventies, and we all understand that the economy

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Speaker 1: is very different fifty years later. We have a much

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Speaker 1: more developed financial market and credit is a key player.

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Speaker 1: So it really transmit to create a sensitive sectors. But

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Speaker 1: non created sensitive sectors are also connected to create sensitive sectors.

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Speaker 1: And really stated a classical example, when we increase rates more,

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Speaker 1: you know, the coastal borrowing goes up, and that reduces

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Speaker 1: the demand for housing. The properties usually stay a bit

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Speaker 1: longer in the market, and there's a lot of purchases

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Speaker 1: that are tied to housing. People that buy a new house,

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Speaker 1: they often buy dotable goods and so on and so forth.

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Speaker 1: So that really connects the housing sector to the rest

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Speaker 1: of the economy. And and so the lacks that would

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Speaker 1: argue have been reduced dramatically, and housing is one of

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Speaker 1: the sectors that is more interconnected to the rest of

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Speaker 1: the economy, not only in terms of the value added,

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Speaker 1: but also in terms of employment. Employment growth in the

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Speaker 1: construction sector also leads employing growth in other sectors in

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Speaker 1: the economy. And that's what we see from looking at

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Speaker 1: deep without put table, and it's very different now than

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Speaker 1: it was, you know, about fifty years ago, so we

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Speaker 1: have to be mindful about that. So being mindful about

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Speaker 1: how it's changed, What does that mean for the economy,

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Speaker 1: What does it mean for UH monetary policy? And I

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Speaker 1: mean central banks broadley. This is just ant happening in

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Speaker 1: in the US with the FED, It's happening with other

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Speaker 1: central banks around the world. It's certainly not unique to

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Speaker 1: the US. And housing markets in essence are similar, but

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Speaker 1: financing markets for housing are very different across countries. We

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Speaker 1: have across the border Canada that has a very different

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Speaker 1: housing finance market, and we see that throughout Europe. So

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Speaker 1: that really changed the transmission mechan is, and that's a

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Speaker 1: key feature of how you know, financial markets are connected

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Speaker 1: with the real economy, and we have to be mindful

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Speaker 1: about how that change the transmission mechan is in terms

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Speaker 1: of the size but also in terms of the speed.

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Speaker 1: A lot of countries now are seeing their hormoners facing

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Speaker 1: sizeable research, whereas in this country the majority of hormoners

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Speaker 1: have fixed laans. So in some sense inflation is really

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Speaker 1: the fleeting the real value their aim, and so transmission

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Speaker 1: is going to be very very different, and we went

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Speaker 1: through a massive refinance emperiod in the last couple of years,

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Speaker 1: so there's a lot of you know, disposable income in

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Speaker 1: the part of the households. And what about mortgage debt

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Speaker 1: and what's difference now from the nineteen seventies, Well, the

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Speaker 1: shadow mortgage they're relative to disposable income in the nineties

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Speaker 1: seventies eighties was substantially lower than what we have right

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Speaker 1: now and now it's what before it was roughly about

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Speaker 1: fifty So that's just a big change in terms of

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Speaker 1: the volume and also in the composition. In the late

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Speaker 1: seventies early eighties, that was when the baby generation was

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Speaker 1: entered in the housing market, so we were expecting a

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Speaker 1: big increase in real estate prices. That didn't happen because

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Speaker 1: of the high inflation. Now we have those households and

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Speaker 1: the tailing of the life cycle and they're in a

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Speaker 1: very different position. And now we have the millenniums getting

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Speaker 1: into the market. Plus the COVID chock really changed a

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Speaker 1: whole lot of things. So how does that feed through

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Speaker 1: now when this central bank, the FED is racing rates

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Speaker 1: rapidly in bigger steps? Is there some risk there with

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Speaker 1: mortgage debt and debt holders, there's no immediate risk or

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Speaker 1: on mortgage debt like what we signed two thousand or seven,

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Speaker 1: what we would expect would be as low adjudgtment correction

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Speaker 1: in the housing market, price adjustment downward. We would see

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Speaker 1: we're already seeing in some areas inventory building up. But

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Speaker 1: we had inventory levels that were a normally low the

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Speaker 1: average historical value somewhere between six to eight months, and

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Speaker 1: we had inventory levels down to two months. So what

