1 00:00:00,800 --> 00:00:04,800 Speaker 1: This is Bloomberg Wall Street Week with David Weston from 2 00:00:04,960 --> 00:00:08,800 Speaker 1: Bloomberg Radio. This is a Bloomberg Wall Street Week roundtable 3 00:00:08,840 --> 00:00:11,880 Speaker 1: discussion of what happened to our banks. I'm David Weston, 4 00:00:12,080 --> 00:00:14,080 Speaker 1: and I'm delighted to say I am joined our special 5 00:00:14,080 --> 00:00:17,360 Speaker 1: Wall Street Week contributor and former treasure Secretary Larry Summers, 6 00:00:17,400 --> 00:00:22,080 Speaker 1: also of former Fed Governor Dan Trulo, and Stephanie Flanders, 7 00:00:22,079 --> 00:00:26,040 Speaker 1: our very own senior executive editor for Economics and Government. 8 00:00:26,120 --> 00:00:28,520 Speaker 1: So thank you all for joining us. Really appreciate it. 9 00:00:28,880 --> 00:00:30,240 Speaker 1: There's a lot that's gone on in the banks in 10 00:00:30,240 --> 00:00:31,920 Speaker 1: the last two weeks. We heard it from j Powe, 11 00:00:31,960 --> 00:00:34,880 Speaker 1: the Sheriff FED yesterday, So let's talk about exactly what happened. 12 00:00:34,880 --> 00:00:36,879 Speaker 1: I want to start with you, Dan. You were a 13 00:00:36,880 --> 00:00:40,000 Speaker 1: colleague for several years of J. Powell. During the time 14 00:00:40,040 --> 00:00:43,120 Speaker 1: you were on the Fed, you had responsibility for banks supervision. 15 00:00:43,479 --> 00:00:45,680 Speaker 1: We've been told the banks were so strong we didn't 16 00:00:45,680 --> 00:00:48,680 Speaker 1: have to worry about it. Were we misled what happened here? 17 00:00:48,720 --> 00:00:51,560 Speaker 1: We didn't think we still had banking problems. Well, I 18 00:00:52,320 --> 00:00:56,840 Speaker 1: trust that the largest banks truly are in the much 19 00:00:56,880 --> 00:01:00,120 Speaker 1: better capital and liquidity position that Jay Powell referred or 20 00:01:00,120 --> 00:01:04,480 Speaker 1: two yesterday during the press conference. We don't, David obviously 21 00:01:04,600 --> 00:01:07,000 Speaker 1: know yet the whole story, but I think there are 22 00:01:07,000 --> 00:01:09,920 Speaker 1: some things that we do know. We know first that 23 00:01:09,959 --> 00:01:15,440 Speaker 1: there was a significant supervisory failure somewhere along the way. 24 00:01:16,160 --> 00:01:21,440 Speaker 1: Was that failure in the San Francisco Fed's inability to 25 00:01:21,560 --> 00:01:25,959 Speaker 1: identify problems of growth and maturity mismatches and the like 26 00:01:26,280 --> 00:01:29,880 Speaker 1: early on. Was it the failure of the second San 27 00:01:29,880 --> 00:01:33,720 Speaker 1: Francisco FED team, to which did identify some problems to 28 00:01:33,840 --> 00:01:37,399 Speaker 1: follow up in a sufficiently robust way. Was it a 29 00:01:37,440 --> 00:01:41,280 Speaker 1: supervisory failure because of the light touch approach to supervision 30 00:01:41,400 --> 00:01:44,640 Speaker 1: that the Federal Reserve Board had put in place over 31 00:01:44,680 --> 00:01:47,720 Speaker 1: the last four or five years. Or was it a 32 00:01:47,760 --> 00:01:53,560 Speaker 1: supervisory failure because the supervisors generally had not adjusted their 33 00:01:53,680 --> 00:01:59,000 Speaker 1: method of assessing liquidity to take account of very high 34 00:01:59,240 --> 00:02:05,680 Speaker 1: uninsured concentrations coexisting with the capacity of big depositors to 35 00:02:05,880 --> 00:02:09,200 Speaker 1: run at warp speed rather than the way they used 36 00:02:09,240 --> 00:02:13,680 Speaker 1: to run. Those are not mutually exclusive explanations, and I 37 00:02:13,760 --> 00:02:17,560 Speaker 1: also would not rule out a contributing factor being the 38 00:02:17,680 --> 00:02:21,840 Speaker 1: twenty eighteen legislation in twenty nineteen FED regulation, both of 39 00:02:21,880 --> 00:02:27,519 Speaker 1: which deregulated banks of under seven hundred or the regulation 40 00:02:27,720 --> 00:02:30,720 Speaker 1: banks of under seven hundred billion dollars in assets, the 41 00:02:30,880 --> 00:02:33,920 Speaker 1: legislation banks of under two hundred and fifty. But I 42 00:02:33,960 --> 00:02:38,640 Speaker 1: think in the most immediate sense this is clearly a 43 00:02:38,680 --> 00:02:43,839 Speaker 1: supervisory failure. Other factors may be uncovered as the FED 44 00:02:43,919 --> 00:02:46,880 Speaker 1: Zone investigation proceeds. Dan, do we have a sense of 45 00:02:46,919 --> 00:02:48,560 Speaker 1: how big the breadbox is? If I can put it 46 00:02:48,600 --> 00:02:51,760 Speaker 1: that way? What is the likelihood disc could spread to 47 00:02:51,840 --> 00:02:54,240 Speaker 1: other parts of the financial system. We heard a chair 48 00:02:54,320 --> 00:02:57,320 Speaker 1: Pile yesterday saying that silicon value back was an outlier. Dan, 49 00:02:57,360 --> 00:03:00,400 Speaker 1: how do we know it's an outlier? I owed, that's 50 00:03:00,440 --> 00:03:04,359 Speaker 1: a good question, David, And you know your correspond and 51 00:03:04,400 --> 00:03:08,240 Speaker 1: Bloomberg correspond and Katarina Sareva asked a really good question. 52 00:03:08,280 --> 00:03:10,960 Speaker 1: In the press conference yesterday. She looked back at the 53 00:03:11,000 --> 00:03:15,480 Speaker 1: notes from the January thirty, first February first FOMC meeting 54 00:03:15,840 --> 00:03:18,960 Speaker 1: and noted that there had been a discussion of the 55 00:03:19,000 --> 00:03:23,160 Speaker 1: potential financial stability implications of the rapid rise and interest 56 00:03:23,240 --> 00:03:25,880 Speaker 1: rates which the FED is engineered over the last year, 57 00:03:26,360 --> 00:03:30,360 Speaker 1: and she pointed to some specific areas of concern which 58 00:03:30,400 --> 00:03:35,160 Speaker 1: the FOEMC had identified, one being runs on non bank 59 00:03:35,200 --> 00:03:39,240 Speaker 1: institutions a little bit ironic in retrospect, but also the 60 00:03:39,280 --> 00:03:44,080 Speaker 1: position of banks with large portfolios of treasuries that had 61 00:03:44,160 --> 00:03:47,400 Speaker 1: not been marked to market but had lost value obviously 62 00:03:47,440 --> 00:03:51,280 Speaker 1: because of