Speaker 1: I'm here because it's the Homer Jones Memorial Lecture, the
Speaker 1: big event for the St. Louis fed. Homer Jones is
Speaker 1: noted for the way he took to a whole other
Speaker 1: level the kind of research that was being done at
Speaker 1: federalserve banks around the country. Carlos Kariga then in a
Speaker 1: very important seat here as the director of research, and
Speaker 1: I'm glad you had some time. It's a big day
Speaker 1: for the bank. Where's this happy to be here. It's
Speaker 1: a big day for the bank. And Homer George started
Speaker 1: about sixty plays years ago what nowadays you know, became FRED,
Speaker 1: our main data tool. Anybody can come to FRED and
Speaker 1: look at their data. We have more than a hundred
Speaker 1: thousand seats. And that started as an innovation thing back
Speaker 1: in the nineteen sixties by Hommer Johnes. So it's great
Speaker 1: to honor his memory. Okay, Well, one of your areas
Speaker 1: of research is housing, the housing market, mortgage rates, how
Speaker 1: it all feeds through the economy. And given what's going
Speaker 1: on in the US housing market, I want to start
Speaker 1: with that. Uh, particularly this this turn in the housing
Speaker 1: market three on the thirty year fixed roughly up to
Speaker 1: about seven percent. It feels like it happened in a
Speaker 1: matter of weeks. It hit the market so hard. When
Speaker 1: have mortgage rates done this in the past. Is this
Speaker 1: almost unprecedented? Are we seen something like this? Well, we
Speaker 1: had hybrid is raised in the past, you don't have
Speaker 1: to go that far. In nearly two thousands and even
Speaker 1: in the late nineties we had mortgage rates at digit level.
Speaker 1: But such a rapid turn in a matter of you know,
Speaker 1: two quarters, it's kind of unprecedented. We had, you know,
Speaker 1: a sizeable increase in the early two thousand and five
Speaker 1: or so, but it has been ratily dramatic. But we
Speaker 1: also had a very rapid increasing inflation in the second
Speaker 1: half of one so we have to be mindful about
Speaker 1: how quick inflation escalated. And I think that's just, you know,
Speaker 1: the appropriate reaction given how quick inflation moved. Sure well,
Speaker 1: And one of the axioms in monetary theory people say
Speaker 1: it over monetary policy has long and variable lags. There
Speaker 1: was not much of a lag between the way progressive
Speaker 1: rate hikes, particularly once the FED picked up the pace,
Speaker 1: and what happened to mortgage rates. Uh As transmission of
Speaker 1: monetary policy in some fundamental way changed, well, I mean,
Speaker 1: this is kind of the same from the nineteen sixties
Speaker 1: and nineteen seventies, and we all understand that the economy
Speaker 1: is very different fifty years later. We have a much
Speaker 1: more developed financial market and credit is a key player.
Speaker 1: So it really transmit to create a sensitive sectors. But
Speaker 1: non created sensitive sectors are also connected to create sensitive sectors.
Speaker 1: And really stated a classical example, when we increase rates more,
Speaker 1: you know, the coastal borrowing goes up, and that reduces
Speaker 1: the demand for housing. The properties usually stay a bit
Speaker 1: longer in the market, and there's a lot of purchases
Speaker 1: that are tied to housing. People that buy a new house,
Speaker 1: they often buy dotable goods and so on and so forth.
Speaker 1: So that really connects the housing sector to the rest
Speaker 1: of the economy. And and so the lacks that would
Speaker 1: argue have been reduced dramatically, and housing is one of
Speaker 1: the sectors that is more interconnected to the rest of
Speaker 1: the economy, not only in terms of the value added,
Speaker 1: but also in terms of employment. Employment growth in the
Speaker 1: construction sector also leads employing growth in other sectors in
Speaker 1: the economy. And that's what we see from looking at
Speaker 1: deep without put table, and it's very different now than
Speaker 1: it was, you know, about fifty years ago, so we
Speaker 1: have to be mindful about that. So being mindful about
Speaker 1: how it's changed, What does that mean for the economy,
Speaker 1: What does it mean for UH monetary policy? And I
Speaker 1: mean central banks broadley. This is just ant happening in
Speaker 1: in the US with the FED, It's happening with other
Speaker 1: central banks around the world. It's certainly not unique to
Speaker 1: the US. And housing markets in essence are similar, but
Speaker 1: financing markets for housing are very different across countries. We
Speaker 1: have across the border Canada that has a very different
Speaker 1: housing finance market, and we see that throughout Europe. So
Speaker 1: that really changed the transmission mechan is, and that's a
Speaker 1: key feature of how you know, financial markets are connected
Speaker 1: with the real economy, and we have to be mindful
Speaker 1: about how that change the transmission mechan is in terms
Speaker 1: of the size but also in terms of the speed.