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Speaker 1: we would expect, just like what we see in vacancy,

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Speaker 1: is it's just an adjustment of correction to more normal levels. Now,

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Speaker 1: it could be the case that we're in a new

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Speaker 1: norm and may be a bit different from what we

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Speaker 1: see historically, but we're too far from those levels. So

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Speaker 1: another trend in the last few years has been private

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Speaker 1: investors buying up lots of a real estate and not

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Speaker 1: just multiple family dwellings but single family homes. Uh where

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Speaker 1: does that stand now? And what does that mean for

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Speaker 1: home affordability? Because there you can find individuals at oh

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Speaker 1: I couldn't buy the house for what two hundred fifty

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Speaker 1: seven thousand dollars that I thought I could. Now those

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Speaker 1: prices are over four hundred thousand because there's so much

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Speaker 1: demand from private investors. What we're gonna see now is

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Speaker 1: to what extends some of the trend that really started

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Speaker 1: to pick up in two thousand nine two thousand eleven,

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Speaker 1: in which you know, investors moved from equity about market

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Speaker 1: into real estate market could be reversed. These investors, they

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Speaker 1: provide a fair amount of liquidity across the U. S landscape,

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Speaker 1: not only in the big cities and vacation in areas,

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Speaker 1: but throughout looking for yields. And what we're finding is

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Speaker 1: that now it could be a perfect opportunity for them

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Speaker 1: to kind of cash out the capital games that they

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Speaker 1: have a crew pretty much in the last decade. If

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Speaker 1: you bought in two thousand and twelve and you have,

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Speaker 1: you know, had substantial cashuals coming out of certain properties

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Speaker 1: because you were listening them out, now may be a

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Speaker 1: good opportunity for you to kind of liquidate that investment

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Speaker 1: position and move to other markets. And that might be

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Speaker 1: a trend that we may see and that should help

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Speaker 1: to mitigate the affordability crisis. If you bought in two

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Speaker 1: thousand and twelve, you have plenty of it within the property.

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Speaker 1: So even if you see a market correction where prices

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Speaker 1: decline you used to on a pretty good territory, and

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Speaker 1: I would assume not not the hugest part of the

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Speaker 1: business landscape, but in terms of the profitability or how

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Speaker 1: strong they are fundamental, because there's a lot of concerns

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Speaker 1: now about debt that the companies are holding. Uh, it

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Speaker 1: seems that if they if they bought low and are

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Speaker 1: selling high, they're in a position now they should be

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Speaker 1: I would expect. So, I mean, I'm not concerned about

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Speaker 1: that positions at this point. As we were in two

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Speaker 1: thousand and five to two thou seven, that was more

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Speaker 1: of a concern. We had abundant supply coming to the

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Speaker 1: market at a period where you know, inventory was spilling

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Speaker 1: up and prices were decreasing and incomes were at risk.

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Speaker 1: Whatevery different situation with the current lebal market. We're still

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Speaker 1: a lot of mobility. Is a very strong leberal market,

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Speaker 1: one of the ones, the strongest one that we have

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Speaker 1: seen in the last three decades. So that concern coming

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Speaker 1: from the leberal market that ultimately funds those mortgage payments

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Speaker 1: does not seem to be there right now, at least

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Speaker 1: what we can see the near term and the households

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Speaker 1: have plenty of equity and pretty much everybody had to

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Speaker 1: refinance the refinance in the last couple of years to

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Speaker 1: putty a little mortgage rates. So final question, if Homer

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Speaker 1: Jones were here, and he would we're advising you on

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Speaker 1: your your next project when it comes to housing mortgages.

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Speaker 1: This area of the economy US globally is become so important.

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Speaker 1: What would he be advising you to look at? I mean,

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Speaker 1: that's an excellent question. I guess that the challenge going

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Speaker 1: forward is going to be internationalist billovers. How economy is

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Speaker 1: bouncing back from this COVID pandemic, plus the underlying structural

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Speaker 1: the changes are going on in the economy is going

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Speaker 1: to shape everything. We're seeing geo political changes and everything

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Speaker 1: kind of feeds into everything, and that's going to pose

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Speaker 1: interesting challenges. But we do know that, you know, the U.