the interest rate increases. And she asked the 63 00:03:51,400 --> 00:03:53,680 Speaker 1: chair for a little bit of an explanation of what 64 00:03:53,720 --> 00:03:56,400 Speaker 1: that discussion had been, and he was unable to give 65 00:03:56,440 --> 00:03:59,200 Speaker 1: it to her. For me, it raises the question of 66 00:03:59,360 --> 00:04:04,600 Speaker 1: whether they were monitoring just those kinds of issues throughout 67 00:04:04,680 --> 00:04:08,160 Speaker 1: last year as they were increasing rates. I mean, you 68 00:04:08,200 --> 00:04:11,520 Speaker 1: would think that interest rate risk would have jumped to 69 00:04:11,560 --> 00:04:15,720 Speaker 1: the top of the supervisory heap, and that the FOMC 70 00:04:15,920 --> 00:04:19,960 Speaker 1: would have been getting reports on the impact of the 71 00:04:20,000 --> 00:04:24,640 Speaker 1: interest rate increases on deposits, deposit flows, holdings of securities, 72 00:04:24,760 --> 00:04:27,560 Speaker 1: especially those that are not marked to market. So I 73 00:04:27,560 --> 00:04:30,400 Speaker 1: think as a backward looking matter, it will be interesting 74 00:04:30,400 --> 00:04:34,520 Speaker 1: to find that out. As a forward looking matter, has 75 00:04:34,600 --> 00:04:38,760 Speaker 1: the FED in since a week ago Friday, done the 76 00:04:38,880 --> 00:04:42,440 Speaker 1: kind of assessment to be able to tell Jay Powell 77 00:04:42,839 --> 00:04:45,400 Speaker 1: you can go out and say that it's an outlier 78 00:04:45,440 --> 00:04:48,320 Speaker 1: in the banking system is safe. He didn't indicate that 79 00:04:48,360 --> 00:04:51,479 Speaker 1: any such assessment had been done. Perhaps it has, Perhaps 80 00:04:51,480 --> 00:04:54,080 Speaker 1: it hasn't. Maybe Vice Chair bar we'll talk about it 81 00:04:54,160 --> 00:04:58,359 Speaker 1: next week for Congress, But right now our basis for 82 00:05:00,000 --> 00:05:03,600 Speaker 1: evaluating his statement is kind of limited. So Larry, let's 83 00:05:03,640 --> 00:05:05,440 Speaker 1: put you back at the Treasury, or for that matter, 84 00:05:05,560 --> 00:05:08,080 Speaker 1: at the White House. If you were looking at this situation, 85 00:05:08,200 --> 00:05:10,880 Speaker 1: what questions would you be asking to make sure you 86 00:05:11,000 --> 00:05:14,080 Speaker 1: understood the possible ramifications of what we've seen so far 87 00:05:14,320 --> 00:05:17,919 Speaker 1: in a broader financial context. Before I answered, Before I 88 00:05:17,960 --> 00:05:22,640 Speaker 1: answer that hypothetical, let me put a question to my 89 00:05:22,760 --> 00:05:26,360 Speaker 1: friend Dan, who I'll just say I think did an 90 00:05:26,480 --> 00:05:31,360 Speaker 1: enormous amount to strengthen our financial system during his time 91 00:05:31,560 --> 00:05:36,600 Speaker 1: at the FED. Dan, I've heard it said, and I 92 00:05:36,640 --> 00:05:42,000 Speaker 1: don't know that. Even in twenty twenty two, the FED 93 00:05:42,240 --> 00:05:47,920 Speaker 1: stress tests that were applied to the largest banks did 94 00:05:47,960 --> 00:05:53,120 Speaker 1: not include an analysis of the stress from a major 95 00:05:53,120 --> 00:05:58,159 Speaker 1: interst rate height. If that's true, that seems kind of 96 00:05:58,240 --> 00:06:01,240 Speaker 1: bizarre from the point of view of the world of 97 00:06:01,320 --> 00:06:07,000 Speaker 1: early twenty twenty two, when it certainly many people, certainly 98 00:06:07,040 --> 00:06:14,440 Speaker 1: me on David's show, were emphasizing that there was likely 99 00:06:14,520 --> 00:06:18,080 Speaker 1: to need to be very substantial increases in interest rates. 100 00:06:18,720 --> 00:06:22,320 Speaker 1: Can you say something and if the stress tests weren't 101 00:06:22,360 --> 00:06:28,200 Speaker 1: considering increases in interest rates, then perhaps the exempting of 102 00:06:28,440 --> 00:06:32,800 Speaker 1: Silicon Valley Bank from the stress tests was not central 103 00:06:32,960 --> 00:06:37,440 Speaker 1: to understanding the problem. Can you say something about interest 104 00:06:37,560 --> 00:06:43,359 Speaker 1: rate hikes and FED stress tests? Sure? So? First off, 105 00:06:43,839 --> 00:06:48,000 Speaker 1: I think Larry, I agree with the statement you made 106 00:06:48,000 --> 00:06:51,440 Speaker 1: toward the end of your question, which is, actually, if 107 00:06:51,480 --> 00:06:54,839 Speaker 1: Silicon Valley had been in last year's stress test for 108 00:06:54,960 --> 00:06:58,320 Speaker 1: real rather than its stress rehearsal, I don't think it 109 00:06:58,360 --> 00:07:01,400 Speaker 1: would have made much difference sisily the reason you say 110 00:07:01,440 --> 00:07:04,760 Speaker 1: that they weren't stressing the things that were the SVB 111 00:07:04,960 --> 00:07:09,560 Speaker 1: vulnerabilities with respect to stress testing generally, over again, over 112 00:07:09,600 --> 00:07:13,000 Speaker 1: the last five or six years, the stress test has 113 00:07:13,040 --> 00:07:17,960 Speaker 1: become eminently predictable. The scenario that's used is now a 114 00:07:18,040 --> 00:07:21,640 Speaker 1: single scenario, which is essentially a variant on the very 115 00:07:21,680 --> 00:07:24,240 Speaker 1: first one we put in some years ago. That is 116 00:07:24,280 --> 00:07:29,800 Speaker 1: a severe, quite severe recession, but it follows the basic 117 00:07:29,880 --> 00:07:33,040 Speaker 1: pattern of the scenario that was developed when we began 118 00:07:33,240 --> 00:07:39,800 Speaker 1: doing the annual stress test. The scenario, of course includes 119 00:07:39,840 --> 00:07:44,200 Speaker 1: a reduction in interest rates because of the hypothesis of 120 00:07:44,240 --> 00:07:48,800 Speaker 1: a recession and the Fed's reaction. When I was at 121 00:07:48,800 --> 00:07:52,760 Speaker 1: the FED, we were using also an alternative scenario. It's 122 00:07:52,840 --> 00:07:56,760 Speaker 1: called the adverse rather than severely adverse scenario, and we 123 00:07:56,960 --> 00:08:02,080 Speaker 1: use that scenario to test things than the prototype of 124 00:08:02,120 --> 00:08:05,520 Speaker 1: the severe recession. And indeed we used it at least 125 00:08:05,520 --> 00:08:07,880 Speaker 1: one year, and I think a couple of years, to 126 00:08:07,920 --> 00:08:11,720 Speaker 1: test what would happen with unusual changes and interest rates 127 00:08:11,960 --> 00:08:15,560 Speaker 1: which were not then anticipated. So to some degree, the 128 00:08:15,600 --> 00:08:20,760 Speaker 1: answer to your question is like supervision. Generally, the stress 129 00:08:20,800 --> 00:08:25,440 Speaker 1: test has become less rigorous over time, and I think 130 00:08:25,680 --> 00:08:29,920 Speaker 1: more importantly, it's become too predictable. And the whole purpose 131 00:08:29,920 --> 00:08:32,480 Speaker 1: of a stress test is that you're trying to stress 132 00:08:32,520 --> 00:08:36,680 Speaker 1: against the unanticipated, not the anticipated. At the risk of 133 00:08:36,800 --> 00:08:42,040 Speaker 1: preps being too tough on your former colleagues at the FED, 134 00:08:42,200 --> 00:08:46,560 Speaker 1: you talk about predictable versus unpredictable. I would argue that 135 00:08:46,600 --> 00:08:51,200 Speaker 1: at a very minimum, the stress tests ought to consider 136 00:08:52,040 --> 00:08:55,720 Speaker 1: what is the major risk of their moment. When you 137 00:08:55,760 --> 00:08:59,079 Speaker 1: were at the FED DAN in that period, I think 138 00:08:59,120 --> 00:09:02,959 Speaker 1: it was reasonable to think that the major risk was 139 00:09:03,600 --> 00:09:07,560 Speaker 1: a tilt towards recession and deflation. But I don't see 140 00:09:07,559 --> 00:09:12,120 Speaker 1: how anybody last spring could have thought that the major 141 00:09:12,200 --> 00:09:17,640 Speaker 1: risk was anything other than a spike in interest rates. 142 00:09:17,720 --> 00:09:22,920 Speaker 1: So a process that didn't consider as a risk seems 143 00:09:22,920 --> 00:09:31,160 Speaker 1: to me to be a profoundly problematic process. Even if 144 00:09:31,200 --> 00:09:34,280 Speaker 1: you were to accept that you were only going to 145 00:09:34,400 --> 00:09:40,280 Speaker 1: look at one scenario and all of that, it seems 146 00:09:40,280 --> 00:09:44,520 Speaker 1: almost like the supervisors were mailing it in if they 147 00:09:44,559 --> 00:09:49,280 Speaker 1: weren't thinking about at a moment when monetary policy was 148 00:09:49,559 --> 00:09:53,120 Speaker 1: turning in a dramatic way towards tightening, and at a 149 00:09:53,200 --> 00:09:56,760 Speaker 1: moment where the FED had just retired the word transitory, 150 00:09:57,360 --> 00:10:02,040 Speaker 1: we're not looking at interest rate. Is there a reasonable 151 00:10:02,120 --> 00:10:08,120 Speaker 1: is there a defense? Well, I would say first, this 152 00:10:08,240 --> 00:10:11,960 Speaker 1: is not by way of defense or certainly not an apologia, 153 00:10:12,120 --> 00:10:16,559 Speaker 1: but just a bit of explanation. It's quite likely that 154 00:10:16,960 --> 00:10:21,560 Speaker 1: the scenario development was taking place in the latter part 155 00:10:21,600 --> 00:10:25,840 Speaker 1: of twenty twenty one if it was going to be 156 00:10:26,040 --> 00:10:29,240 Speaker 1: the twenty twenty two stress test, And of course this 157 00:10:29,320 --> 00:10:32,720 Speaker 1: is the period in which the FOMC was still figuring 158 00:10:32,760 --> 00:10:37,080 Speaker 1: out that the inflation problem was not transitory. But I 159 00:10:37,120 --> 00:10:40,080 Speaker 1: don't want to use that as a kind of exculpation 160 00:10:40,400 --> 00:10:45,400 Speaker 1: of the supervisors. Second thing to say is it's not 161 00:10:46,040 --> 00:10:50,199 Speaker 1: the supervisors, meaning the staff who are making the policy 162 00:10:50,320 --> 00:10:53,160 Speaker 1: decisions as to what kind of stress tests to have 163 00:10:53,320 --> 00:10:56,400 Speaker 1: whether to have multiple scenarios, that's a decision of the 164 00:10:56,440 --> 00:11:01,840 Speaker 1: Board of Governors, and so it rests with them. But 165 00:11:01,920 --> 00:11:06,400 Speaker 1: I agree with the graviment of your remarks, which is 166 00:11:07,360 --> 00:11:11,040 Speaker 1: not to have tried to think about something other than 167 00:11:11,160 --> 00:11:15,280 Speaker 1: the same scenario is a failure of supervision in and 168 00:11:15,320 --> 00:11:17,360 Speaker 1: of itself. Stephane, you've worked at the Treasury in the 169 00:11:17,400 --> 00:11:20,200 Speaker 1: United States. You also have covered financial markets and other 170 00:11:20,520 --> 00:11:22,719 Speaker 1: business issues over in Europe for a good long time. 171 00:11:22,840 --> 00:11:24,840 Speaker 1: One thing we're hearing from both Larry and Dan is 172 00:11:25,160 --> 00:11:27,600 Speaker 1: rates were going up, and there weren't just going up here, 173 00:11:27,600 --> 00:11:30,240 Speaker 1: They're going up over in Europe as well. Was what 174 00:11:30,280 --> 00:11:32,240 Speaker 1: we're seeing aroun now in the banking system. Maybe not 175 00:11:32,280 --> 00:11:34,960 Speaker 1: the specifics of Silicon Valley Bank, but was something like 176 00:11:35,080 --> 00:11:38,160 Speaker 1: that almost inevitable. After we've pumped so much money in 177 00:11:38,240 --> 00:11:40,240 Speaker 1: the system, we start taking it out, there's going to 178 00:11:40,280 --> 00:11:43,000 Speaker 1: be stress, real stress, and there's going to be some failure. Yeah, 179 00:11:43,000 --> 00:11:45,160 Speaker 1: And I wish I was I was closer to you guys, 180 00:11:45,200 --> 00:11:46,600 Speaker 1: because I knew I was going to struggle to get 181 00:11:46,600 --> 00:11:49,160 Speaker 1: a word in with you too. But I think in 182 00:11:49,480 --> 00:11:52,319 Speaker 1: this conversation, I think it is important when we're thinking 183 00:11:52,320 --> 00:11:54,320 Speaker 1: about what the implications are. You know, you have to 184 00:11:54,320 --> 00:11:57,960 Speaker 1: distinguish what is an outlier about not the Silicon Valley Bank, 185 00:11:57,960 --> 00:12:00,719 Speaker 1: but others that have got into trouble in this episode. 