Speaker 1: A lot of countries now are seeing their hormoners facing
Speaker 1: sizeable research, whereas in this country the majority of hormoners
Speaker 1: have fixed laans. So in some sense inflation is really
Speaker 1: the fleeting the real value their aim, and so transmission
Speaker 1: is going to be very very different, and we went
Speaker 1: through a massive refinance emperiod in the last couple of years,
Speaker 1: so there's a lot of you know, disposable income in
Speaker 1: the part of the households. And what about mortgage debt
Speaker 1: and what's difference now from the nineteen seventies, Well, the
Speaker 1: shadow mortgage they're relative to disposable income in the nineties
Speaker 1: seventies eighties was substantially lower than what we have right
Speaker 1: now and now it's what before it was roughly about
Speaker 1: fifty So that's just a big change in terms of
Speaker 1: the volume and also in the composition. In the late
Speaker 1: seventies early eighties, that was when the baby generation was
Speaker 1: entered in the housing market, so we were expecting a
Speaker 1: big increase in real estate prices. That didn't happen because
Speaker 1: of the high inflation. Now we have those households and
Speaker 1: the tailing of the life cycle and they're in a
Speaker 1: very different position. And now we have the millenniums getting
Speaker 1: into the market. Plus the COVID chock really changed a
Speaker 1: whole lot of things. So how does that feed through
Speaker 1: now when this central bank, the FED is racing rates
Speaker 1: rapidly in bigger steps? Is there some risk there with
Speaker 1: mortgage debt and debt holders, there's no immediate risk or
Speaker 1: on mortgage debt like what we signed two thousand or seven,
Speaker 1: what we would expect would be as low adjudgtment correction
Speaker 1: in the housing market, price adjustment downward. We would see
Speaker 1: we're already seeing in some areas inventory building up. But
Speaker 1: we had inventory levels that were a normally low the
Speaker 1: average historical value somewhere between six to eight months, and
Speaker 1: we had inventory levels down to two months. So what
Speaker 1: we would expect, just like what we see in vacancy,
Speaker 1: is it's just an adjustment of correction to more normal levels. Now,
Speaker 1: it could be the case that we're in a new
Speaker 1: norm and may be a bit different from what we
Speaker 1: see historically, but we're too far from those levels. So
Speaker 1: another trend in the last few years has been private
Speaker 1: investors buying up lots of a real estate and not
Speaker 1: just multiple family dwellings but single family homes. Uh where
Speaker 1: does that stand now? And what does that mean for
Speaker 1: home affordability? Because there you can find individuals at oh
Speaker 1: I couldn't buy the house for what two hundred fifty
Speaker 1: seven thousand dollars that I thought I could. Now those
Speaker 1: prices are over four hundred thousand because there's so much
Speaker 1: demand from private investors. What we're gonna see now is
Speaker 1: to what extends some of the trend that really started
Speaker 1: to pick up in two thousand nine two thousand eleven,
Speaker 1: in which you know, investors moved from equity about market
Speaker 1: into real estate market could be reversed. These investors, they
Speaker 1: provide a fair amount of liquidity across the U. S landscape,
Speaker 1: not only in the big cities and vacation in areas,
Speaker 1: but throughout looking for yields. And what we're finding is
Speaker 1: that now it could be a perfect opportunity for them
Speaker 1: to kind of cash out the capital games that they
Speaker 1: have a crew pretty much in the last decade. If
Speaker 1: you bought in two thousand and twelve and you have,
Speaker 1: you know, had substantial cashuals coming out of certain properties
Speaker 1: because you were listening them out, now may be a
Speaker 1: good opportunity for you to kind of liquidate that investment
Speaker 1: position and move to other markets. And that might be
Speaker 1: a trend that we may see and that should help
Speaker 1: to mitigate the affordability crisis. If you bought in two
Speaker 1: thousand and twelve, you have plenty of it within the property.
Speaker 1: So even if you see a market correction where prices
Speaker 1: decline you used to on a pretty good territory, and
Speaker 1: I would assume not not the hugest part of the
Speaker 1: business landscape, but in terms of the profitability or how
Speaker 1: strong they are fundamental, because there's a lot of concerns
Speaker 1: now about debt that the companies are holding. Uh, it
Speaker 1: seems that if they if they bought low and are
Speaker 1: selling high, they're in a position now they should be
Speaker 1: I would expect. So, I mean, I'm not concerned about
Speaker 1: that positions at this point. As we were in two
Speaker 1: thousand and five to two thou seven, that was more
Speaker 1: of a concern. We had abundant supply coming to the
Speaker 1: market at a period where you know, inventory was spilling
Speaker 1: up and prices were decreasing and incomes were at risk.