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Speaker 1: S economy is one of the strongest one globally, and

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Speaker 1: we're seeing that with this frank of the dollar. When

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Speaker 1: things are uncertain, the dollar picks up a lot of

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Speaker 1: the strengths. I would say that we would still maintain

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Speaker 1: that position and and that's kind of good news for us.

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Speaker 1: All Right, Well, Karlov Karriga, thank you so much for

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Speaker 1: joining us today here at the Federatory Bank of St.

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Speaker 1: Louis on this very important Homer Jones Memorial Lecture day.

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Speaker 1: And plus they're always happy to have you equal all right,

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Speaker 1: Paula Matta, having a great time starting the day off

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Speaker 1: with a very interesting conversation, and the course will be

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Speaker 1: continuing throughout the day. I'm very happy to welcome to

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Speaker 1: Bloomberg rade you at the Federal Bank of St. Louis

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Speaker 1: on this very important day when they honor one of

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Speaker 1: the top economists in the country with the Homer Jones

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Speaker 1: Memorial Award and he gives a lecture. Sar prasade As

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Speaker 1: he said, professor of Cornell University, Senior Fellow of Brookings

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Speaker 1: and the author of another new book, The Future of Money,

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Speaker 1: How Digital transfer revolution is transforming currencies and finance. On

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Speaker 1: a busy day for you, Glad you could find the

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Speaker 1: time as well. It's a pleasure, Kathleen. So you've written papers,

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Speaker 1: two books about the dollar, its role in the world.

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Speaker 1: What drew you to cryptocurrencies and all the changes it's

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Speaker 1: it's doing and actually signaling, You know, I hang out

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Speaker 1: with central bankers a lot and a few years ago,

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Speaker 1: questions started arising about what the digital revolution might mean

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Speaker 1: for banking financing, particularly for central banks. So my plan

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Speaker 1: was to think about central bank digital currencies CBDCs and

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Speaker 1: what role they might play in in finance. But it

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Speaker 1: quickly became apparent to me that one needed to think

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Speaker 1: about basic developments taking place in financial markets as a

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Speaker 1: result of technology, which goes under the term fintech. Then

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Speaker 1: to think about cryptocurrencies and what they might mean for finance,

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Speaker 1: and then central bank digital currencies and what it might

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Speaker 1: all mean for the structure of financial markets and institutions,

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Speaker 1: central banking, and indeed the international monetary system, which is

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Speaker 1: why what was meant to be a slim little volume

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Speaker 1: turned into a five page tom I want to jump

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Speaker 1: into that, but I just have to ask you quickly.

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Speaker 1: Were you a little bit horror fight as you saw

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Speaker 1: bitcoin shooting up as high as a cart falling back down,

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Speaker 1: knowing that a lot of small investors who maybe have

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Speaker 1: invested much for getting swept along and maybe a not

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Speaker 1: so good way into this cryptocurrency world. You know, Kathleen,

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Speaker 1: one of the great joys in writing this book was

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Speaker 1: learning about the technology underlying bitcoin, and it's a phenomenal

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Speaker 1: technology if you think about what bitcoin is trying to accomplish,

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Speaker 1: being able to conduct transactions without using a trusted intermediary,

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Speaker 1: without even revealing a digital identity, actual identity, and just

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Speaker 1: using a digital identity, it's phenomenal. But bitcoin was meant

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Speaker 1: to be a medium of exchange. Instead it's become a

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Speaker 1: speculative financial asset, and as you've pointed out, many people

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Speaker 1: seem to have gotten taken in by the razzle dazzle

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Speaker 1: of the new technology, don't understand what risks they're taking on.

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Speaker 1: And if you're a wealthy investor willing to take a

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Speaker 1: roll of the dice, it's one thing. If you're an

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Speaker 1: unsophisticated investor putting a lot of your life savings on

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Speaker 1: the line, that is a buddying proposition. And certainly the

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Speaker 1: bitcoin price alatility has given us a lot to worry about. Well.