186 00:12:01,120 --> 00:12:06,959 Speaker 1: What is fundamentally a regulatory stupidity, you know, a very 187 00:12:07,000 --> 00:12:10,480 Speaker 1: traditional problem the interest rate risk that was just hiding 188 00:12:10,480 --> 00:12:13,920 Speaker 1: in plain sight, and what is a genuinely new issue 189 00:12:14,040 --> 00:12:17,280 Speaker 1: which was not being fully taken into account by anyone 190 00:12:17,320 --> 00:12:19,800 Speaker 1: looking at the risks. And I think when you look 191 00:12:19,840 --> 00:12:21,480 Speaker 1: at something like Silicon Valley Bank, you know clearly it 192 00:12:21,559 --> 00:12:24,360 Speaker 1: was an outlier in the speed with which deposits had 193 00:12:24,360 --> 00:12:29,199 Speaker 1: been built up, in its massive exposure to uninsured deposits 194 00:12:29,200 --> 00:12:32,719 Speaker 1: and reliance on that for funding. I hope it was 195 00:12:32,760 --> 00:12:35,320 Speaker 1: an outlier in not having a chief risk officer for 196 00:12:35,400 --> 00:12:39,200 Speaker 1: nine months, which was an extraordinary state of affairs. Was 197 00:12:39,360 --> 00:12:41,880 Speaker 1: but what was very traditional about this, and as the 198 00:12:41,960 --> 00:12:45,120 Speaker 1: discussion with Larry and Dan is suggesting, was that you know, 199 00:12:45,240 --> 00:12:48,680 Speaker 1: right here was a massive interest rate risk that was 200 00:12:49,000 --> 00:12:50,960 Speaker 1: whether or not it was in the stress test was 201 00:12:51,000 --> 00:12:53,920 Speaker 1: something that central banks should have been thinking very hard about. 202 00:12:54,240 --> 00:12:55,640 Speaker 1: And I think it was sort of striking that we 203 00:12:55,679 --> 00:12:57,880 Speaker 1: had a lot of the debate around this, What are 204 00:12:57,920 --> 00:13:00,080 Speaker 1: the hidden risk. You know, all the conversations that you 205 00:13:00,080 --> 00:13:02,800 Speaker 1: will have had, David, when you ask regulators what's keeping 206 00:13:02,800 --> 00:13:05,080 Speaker 1: you up at night, they would always talk about private equity. 207 00:13:05,120 --> 00:13:08,160 Speaker 1: They'd talk about non bank shadow banking. Has been the 208 00:13:08,160 --> 00:13:11,440 Speaker 1: thing that people were you know, was this worry for 209 00:13:11,480 --> 00:13:13,720 Speaker 1: all these years, and in fact it was the most 210 00:13:13,800 --> 00:13:18,840 Speaker 1: obvious problem sitting on bank balance sheets as a direct 211 00:13:18,880 --> 00:13:21,640 Speaker 1: result of monetary policy actions by central banks that has 212 00:13:21,679 --> 00:13:24,000 Speaker 1: actually caused this issue. I would just say, though one 213 00:13:24,040 --> 00:13:26,600 Speaker 1: of the reasons maybe they weren't looking at that so closely, 214 00:13:26,720 --> 00:13:28,599 Speaker 1: or that I'd be interested to know what Dan and 215 00:13:28,880 --> 00:13:30,760 Speaker 1: Larry think about this. You know, there is an element 216 00:13:30,760 --> 00:13:32,920 Speaker 1: of this which is new, and we see in the 217 00:13:33,040 --> 00:13:37,880 Speaker 1: speed with which deposits left these institutions, and that's the 218 00:13:38,280 --> 00:13:41,600 Speaker 1: non stickiness of those deposits. And I think, you know, 219 00:13:41,640 --> 00:13:43,839 Speaker 1: one of the things that regulators were thinking when they 220 00:13:43,880 --> 00:13:47,400 Speaker 1: looked considered interest rate risk potentially was that there was 221 00:13:47,440 --> 00:13:52,720 Speaker 1: a sort of self hedging mechanism in a bank of 222 00:13:52,800 --> 00:13:55,160 Speaker 1: the fact that deposits would be slow to move if 223 00:13:55,200 --> 00:13:57,680 Speaker 1: they weren't being paid the higher interest rates. That is 224 00:13:57,720 --> 00:14:00,240 Speaker 1: no longer the case, and I think that probably does 225 00:14:00,320 --> 00:14:05,160 Speaker 1: have longer term implications for regulation and potentially longer term 226 00:14:05,160 --> 00:14:08,200 Speaker 1: implications for how much we insure deposits. Yeah, I think 227 00:14:08,240 --> 00:14:11,120 Speaker 1: that's a question for either Larry or Dan. Does our 228 00:14:11,360 --> 00:14:14,080 Speaker 1: entire approach to deposits change given what we've seen in 229 00:14:14,080 --> 00:14:15,640 Speaker 1: the fact is they're not as stick as we thought 230 00:14:15,679 --> 00:14:18,439 Speaker 1: they were. That's what I was alluding to earlier. I'd 231 00:14:18,480 --> 00:14:21,960 Speaker 1: like to have a sense of exactly what the deposit 232 00:14:22,040 --> 00:14:25,800 Speaker 1: profiles of this group of banks is as a whole, 233 00:14:26,240 --> 00:14:31,040 Speaker 1: because in theory, at least, the supervisor should already have 234 00:14:31,120 --> 00:14:36,040 Speaker 1: been distinguishing among different kinds of uninsured deposits, some of 235 00:14:36,080 --> 00:14:40,800 Speaker 1: which I've always been understood to be eminently runnable, others 236 00:14:40,840 --> 00:14:43,640 Speaker 1: of which have thought to were thought to be at 237 00:14:43,720 --> 00:14:49,480 Speaker 1: least somewhat stickier than insured retail deposits. If it turns 238 00:14:49,560 --> 00:14:52,360 Speaker 1: out that those and this is what Stephanie I think 239 00:14:52,480 --> 00:14:58,600 Speaker 1: was suggesting that those middle categories have changed, then you're 240 00:14:58,600 --> 00:15:00,720 Speaker 1: going to need a change in regular lesion, and not 241 00:15:00,760 --> 00:15:06,040 Speaker 1: just in supervision. Larry, let me let mean sort of 242 00:15:06,080 --> 00:15:10,120 Speaker 1: widen the frame a little bit without I agree with 243 00:15:10,160 --> 00:15:15,280 Speaker 1: what Dan said, but I would put it this way. 244 00:15:16,360 --> 00:15:19,880 Speaker 1: We know that the FED staff has a problem with 245 00:15:20,000 --> 00:15:26,200 Speaker 1: discontinuous change. They basically entirely missed the discontinuous change in 246 00:15:26,200 --> 00:15:31,239 Speaker 1: inflation because they stuck with their model and its traditions. 