Speaker 1: Whatevery different situation with the current lebal market. We're still
Speaker 1: a lot of mobility. Is a very strong leberal market,
Speaker 1: one of the ones, the strongest one that we have
Speaker 1: seen in the last three decades. So that concern coming
Speaker 1: from the leberal market that ultimately funds those mortgage payments
Speaker 1: does not seem to be there right now, at least
Speaker 1: what we can see the near term and the households
Speaker 1: have plenty of equity and pretty much everybody had to
Speaker 1: refinance the refinance in the last couple of years to
Speaker 1: putty a little mortgage rates. So final question, if Homer
Speaker 1: Jones were here, and he would we're advising you on
Speaker 1: your your next project when it comes to housing mortgages.
Speaker 1: This area of the economy US globally is become so important.
Speaker 1: What would he be advising you to look at? I mean,
Speaker 1: that's an excellent question. I guess that the challenge going
Speaker 1: forward is going to be internationalist billovers. How economy is
Speaker 1: bouncing back from this COVID pandemic, plus the underlying structural
Speaker 1: the changes are going on in the economy is going
Speaker 1: to shape everything. We're seeing geo political changes and everything
Speaker 1: kind of feeds into everything, and that's going to pose
Speaker 1: interesting challenges. But we do know that, you know, the U.
Speaker 1: S economy is one of the strongest one globally, and
Speaker 1: we're seeing that with this frank of the dollar. When
Speaker 1: things are uncertain, the dollar picks up a lot of
Speaker 1: the strengths. I would say that we would still maintain
Speaker 1: that position and and that's kind of good news for us.
Speaker 1: All Right, Well, Karlov Karriga, thank you so much for
Speaker 1: joining us today here at the Federatory Bank of St.
Speaker 1: Louis on this very important Homer Jones Memorial Lecture day.
Speaker 1: And plus they're always happy to have you equal all right,
Speaker 1: Paula Matta, having a great time starting the day off
Speaker 1: with a very interesting conversation, and the course will be
Speaker 1: continuing throughout the day. I'm very happy to welcome to
Speaker 1: Bloomberg rade you at the Federal Bank of St. Louis
Speaker 1: on this very important day when they honor one of
Speaker 1: the top economists in the country with the Homer Jones
Speaker 1: Memorial Award and he gives a lecture. Sar prasade As
Speaker 1: he said, professor of Cornell University, Senior Fellow of Brookings
Speaker 1: and the author of another new book, The Future of Money,
Speaker 1: How Digital transfer revolution is transforming currencies and finance. On
Speaker 1: a busy day for you, Glad you could find the
Speaker 1: time as well. It's a pleasure, Kathleen. So you've written papers,
Speaker 1: two books about the dollar, its role in the world.
Speaker 1: What drew you to cryptocurrencies and all the changes it's
Speaker 1: it's doing and actually signaling, You know, I hang out
Speaker 1: with central bankers a lot and a few years ago,
Speaker 1: questions started arising about what the digital revolution might mean
Speaker 1: for banking financing, particularly for central banks. So my plan
Speaker 1: was to think about central bank digital currencies CBDCs and
Speaker 1: what role they might play in in finance. But it
Speaker 1: quickly became apparent to me that one needed to think
Speaker 1: about basic developments taking place in financial markets as a
Speaker 1: result of technology, which goes under the term fintech. Then
Speaker 1: to think about cryptocurrencies and what they might mean for finance,
Speaker 1: and then central bank digital currencies and what it might
Speaker 1: all mean for the structure of financial markets and institutions,
Speaker 1: central banking, and indeed the international monetary system, which is
Speaker 1: why what was meant to be a slim little volume
Speaker 1: turned into a five page tom I want to jump
Speaker 1: into that, but I just have to ask you quickly.
Speaker 1: Were you a little bit horror fight as you saw
Speaker 1: bitcoin shooting up as high as a cart falling back down,
Speaker 1: knowing that a lot of small investors who maybe have
Speaker 1: invested much for getting swept along and maybe a not
Speaker 1: so good way into this cryptocurrency world. You know, Kathleen,
Speaker 1: one of the great joys in writing this book was
Speaker 1: learning about the technology underlying bitcoin, and it's a phenomenal
Speaker 1: technology if you think about what bitcoin is trying to accomplish,
Speaker 1: being able to conduct transactions without using a trusted intermediary,
Speaker 1: without even revealing a digital identity, actual identity, and just
Speaker 1: using a digital identity, it's phenomenal. But bitcoin was meant
Speaker 1: to be a medium of exchange. Instead it's become a
Speaker 1: speculative financial asset, and as you've pointed out, many people
Speaker 1: seem to have gotten taken in by the razzle dazzle
Speaker 1: of the new technology, don't understand what risks they're taking on.