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Speaker 1: Central banks concerned about financial stability of decentralized payment systems

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Speaker 1: UH stable coins and how they can displace cash, you know,

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Speaker 1: traditional systems. At the same time, they're moving very slowly, carefully,

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Speaker 1: i might even say reluctantly to develop CBDC central bank

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Speaker 1: Digital coins. Yeah, I think all central banks rightly think

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Speaker 1: about the dangers of stepping in where the private sector

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Speaker 1: could provide services equally well. And there is clearly a

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Speaker 1: need for better payment systems, both domestically between consumers, between

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Speaker 1: consumers and businesses between businesses, and also the international level

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Speaker 1: where there are huge frictions in terms of payments. So

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Speaker 1: when you think about cryptocurrencies like stable coins, they're trying

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Speaker 1: to meet a real need. And of course, in many

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Speaker 1: developing countries and advanced economies around the world, the private

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Speaker 1: sector is doing a great job of providing low cost,

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Speaker 1: easy access digital payments. So the question is what is

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Speaker 1: the value proposition for a CBDC, And I think central

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Speaker 1: banks are rightly concerned that it could lead to some

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Speaker 1: risks of financial instability, disintermediation, the banking system, perhaps private

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Speaker 1: sector innovation in terms of payments being limited, so they're

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Speaker 1: treading very cautiously. But one thing that's clear is that

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Speaker 1: we definitely need better payment systems because after all, that's

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Speaker 1: the key lubricant of any market economy, and if it

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Speaker 1: doesn't work well and efficiently, there are things that could

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Speaker 1: be improved. So how big is the threat of these

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Speaker 1: digital payment systems to commercial banks. From the beginning, it's

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Speaker 1: been Oh, if people don't put their deposits in JP

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Speaker 1: Morgan and Bangup America and other places, that's going to

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Speaker 1: be a problem. So stable coins are an interesting element

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Speaker 1: of this discussion, and of course they could post a

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Speaker 1: threat to banks if they become seen as a deposit

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Speaker 1: taking institutions. Now, the interesting irony of stable coins, of course,

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Speaker 1: is that they completely wciate what Bitcoin was supposed to accomplish,

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Speaker 1: which is a departure from the dependence on fiard currencies.

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Speaker 1: Stable coins get their stable value precisely by being backed

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Speaker 1: up by stores of fiat currencies, but many stable coin

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Speaker 1: issuers do provide interstrates, and there is a concern that

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Speaker 1: if people see stable coins as being more functional in

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Speaker 1: terms of payment mechanisms and perhaps even offering higher interstrates

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Speaker 1: and bank deposits, then you could get a disintermediation of

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Speaker 1: the banking system. You could also have instability in the

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Speaker 1: financial system coming from stable coins themselves. That risk, I

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Speaker 1: think is somewhat mitigated by the fact that stable coins

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Speaker 1: need to be backed up one to one, so they

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Speaker 1: didn't affect narrow banks. It's not a huge threat but

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Speaker 1: there are other risks of the financial system we need

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Speaker 1: to worry about. You know, it's interesting because we look

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Speaker 1: at emerging markets, developing economies and all the advantages they

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Speaker 1: could get from these digital payment systems, stable coins, etcetera.

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Speaker 1: But you see some risks I don't know. I everybody

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Speaker 1: thinks about two emerging markets in this transition. You know,

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Speaker 1: a friction free international payments are a wonderful thing for

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Speaker 1: economic migrants send remittances back to their home countries for

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Speaker 1: small and mediumental prices, trying to access global pools of capital,

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Speaker 1: for investors looking for international portfolio diversification opportunities. But you

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Speaker 1: could have digital versions of the dollar of their in

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Speaker 1: min b being easily available in the future. You could

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Speaker 1: even have stable coins issued by major corporations UM such

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Speaker 1: as Amazon and perhaps one day Meta will provive with

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Speaker 1: stable coin project. These currencies, either private or official, might

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Speaker 1: be trusted more than the currencies issued by non credible

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Speaker 1: central banks UM in small open economies. So there is

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Speaker 1: an existential threat I think to some of these smaller currencies,

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Speaker 1: especially currencies and economies that are mismanaged or where the

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Speaker 1: central banks are not credible, so there's their currency could

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Speaker 1: get tanked. That's right, You could bear a real shakeout

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Speaker 1: because everybody in the country might decide that it's easier

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Speaker 1: to trust the currency issued by one of the major

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Speaker 1: economies or even one of the major corporations, because they

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Speaker 1: have deeper pockets and are more trustworthy than the domestic

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Speaker 1: central banks. So this could be a problem and dollar dominance,

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Speaker 1: I think maybe are some people are sort of hoping

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Speaker 1: that also push the dollar back a bit and their

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Speaker 1: currencies can rise, and that's going to happen. What do

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Speaker 1: you think that is the great hope that perhaps digital

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Speaker 1: technologies will provide a way to displace a dollar in

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Speaker 1: this medium of exchange or store of value function. Perhaps

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Speaker 1: if the digital uan were to be easily available, you

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Speaker 1: could see it getting a little more traction and international payments.