247 00:15:31,960 --> 00:15:35,640 Speaker 1: And I think the broad concern that someone has to 248 00:15:35,680 --> 00:15:40,200 Speaker 1: put is that for the first time ever, we are 249 00:15:40,280 --> 00:15:45,120 Speaker 1: now in a world of highly digital banking, with the 250 00:15:45,160 --> 00:15:49,280 Speaker 1: ability to withdraw funds extremely quickly and with the ability 251 00:15:49,320 --> 00:15:53,280 Speaker 1: to put them somewhere else extremely quickly and easily because 252 00:15:53,320 --> 00:15:58,040 Speaker 1: of digital account opening. So we're in this super digital world, 253 00:15:58,720 --> 00:16:03,120 Speaker 1: and we're in a super digital world with five percent 254 00:16:03,160 --> 00:16:06,800 Speaker 1: interest rates, and we've never been in a high interest rate, 255 00:16:07,000 --> 00:16:12,760 Speaker 1: super digital world before, and large amounts of the economics 256 00:16:12,840 --> 00:16:20,360 Speaker 1: of the banking industry rest on earning substantial interest premiums 257 00:16:20,480 --> 00:16:27,520 Speaker 1: on deposits and whatever the traditional models are of what's 258 00:16:27,640 --> 00:16:31,040 Speaker 1: sticky and what's not. The fact that we've had the 259 00:16:31,080 --> 00:16:36,040 Speaker 1: world's fastest run and the world's biggest run at one 260 00:16:36,080 --> 00:16:39,480 Speaker 1: of at the sixteenth largest bank in the country managed 261 00:16:39,520 --> 00:16:42,800 Speaker 1: to have the biggest bank run in history has to 262 00:16:42,840 --> 00:16:47,640 Speaker 1: teach us that there's a lot of reason to be 263 00:16:47,840 --> 00:16:52,240 Speaker 1: open to a much wider range of possibilities about the 264 00:16:52,360 --> 00:17:00,680 Speaker 1: risks associated with deposits. Then we thought previously, and so 265 00:17:00,760 --> 00:17:03,720 Speaker 1: it seems to me that you asked me earlier what 266 00:17:03,840 --> 00:17:06,600 Speaker 1: I would be thinking about if I was in the 267 00:17:06,680 --> 00:17:10,160 Speaker 1: Treasury Department, and I guess I would be feeling my 268 00:17:10,760 --> 00:17:15,840 Speaker 1: responsibility as the Chair of the Financial Stability Oversight Council 269 00:17:16,600 --> 00:17:20,560 Speaker 1: very strongly at a moment like this, and I'd be 270 00:17:20,600 --> 00:17:25,320 Speaker 1: thinking about making sure that whatever I was saying and doing, 271 00:17:25,880 --> 00:17:34,400 Speaker 1: I was adding to confidence rather than subtracting from confidence 272 00:17:34,440 --> 00:17:37,720 Speaker 1: in the very short run, that if you're in an 273 00:17:37,720 --> 00:17:42,800 Speaker 1: institution and that institution fails, it's gonna be okay for 274 00:17:42,840 --> 00:17:46,080 Speaker 1: you if that happens right now, because if you're not 275 00:17:46,240 --> 00:17:49,800 Speaker 1: sending that signal in a reasonably clear way, you'd ever 276 00:17:49,880 --> 00:17:53,560 Speaker 1: know where the runs are going to start next. I'd 277 00:17:53,600 --> 00:17:59,280 Speaker 1: be thinking about this issue that I just raised of 278 00:18:00,359 --> 00:18:04,119 Speaker 1: the new high interest rate digital world, and I'd be 279 00:18:04,200 --> 00:18:11,639 Speaker 1: thinking about making sure that there was some broader discussion 280 00:18:11,720 --> 00:18:16,960 Speaker 1: of the whole official financial community about these questions of 281 00:18:18,160 --> 00:18:22,960 Speaker 1: stress testing, because I must say, doing stress testing four 282 00:18:23,160 --> 00:18:27,359 Speaker 1: twenty twenty two, even if it was started in twenty 283 00:18:27,480 --> 00:18:34,680 Speaker 1: twenty one, without considering unusual increases in interest rates as 284 00:18:34,720 --> 00:18:40,720 Speaker 1: a stressor, is really very problematic. So I want to 285 00:18:40,720 --> 00:18:43,200 Speaker 1: pick about this speed of digital just for a moment. 286 00:18:43,600 --> 00:18:46,280 Speaker 1: It's been talked about by others as well. Digital's not 287 00:18:46,320 --> 00:18:48,360 Speaker 1: going away, at least not that I can see. It's 288 00:18:48,359 --> 00:18:51,320 Speaker 1: not gonna We can't. We can't regulate digital out of existence. 289 00:18:51,640 --> 00:18:54,720 Speaker 1: Are there other possible rautary responses that I mean, we 290 00:18:54,840 --> 00:18:56,959 Speaker 1: have circuit breakers when it comes to the stock market, right, 291 00:18:57,040 --> 00:18:59,320 Speaker 1: there's too much move too quickly, Stephan, I'll ask you 292 00:18:59,359 --> 00:19:01,640 Speaker 1: the question, is there a prospect of having something that's 293 00:19:01,640 --> 00:19:04,520 Speaker 1: an equivalent of a circuit breaker for deposits? I think, 294 00:19:04,560 --> 00:19:06,040 Speaker 1: I mean, I think there's a whole range of things 295 00:19:06,040 --> 00:19:08,720 Speaker 1: we could get into. I think one could also think about, 296 00:19:08,800 --> 00:19:11,120 Speaker 1: you know, the degree of you know, how we look 297 00:19:11,160 --> 00:19:15,080 Speaker 1: at liquidity ratios and liquidity buffers might have to change 298 00:19:15,200 --> 00:19:17,920 Speaker 1: if you know, there is that lack of there's lack 299 00:19:17,960 --> 00:19:20,720 Speaker 1: of stickiness. If we think that those deposits could go 300 00:19:20,800 --> 00:19:22,840 Speaker 1: much faster, you may even get I mean, a number 301 00:19:22,840 --> 00:19:25,440 Speaker 1: of people have drawn the conclusion, that's quite a leak 302 00:19:25,520 --> 00:19:28,360 Speaker 1: from here, that this is one of the biggest arguments 303 00:19:28,400 --> 00:19:33,560 Speaker 1: for having a central bank digital currency, because then you 304 00:19:33,600 --> 00:19:38,280 Speaker 1: can automatically have a claim on the central bank for 305 00:19:38,280 --> 00:19:41,320 Speaker 1: your deposits and your your you don't face any of 306 00:19:41,359 --> 00:19:43,239 Speaker 1: these issues. It's a big leak from where we are now, 307 00:19:43,240 --> 00:19:46,040 Speaker 1: and it means a fundamental change to to the model 308 00:19:46,080 --> 00:19:47,760 Speaker 1: of banking that we've had. But I think you know 309 00:19:47,880 --> 00:19:49,239 Speaker 1: Larry is right, and that was one of the things 310 00:19:49,359 --> 00:19:51,639 Speaker 1: I was alluding to that it is it's a threat 311 00:19:51,680 --> 00:19:54,280 Speaker 1: to the basic business model of model of banking and 312 00:19:54,320 --> 00:19:57,600 Speaker 1: also to the way we