Speaker 1: And if you're a wealthy investor willing to take a
Speaker 1: roll of the dice, it's one thing. If you're an
Speaker 1: unsophisticated investor putting a lot of your life savings on
Speaker 1: the line, that is a buddying proposition. And certainly the
Speaker 1: bitcoin price alatility has given us a lot to worry about. Well.
Speaker 1: Central banks concerned about financial stability of decentralized payment systems
Speaker 1: UH stable coins and how they can displace cash, you know,
Speaker 1: traditional systems. At the same time, they're moving very slowly, carefully,
Speaker 1: i might even say reluctantly to develop CBDC central bank
Speaker 1: Digital coins. Yeah, I think all central banks rightly think
Speaker 1: about the dangers of stepping in where the private sector
Speaker 1: could provide services equally well. And there is clearly a
Speaker 1: need for better payment systems, both domestically between consumers, between
Speaker 1: consumers and businesses between businesses, and also the international level
Speaker 1: where there are huge frictions in terms of payments. So
Speaker 1: when you think about cryptocurrencies like stable coins, they're trying
Speaker 1: to meet a real need. And of course, in many
Speaker 1: developing countries and advanced economies around the world, the private
Speaker 1: sector is doing a great job of providing low cost,
Speaker 1: easy access digital payments. So the question is what is
Speaker 1: the value proposition for a CBDC, And I think central
Speaker 1: banks are rightly concerned that it could lead to some
Speaker 1: risks of financial instability, disintermediation, the banking system, perhaps private
Speaker 1: sector innovation in terms of payments being limited, so they're
Speaker 1: treading very cautiously. But one thing that's clear is that
Speaker 1: we definitely need better payment systems because after all, that's
Speaker 1: the key lubricant of any market economy, and if it
Speaker 1: doesn't work well and efficiently, there are things that could
Speaker 1: be improved. So how big is the threat of these
Speaker 1: digital payment systems to commercial banks. From the beginning, it's
Speaker 1: been Oh, if people don't put their deposits in JP
Speaker 1: Morgan and Bangup America and other places, that's going to
Speaker 1: be a problem. So stable coins are an interesting element
Speaker 1: of this discussion, and of course they could post a
Speaker 1: threat to banks if they become seen as a deposit
Speaker 1: taking institutions. Now, the interesting irony of stable coins, of course,
Speaker 1: is that they completely wciate what Bitcoin was supposed to accomplish,
Speaker 1: which is a departure from the dependence on fiard currencies.
Speaker 1: Stable coins get their stable value precisely by being backed
Speaker 1: up by stores of fiat currencies, but many stable coin
Speaker 1: issuers do provide interstrates, and there is a concern that
Speaker 1: if people see stable coins as being more functional in
Speaker 1: terms of payment mechanisms and perhaps even offering higher interstrates
Speaker 1: and bank deposits, then you could get a disintermediation of
Speaker 1: the banking system. You could also have instability in the
Speaker 1: financial system coming from stable coins themselves. That risk, I
Speaker 1: think is somewhat mitigated by the fact that stable coins
Speaker 1: need to be backed up one to one, so they
Speaker 1: didn't affect narrow banks. It's not a huge threat but
Speaker 1: there are other risks of the financial system we need
Speaker 1: to worry about. You know, it's interesting because we look
Speaker 1: at emerging markets, developing economies and all the advantages they
Speaker 1: could get from these digital payment systems, stable coins, etcetera.