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Speaker 1: But the reality is that people are not going to

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Speaker 1: trust the currency just because it's available in digital form.

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Speaker 1: They care about what lies behind the currency, you know,

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Speaker 1: deep and liquid financial markets, but more importantly, what is

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Speaker 1: necessary to engender the trust of foreign investors and domestic investors.

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Speaker 1: There is an institutional system such as an independent central

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Speaker 1: bank and a system of checks and balances. All of

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Speaker 1: these are really important to inspire the trust of foreign investors.

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Speaker 1: I don't think there is any other economy um that

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Speaker 1: has the financial and economic might the US does and

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Speaker 1: is also backed up by an institutional framework of this sort.

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Speaker 1: So I don't think the dollar is going to be

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Speaker 1: significantly threatened anytime soon. Getting outside the crypto around for

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Speaker 1: a minute, Uh, strong dollar getting stronger all the time.

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Speaker 1: I am a World Bank meetings last week. It's a concern.

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Speaker 1: They say, go ahead, keep doing those rate hikes. But

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Speaker 1: what kind of risk do you see? What are your

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Speaker 1: concerns about this dollar that continues to strengthen. What it

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Speaker 1: means for the rest of the world. Well, it's a

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Speaker 1: sign of two things. One is that the US economy

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Speaker 1: has slightly better prospects, even though not great prospects, relative

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Speaker 1: to the rest of the world. And there is a

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Speaker 1: desire for safety. Right now. There is a great deal

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Speaker 1: of financial and economic termoil around the world, and people

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Speaker 1: still look to the U. S Dollar for safety. So

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Speaker 1: this is a bit of a paradox because a strong

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Speaker 1: dollar helps the U S a little bit of the

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Speaker 1: margin it makes important goes a little cheaper here, but

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Speaker 1: the positive effect is not that large. But for countries

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Speaker 1: around the world whose currency is are depreciating against a dollar,

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Speaker 1: it means more domestic in lationary pressures because lots of

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Speaker 1: international trade is still priced in dollars, so the prices

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Speaker 1: and domestic currencies of those goods go up. The cost

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Speaker 1: of financing debt um that is UH and servicing debt

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Speaker 1: that has been denominated in dollars is very high. So

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Speaker 1: for the rest of the world it's a huge negative.

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Speaker 1: So this asymmetry is a real problem for the world economy.

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Speaker 1: But right now there doesn't seem to be any easy

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Speaker 1: way out of it because the FED has to do

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Speaker 1: what it needs to do because otherwise we could get

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Speaker 1: higher rate hikes and even more economic pain down the road. Now, you,

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Speaker 1: as represent are giving the Homo Jones Memorial lecture today

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Speaker 1: quite an honor. Is there some point you're making in

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Speaker 1: that lecture You can't tell us exactly what you're saying

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Speaker 1: that that we would likely like to leave us with today.

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Speaker 1: I think it's going to be an interesting era of

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Speaker 1: competition in various forms of money um as we just discussed.

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Speaker 1: I think that is going to be competition between privately

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Speaker 1: issued moneies and central bank FIAT currencies in the medium

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Speaker 1: of exchange function even at the international and I can

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Speaker 1: see digital versions of some currencies beginning to, uh, you know,

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Speaker 1: at least compete with the dollar more effectively. So a

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Speaker 1: lot more interesting currency competition, and as an economist, I

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Speaker 1: think competition is a good thing, all right. Thank you

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Speaker 1: for joining us. Professor at Colonel University, senior fellow at

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Speaker 1: the Brookings Institute, and the author of a new book,

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Speaker 1: The Future of Money, How the Digital Revolution is transforming

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Speaker 1: Currencies and Finance. Thank you for joining us today here

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Speaker 1: at the St. Louis fed on Bloomberg Radio. It's been

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Speaker 1: my pleasure. Kathleen