have thought about safety nets 313 00:19:57,720 --> 00:20:01,000 Speaker 1: in this area and how one provides comm David, I 314 00:20:01,040 --> 00:20:05,480 Speaker 1: would just add two things. One, I think we need 315 00:20:05,520 --> 00:20:09,960 Speaker 1: to be careful about the time scale of things. It 316 00:20:10,000 --> 00:20:14,080 Speaker 1: may be that it will be appropriate to fundamentally rethink 317 00:20:14,119 --> 00:20:17,760 Speaker 1: the structure of our financial system, but the worst time 318 00:20:17,840 --> 00:20:20,960 Speaker 1: to do that would be in a six week period 319 00:20:21,440 --> 00:20:24,320 Speaker 1: while the fires were burning, And so we need to 320 00:20:24,400 --> 00:20:27,600 Speaker 1: separate the what are we going to do now tactically 321 00:20:28,200 --> 00:20:32,480 Speaker 1: from the longer run strategic questions. The other thing I'd 322 00:20:32,480 --> 00:20:36,080 Speaker 1: say is that I agree with Stephanie about strengthening liquidity. 323 00:20:36,520 --> 00:20:40,080 Speaker 1: Dan will be very knowledgeable about exactly how you would 324 00:20:40,119 --> 00:20:46,240 Speaker 1: do that, But I would dissent massively from the idea 325 00:20:46,280 --> 00:20:50,080 Speaker 1: of circuit breakers on deposits. If you start saying that 326 00:20:50,119 --> 00:20:53,280 Speaker 1: when certain things happen, then you're no longer going to 327 00:20:53,320 --> 00:20:54,840 Speaker 1: be able to get your money out of the bank. 328 00:20:55,280 --> 00:20:58,479 Speaker 1: What that's going to do is accelerate the run because 329 00:20:58,520 --> 00:21:00,720 Speaker 1: people are gonna want to make sure that they get 330 00:21:00,720 --> 00:21:05,920 Speaker 1: their money out before the circuit breaker comes down. So 331 00:21:06,200 --> 00:21:08,800 Speaker 1: I don't think there's likely to be a circuit breaker 332 00:21:08,960 --> 00:21:12,800 Speaker 1: mechanism that works. And I think there's a lot of 333 00:21:12,840 --> 00:21:17,159 Speaker 1: debate about the merits of the circuit breakers we have 334 00:21:17,560 --> 00:21:20,680 Speaker 1: in equity markets, So that would not be the direction 335 00:21:20,760 --> 00:21:24,719 Speaker 1: I would build. So Dan, let me accept Larry's very 336 00:21:24,760 --> 00:21:26,879 Speaker 1: strong descent from circuit breakers and turn it all the 337 00:21:26,880 --> 00:21:29,399 Speaker 1: way around the other way, and that's guaranteeing deposits across 338 00:21:29,440 --> 00:21:31,920 Speaker 1: the board. We had the Secretary of Treasury, Janet Yell 339 00:21:31,960 --> 00:21:34,040 Speaker 1: And go up to Congress this week and say, you 340 00:21:34,040 --> 00:21:36,600 Speaker 1: know what, we're not really considering seriously just taking all 341 00:21:36,640 --> 00:21:38,680 Speaker 1: the limits off the guarantees. And then she came back 342 00:21:38,680 --> 00:21:40,240 Speaker 1: the next day and say, I have to demand my 343 00:21:40,320 --> 00:21:42,040 Speaker 1: remarks a little bit here, because we're going to do 344 00:21:42,040 --> 00:21:44,239 Speaker 1: what we need to do to back deposits. Are we 345 00:21:44,240 --> 00:21:48,040 Speaker 1: getting a clear message about exactly the security of deposits 346 00:21:47,880 --> 00:21:50,600 Speaker 1: its secured by the federal government. Well, I mean, I 347 00:21:50,880 --> 00:21:53,440 Speaker 1: let people judge for themselves whether the message is clear. 348 00:21:53,480 --> 00:21:56,919 Speaker 1: Here's what I drew from what both Janet Yellen and 349 00:21:57,000 --> 00:21:59,520 Speaker 1: Jay Powell have said over the last forty eight hours. 350 00:22:00,760 --> 00:22:05,680 Speaker 1: They do not have the authority without congressional action to 351 00:22:05,840 --> 00:22:09,720 Speaker 1: ensure the deposits and open banks. What I think they 352 00:22:09,760 --> 00:22:13,600 Speaker 1: have done is effectively to say the following, We do 353 00:22:13,720 --> 00:22:18,560 Speaker 1: have the authority, along with the FDIC to ensure previously 354 00:22:18,640 --> 00:22:22,440 Speaker 1: uninsured deposits in failed banks. And so what we are 355 00:22:22,520 --> 00:22:27,160 Speaker 1: basically telling you is, if a bank fails, we will 356 00:22:27,280 --> 00:22:32,320 Speaker 1: ensure the uninsured deposits. And I take it that that's 357 00:22:32,359 --> 00:22:35,520 Speaker 1: what Jay Powell was really saying yesterday when he said 358 00:22:35,960 --> 00:22:39,040 Speaker 1: all deposits are safe, and when he was asked to 359 00:22:39,080 --> 00:22:42,080 Speaker 1: elaborate on that, he just repeated the talking point. And 360 00:22:42,200 --> 00:22:45,040 Speaker 1: that's when I inferred that this was the message that 361 00:22:45,040 --> 00:22:47,479 Speaker 1: he was trying to give. And if you think about it, 362 00:22:47,520 --> 00:22:51,359 Speaker 1: if that is indeed their position. If you think about it, 363 00:22:51,080 --> 00:22:55,560 Speaker 1: it's essentially the same as ensuring uninsured deposits, because even 364 00:22:55,600 --> 00:22:59,000 Speaker 1: if you said x anti, all these big deposits are insured, 365 00:22:59,400 --> 00:23:02,400 Speaker 1: no one will actually drawn that insurance until the bank 366 00:23:02,400 --> 00:23:05,919 Speaker 1: had failed. So in that sense, it may be the 367 00:23:06,000 --> 00:23:12,359 Speaker 1: equivalent of the ensuring of all deposits in the system, 368 00:23:12,520 --> 00:23:15,840 Speaker 1: except for the fact, of course that it's presumably a 369 00:23:16,359 --> 00:23:19,280 Speaker 1: policy that will not last forever, and when are they 370 00:23:19,320 --> 00:23:23,400 Speaker 1: going to kind of back off of it? Is obviously 371 00:23:23,400 --> 00:23:26,440 Speaker 1: a pretty important point. The second thing one might say, 372 00:23:26,440 --> 00:23:28,760 Speaker 1: and I can already I can feel Larry maybe having 373 00:23:28,760 --> 00:23:32,080 Speaker 1: this reaction, is if that's what you mean, why don't 374 00:23:32,119 --> 00:23:35,840 Speaker 1: you say it more clearly so that you will maximize 375 00:23:36,240 --> 00:23:39,000 Speaker 1: the calming effect of whatever tool it is that you're 