Speaker 1: But you see some risks I don't know. I everybody
Speaker 1: thinks about two emerging markets in this transition. You know,
Speaker 1: a friction free international payments are a wonderful thing for
Speaker 1: economic migrants send remittances back to their home countries for
Speaker 1: small and mediumental prices, trying to access global pools of capital,
Speaker 1: for investors looking for international portfolio diversification opportunities. But you
Speaker 1: could have digital versions of the dollar of their in
Speaker 1: min b being easily available in the future. You could
Speaker 1: even have stable coins issued by major corporations UM such
Speaker 1: as Amazon and perhaps one day Meta will provive with
Speaker 1: stable coin project. These currencies, either private or official, might
Speaker 1: be trusted more than the currencies issued by non credible
Speaker 1: central banks UM in small open economies. So there is
Speaker 1: an existential threat I think to some of these smaller currencies,
Speaker 1: especially currencies and economies that are mismanaged or where the
Speaker 1: central banks are not credible, so there's their currency could
Speaker 1: get tanked. That's right, You could bear a real shakeout
Speaker 1: because everybody in the country might decide that it's easier
Speaker 1: to trust the currency issued by one of the major
Speaker 1: economies or even one of the major corporations, because they
Speaker 1: have deeper pockets and are more trustworthy than the domestic
Speaker 1: central banks. So this could be a problem and dollar dominance,
Speaker 1: I think maybe are some people are sort of hoping
Speaker 1: that also push the dollar back a bit and their
Speaker 1: currencies can rise, and that's going to happen. What do
Speaker 1: you think that is the great hope that perhaps digital
Speaker 1: technologies will provide a way to displace a dollar in
Speaker 1: this medium of exchange or store of value function. Perhaps
Speaker 1: if the digital uan were to be easily available, you
Speaker 1: could see it getting a little more traction and international payments.
Speaker 1: But the reality is that people are not going to
Speaker 1: trust the currency just because it's available in digital form.
Speaker 1: They care about what lies behind the currency, you know,
Speaker 1: deep and liquid financial markets, but more importantly, what is
Speaker 1: necessary to engender the trust of foreign investors and domestic investors.
Speaker 1: There is an institutional system such as an independent central
Speaker 1: bank and a system of checks and balances. All of
Speaker 1: these are really important to inspire the trust of foreign investors.
Speaker 1: I don't think there is any other economy um that
Speaker 1: has the financial and economic might the US does and
Speaker 1: is also backed up by an institutional framework of this sort.
Speaker 1: So I don't think the dollar is going to be
Speaker 1: significantly threatened anytime soon. Getting outside the crypto around for
Speaker 1: a minute, Uh, strong dollar getting stronger all the time.
Speaker 1: I am a World Bank meetings last week. It's a concern.
Speaker 1: They say, go ahead, keep doing those rate hikes. But
Speaker 1: what kind of risk do you see? What are your
Speaker 1: concerns about this dollar that continues to strengthen. What it
Speaker 1: means for the rest of the world. Well, it's a
Speaker 1: sign of two things. One is that the US economy
Speaker 1: has slightly better prospects, even though not great prospects, relative
Speaker 1: to the rest of the world. And there is a
Speaker 1: desire for safety. Right now. There is a great deal
Speaker 1: of financial and economic termoil around the world, and people
Speaker 1: still look to the U. S Dollar for safety. So
Speaker 1: this is a bit of a paradox because a strong
Speaker 1: dollar helps the U S a little bit of the
Speaker 1: margin it makes important goes a little cheaper here, but
Speaker 1: the positive effect is not that large. But for countries
Speaker 1: around the world whose currency is are depreciating against a dollar,
Speaker 1: it means more domestic in lationary pressures because lots of
Speaker 1: international trade is still priced in dollars, so the prices
Speaker 1: and domestic currencies of those goods go up. The cost
Speaker 1: of financing debt um that is UH and servicing debt
Speaker 1: that has been denominated in dollars is very high. So
Speaker 1: for the rest of the world it's a huge negative.
Speaker 1: So this asymmetry is a real problem for the world economy.
Speaker 1: But right now there doesn't seem to be any easy
Speaker 1: way out of it because the FED has to do
Speaker 1: what it needs to do because otherwise we could get
Speaker 1: higher rate hikes and even more economic pain down the road. Now, you,
Speaker 1: as represent are giving the Homo Jones Memorial lecture today
Speaker 1: quite an honor. Is there some point you're making in
Speaker 1: that lecture You can't tell us exactly what you're saying
Speaker 1: that that we would likely like to leave us with today.
Speaker 1: I think it's going to be an interesting era of
Speaker 1: competition in various forms of money um as we just discussed.
Speaker 1: I think that is going to be competition between privately
Speaker 1: issued moneies and central bank FIAT currencies in the medium
Speaker 1: of exchange function even at the international and I can
Speaker 1: see digital versions of some currencies beginning to, uh, you know,
Speaker 1: at least compete with the dollar more effectively. So a
Speaker 1: lot more interesting currency competition, and as an economist, I
Speaker 1: think competition is a good thing, all right. Thank you
Speaker 1: for joining us. Professor at Colonel University, senior fellow at
Speaker 1: the Brookings Institute, and the author of a new book,
Speaker 1: The Future of Money, How the Digital Revolution is transforming
Speaker 1: Currencies and Finance. Thank you for joining us today here
Speaker 1: at the St. Louis fed on Bloomberg Radio. It's been
Speaker 1: my pleasure. Kathleen