376 00:23:39,000 --> 00:23:43,359 Speaker 1: prepared to use. And I don't know why they didn't 377 00:23:43,400 --> 00:23:46,800 Speaker 1: say it more explicitly, except perhaps that they didn't want 378 00:23:46,800 --> 00:23:50,240 Speaker 1: to intimate that somehow they were using the authority they 379 00:23:50,280 --> 00:23:53,520 Speaker 1: do have to achieve an end that supposedly they can't 380 00:23:53,560 --> 00:23:57,320 Speaker 1: achieve without congressional approval. Dan, I think there's one other 381 00:23:57,400 --> 00:24:01,560 Speaker 1: I think there's one other point, certainly, and you may 382 00:24:01,600 --> 00:24:05,200 Speaker 1: have parsed the statements more closely than I did. But 383 00:24:05,640 --> 00:24:09,280 Speaker 1: some of the statements, particularly I think from the Treasury side, 384 00:24:09,760 --> 00:24:14,639 Speaker 1: have talked about contagion as well, So I'm not sure 385 00:24:14,680 --> 00:24:18,119 Speaker 1: the authorities have been quite as clear as you suggest 386 00:24:18,840 --> 00:24:21,200 Speaker 1: in saying that if you've got money in a bank 387 00:24:21,280 --> 00:24:25,160 Speaker 1: and that bank fails and it's not a source of contagion, 388 00:24:25,920 --> 00:24:32,719 Speaker 1: you will nonetheless have your deposit ensured, and as I 389 00:24:32,840 --> 00:24:39,280 Speaker 1: understand it, in order to payoff uninsured deposits, there need 390 00:24:39,320 --> 00:24:42,359 Speaker 1: to be some set of claims made by the government 391 00:24:42,880 --> 00:24:48,080 Speaker 1: about the systemic seriousness of the moment. So I think 392 00:24:48,160 --> 00:24:52,359 Speaker 1: that is also a place where there's some play. But 393 00:24:52,480 --> 00:24:55,200 Speaker 1: I think I would share what I think as your 394 00:24:55,400 --> 00:25:00,639 Speaker 1: instinct to be erring on the side of projecting confidence 395 00:25:01,080 --> 00:25:03,800 Speaker 1: as ones choosing the way in which one talks about this. 396 00:25:04,160 --> 00:25:08,320 Speaker 1: I mean the contagion of reference. Contagion sends the message 397 00:25:08,720 --> 00:25:10,840 Speaker 1: that is exactly what a lot of depositors are quite 398 00:25:10,840 --> 00:25:12,600 Speaker 1: reasonably doing, which is why, okay, I need to get 399 00:25:12,600 --> 00:25:15,000 Speaker 1: into a bigger bank. So just to spell out why 400 00:25:15,040 --> 00:25:17,760 Speaker 1: that matters. If you make it all part of a 401 00:25:17,760 --> 00:25:21,280 Speaker 1: contagion argument, you're not giving that confidence to people who 402 00:25:21,280 --> 00:25:24,160 Speaker 1: are in the relatively smaller banks, although it still pretty 403 00:25:24,200 --> 00:25:27,200 Speaker 1: big banks by European standards. Well, I think I think 404 00:25:27,240 --> 00:25:29,520 Speaker 1: if I were at the FED now and we were 405 00:25:29,560 --> 00:25:33,399 Speaker 1: trying to formulate a rationale for what I suggested a 406 00:25:33,440 --> 00:25:38,720 Speaker 1: moment ago was the likely policy, even though it's not 407 00:25:38,840 --> 00:25:42,159 Speaker 1: stated explicitly, I think I would probably say something like 408 00:25:42,240 --> 00:25:46,600 Speaker 1: the following. Look six weeks ago, if there had been 409 00:25:46,640 --> 00:25:50,960 Speaker 1: a failure of a two billion dollar bank somewhere, ensuring 410 00:25:51,000 --> 00:25:53,640 Speaker 1: uninsured depositors would be a very hard case to make 411 00:25:53,680 --> 00:25:58,040 Speaker 1: on systemic risk grounds. But at this juncture, even if 412 00:25:58,080 --> 00:26:02,240 Speaker 1: a two billion dollar bank fails and an uninsured depositor 413 00:26:02,400 --> 00:26:06,520 Speaker 1: is not made whole, in the current circumstances, the anxiety, 414 00:26:06,560 --> 00:26:11,679 Speaker 1: the nervousness, the uncertainty that itself will add fuel to 415 00:26:11,800 --> 00:26:16,480 Speaker 1: the potential systemic fire. And thus in these circumstances one 416 00:26:16,600 --> 00:26:19,639 Speaker 1: could take the action there as well. You do, as 417 00:26:19,640 --> 00:26:23,440 Speaker 1: a statutory matter, need to make the systemic risk argument, 418 00:26:23,480 --> 00:26:26,800 Speaker 1: though that is the authority that they have, and I 419 00:26:26,840 --> 00:26:30,480 Speaker 1: think Janet Yellen did make reference to small banks yesterday 420 00:26:30,520 --> 00:26:32,960 Speaker 1: as well. Dan, I want to pick up on your 421 00:26:33,000 --> 00:26:34,840 Speaker 1: comment if you were still to Fed. We had a 422 00:26:34,880 --> 00:26:37,600 Speaker 1: decision from the Fed this week to raise another twenty 423 00:26:37,640 --> 00:26:40,399 Speaker 1: five basis points. Some people had been urging that actually 424 00:26:40,480 --> 00:26:43,000 Speaker 1: they just hold given the difficulis with banking. At the 425 00:26:43,040 --> 00:26:46,320 Speaker 1: same time, he Jaypole admitted that there's more uncertainty about 426 00:26:46,320 --> 00:26:48,960 Speaker 1: the extent of which what's already happened with financial conditions 427 00:26:49,000 --> 00:26:52,760 Speaker 1: may have essentially imposed a further rate hike already. Did 428 00:26:52,800 --> 00:26:54,560 Speaker 1: they get it right? Dan? From your point of view, 429 00:26:54,560 --> 00:26:57,680 Speaker 1: did Jay Pal get it right? Well? I mean it's 430 00:26:58,480 --> 00:27:02,080 Speaker 1: very obviously, our ly the most difficult decisions since he's 431 00:27:02,080 --> 00:27:05,159 Speaker 1: been there, although I actually think market expectations helped him. 432 00:27:05,160 --> 00:27:08,879 Speaker 1: They had sort of converged around twenty five basis points, 433 00:27:08,880 --> 00:27:12,400 Speaker 1: and so then it became a communication issue. I mean, 434 00:27:12,440 --> 00:27:15,399 Speaker 1: what I was struck by David In on the monetary 435 00:27:15,440 --> 00:27:19,200 Speaker 1: policy side of what he said yesterday was that he said, 436 00:27:19,280 --> 00:27:23,240 Speaker 1: quite explicitly, it's too soon to tell how monetary policy 437 00:27:23,320 --> 00:27:28,000 Speaker 1: should respond to the anticipated credit tightening. But I actually 438 00:27:28,080 --> 00:27:34,960 Speaker 1: think their actions yesterday were a fairly significant response. I mean, everybody, 439 00:27:34,960 --> 00:27:37,359 Speaker 1: three or four weeks ago, people were anticipating a fifty 440 00:27:37,400 --> 00:27:40,520 Speaker 1: basis point increase, We got twenty five. Three or four 441 00:27:40,520 --> 00:27:43,080 Speaker 1: weeks ago, we thought we might see the SEP suggest 442 00:27:44,000 --> 00:27:48,040 Speaker 1: a ceiling of five seventy five or six percent interest, 443 00:27:48,359 --> 00:27:50,600 Speaker 1: And now we're back to exactly where they were in 444 00:27:50,680 --> 00:27:53,840 Speaker 1: December at last December when they did the last SEP, 445 00:27:54,760 --> 00:28:00,280 Speaker 1: and of course they changed the language on the forward 446 00:28:00,320 --> 00:28:04,159 Speaker 1: guidance type language. Instead of ongoing increases, we're back to 447 00:28:04,800 --> 00:28:07,480 Speaker 1: may have some firming, and of course some people were 448 00:28:07,480 --> 00:28:10,679 Speaker 1: reading that as the end or close to the end 449 00:28:10,720 --> 00:28:16,719 Speaker 1: of the tightening cycle. So I actually thought that they 450 00:28:17,160 --> 00:28:22,359 Speaker 1: were conveying more of an assessment of the impact than 451 00:28:23,040 --> 00:28:26,280 Speaker 1: Chair Powa suggested in his remarks yesterday. So, Laurie, what 452 00:28:26,320 --> 00:28:29,040 Speaker 1: about you. In the past you suggested perhaps they might 453 00:28:29,119 --> 00:28:30,600 Speaker 1: have to have a term of rate as high as 454 00:28:30,640 --> 00:28:32,840 Speaker 1: six percent. Do you agree with Dan that what we 455 00:28:32,880 --> 00:28:35,120 Speaker 1: saw from j. Powe in the Federal Reserve this week 456 00:28:35,359 --> 00:28:37,920 Speaker 1: was a monetary policy reaction to what we've seen already, 457 00:28:38,080 --> 00:28:40,920 Speaker 1: and if so, was it appropriate? I think what they 458 00:28:40,960 --> 00:28:46,640 Speaker 1: did was broadly appropriate. It was a time for temporizing, 459 00:28:47,200 --> 00:28:50,600 Speaker 1: because there's a lot of uncertainty and a lot of 460 00:28:50,640 --> 00:28:54,080 Speaker 1: cards are going to be turned over in the next 461 00:28:54,680 --> 00:29:00,280 Speaker 1: several months. And the question then was just temporizing mean 462 00:29:00,880 --> 00:29:04,360 Speaker 1: stopping all rate increases. And I think if they had 463 00:29:04,400 --> 00:29:07,800 Speaker 1: done that, it would have sent actually a signal that 464 00:29:07,840 --> 00:29:11,320 Speaker 1: they were very highly alarmed and would have been a 465 00:29:11,360 --> 00:29:18,360 Speaker 1: mistake whether to continue precisely on the path that they 466 00:29:18,640 --> 00:29:23,600 Speaker 1: were on before these banking concerns arose. I think that 467 00:29:23,640 --> 00:29:27,840 Speaker 1: would have seemed almost oblivious to what was a potentially 468 00:29:27,920 --> 00:29:31,800 Speaker 1: gathering storm and so I think, as Dan suggests, that 469 00:29:31,960 --> 00:29:38,680 Speaker 1: a middle ground path was right, and it was particularly 470 00:29:38,840 --> 00:29:46,240 Speaker 1: right if the policy is going to be signaling in 471 00:29:46,280 --> 00:29:51,320 Speaker 1: a clear way that even if your bank fails, you're 472 00:29:51,320 --> 00:29:54,560 Speaker 1: going to be a depositor as well, And so nobody 473 00:29:54,560 --> 00:29:58,280 Speaker 1: in America needs to have the kind of sweaty Palm's 474 00:29:58,360 --> 00:30:02,600 Speaker 1: weekend that a large number of people had worrying about 475 00:30:02,680 --> 00:30:05,320 Speaker 1: whether they were going to meet their payroll because of 476 00:30:05,400 --> 00:30:08,440 Speaker 1: Silicon Valley Bank. And I think in the context of 477 00:30:08,840 --> 00:30:15,920 Speaker 1: providing those kinds of assurances that the monetary policy path 478 00:30:16,080 --> 00:30:21,000 Speaker 1: they set was appropriate and appropriate doesn't mean that it 479 00:30:21,040 --> 00:30:25,560 Speaker 1: will turn out to be right. Appropriate means that the 480 00:30:25,760 --> 00:30:29,320 Speaker 1: errors are kind of two sided. That there's a chance 481 00:30:29,440 --> 00:30:33,840 Speaker 1: that they'll need to tighten more than they're currently projecting, 482 00:30:34,200 --> 00:30:37,040 Speaker 1: and there's also a chance that not all the tightening 483 00:30:37,080 --> 00:30:43,840 Speaker 1: they're currently projecting will be necessary. I think if authorities 484 00:30:43,880 --> 00:30:49,239 Speaker 1: are sufficiently aggressive about adding confidence to the system, my 485 00:30:49,360 --> 00:30:53,080 Speaker 1: guest best guess is that the Fed's judgment in the 486 00:30:53,400 --> 00:30:58,040 Speaker 1: SEP will turn out to be considerably more accurate than 487 00:30:58,160 --> 00:31:01,520 Speaker 1: the markets assessment that the FED is going to be 488 00:31:01,600 --> 00:31:09,640 Speaker 1: pushed into rate cuts very soon. But that's a a 489 00:31:09,840 --> 00:31:15,440 Speaker 1: judgment that one can't have any great amount of confidence 490 00:31:15,560 --> 00:31:20,640 Speaker 1: in But yes, I think what they did was broadly appropriate, 491 00:31:21,200 --> 00:31:25,480 Speaker 1: particularly if we can be sending reasonably strong signals of 492 00:31:25,560 --> 00:31:28,440 Speaker 1: confidence in the system. So that is going to conclude 493 00:31:28,600 --> 00:31:32,000 Speaker 1: our Bloomberg Wall Street Week Brown Table, the first we've 494 00:31:32,040 --> 00:31:34,400 Speaker 1: ever had. Actually, I want to thank our panelists. She's 495 00:31:34,440 --> 00:31:38,080 Speaker 1: Stephanie Flanders. She's the senior executive editor for Economics and 496 00:31:38,160 --> 00:31:42,000 Speaker 1: Government for Bloomberg, dance roller, former Fed governor, and also, 497 00:31:42,040 --> 00:31:44,000 Speaker 1: of course our special contrior on Wall Street Week. He's 498 00:31:44,080 --> 00:31:47,000 Speaker 1: Larry Summers of Harvard. That's it for this edition of 499 00:31:47,040 --> 00:31:50,360 Speaker 1: Wall Street Week. I'm David Weston. This is Bloomberg