Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: His name is Richard Clarida. He is Where do I begin? Uh.
Speaker 1: He's a managing director and global strategist for investing giant Pimco.
Speaker 1: He was also had served in the Bush White House
Speaker 1: in the Treasury Department and uh informally as an advisor
Speaker 1: to various senior people in that administration. What was kind
Speaker 1: of interesting to me is that a lot of people
Speaker 1: kind of came through that administration with their reputation a
Speaker 1: little dinged up, and Clarida really had no such issue. Uh.
Speaker 1: He went in and came out really highly respected. He
Speaker 1: is incredibly insightful to things like the fiscal process and
Speaker 1: how the Federal Reserve interacts with Congress and how their policies,
Speaker 1: how monetary policies and fiscal policies affect each other. He
Speaker 1: has really an amazing understanding of government programs and policies, economics,
Speaker 1: investment theory, and where they all intersect. It really is
Speaker 1: not the usual economics conversation. And so the process of
Speaker 1: looking at the world to finance and looking at investing
Speaker 1: through that lens really is is makes for for wonderful conversation,
Speaker 1: and PIMCO has found that it's tremendously helpful uh to
Speaker 1: their process. I think you'll really enjoy this conversation. So,
Speaker 1: with no further ado, my conversation with Richard Clarada of PIMCO.
Speaker 1: My special guest today is Richard Clarada. He is an
Speaker 1: economist and Lowell Harris Professor of Economics and International Affairs
Speaker 1: at the School of Public and International Affairs at Columbia University.
Speaker 1: He has been the Global Strategic Advisor for PIMCO since
Speaker 1: two thousand and six. He is the former Assistant Secretary
Speaker 1: of the Treasury Department for Economic Policy under George W. Bush.
Speaker 1: He is the recipient of the Treasury Medal. He earned
Speaker 1: his BS from University of Illinois and a master's and
Speaker 1: PhD in economics from Harvard University. Richard Clarada, Welcome to Bloomberg. Wow.
Speaker 1: Great to be on your show, Barry. I'm a big,
Speaker 1: big fan, so it's a treat to be in the studio. Well,
Speaker 1: it's a treat to have you. You and I know
Speaker 1: each other for a while. I've been a fan of
Speaker 1: your work for quite a bit. I know of you
Speaker 1: from your work in the Treasury Department. Let's begin talking
Speaker 1: about your tenure as Assistant Secretary to the Treasury for
Speaker 1: Economic Policy. You were there really as the dot com
Speaker 1: bust was accelerating, as the recession was starting. What was
Speaker 1: that like during that period, Well, you know, Barry, was
Speaker 1: a very eventful time. In fact, interestingly enough, my first
Speaker 1: day on the job at Treasury was September eleventh, two
Speaker 1: thousand and one. So we all know, we all know
Speaker 1: where we were. But I was just checking out my office,
Speaker 1: and you may know Peter Fisher. I was in Peter
Speaker 1: Fisher's office when when the second tower got hit and
Speaker 1: then we were evacuated at Treasury. Actually saw people streaming
Speaker 1: out out of the the White House and someone said
Speaker 1: the Pentagon has been hit, so we're next. It was
Speaker 1: actually quite quite scary, and I can imagine, but it
Speaker 1: was an eventful time economically, um the dot com Of course,
Speaker 1: we did have the bursting of the dot com bubble.
Speaker 1: When I arrived in September Barry of two thousand and one,
Speaker 1: the data was sort of close to indicating a recession.
Speaker 1: On September t the nb R hadn't called it yet
Speaker 1: certainly the day after we we thought we were going
Speaker 1: into a recession. So in retrospect and everything that's happened
Speaker 1: since then, it may seem like a pretty, uh, pretty
Speaker 1: tame and quiet period, but it's pretty eventful. The dot
Speaker 1: com bubble, we had, the the end Roun World calm
Speaker 1: accounting scandals, uh and and obviously the financial system seizing
Speaker 1: up for a while. So yeah, it was a very
Speaker 1: eventful time. That that's some first day you know, you
Speaker 1: mentioned it was nothing like the financial crisis. I believe,
Speaker 1: if memory serves correctly, that recession began around March of
Speaker 1: that year, and by the time nine eleven came around,
Speaker 1: it was almost over. I think we dated in November,
Speaker 1: is that, But that's of course with the benefit of hindsight.
Speaker 1: At the time, the nb e R hadn't gotten around.
Speaker 1: You're right now, we know started marching into November, and
Speaker 1: you were an economist and researcher for nb e R.
Speaker 1: I left that out of your your CV. Um what
Speaker 1: did you do for them? Well? Nb R is an
Speaker 1: incredible organization that I think dates back to the the twenties.
Speaker 1: It's essentially an independent organization for doing applied economic research.
Speaker 1: Really pioneering work and business cycle analysis. UM. I was
Speaker 1: fortunate enough to do my graduate work at Harvard in
Speaker 1: the in the late seventies and early nineteen eighties, right
Speaker 1: about the time that Marty Feldstein moved the mb e
Speaker 1: R from New York to Cambridge, and so it's really
Speaker 1: an incredible organization. I started as a faculty of research
Speaker 1: fellow and then now as a research associate and essentially
Speaker 1: part of a group that publishes applied research in my
Speaker 1: case and international macro economics. And for people who may
Speaker 1: not realize, that's the organization that officially dates starts and
Speaker 1: ends of US recessions exactly, the Business Cycle Dating Committee.
Speaker 1: And by the way, for people who have never been
Speaker 1: on the website, there's an enormous amount of of research
Speaker 1: of data. It's really a tremendous resource for people who
Speaker 1: have those fields. Absolutely, so since nine eleven, the immediate response,
Speaker 1: so I think it was a week or so after that,
Speaker 1: then FED chairman Allen Greenspan cut rates. He took them
Speaker 1: at at a rep cutting um period where we were
Speaker 1: under two percent for two or three years and then
Speaker 1: at one percent for a full year. What was the
Speaker 1: impact of those ultra low rates well at the time.
Speaker 1: Interestingly enough, the time, there was a concern of of
Speaker 1: a deflation UH scare UH. The economy was recovering, but
Speaker 1: the recovery and two thousand and two UH was was
Speaker 1: was pretty feeble UM and UM, and so as a result,
Speaker 1: there was also a lot of changes impacting the financial
Speaker 1: system as well UH, and so we did go through
Speaker 1: a period of very low rates. I think in that cycle.
Speaker 1: The FED cut the funds rate to one percent UH
Speaker 1: in UH in June of two thousand and three and
Speaker 1: kept it there for a year. Obviously since that period
Speaker 1: of time, I must say at the time, I was
Speaker 1: at Treasure and I would have weekly meetings at the
Speaker 1: FED as part of that job. You know, I was
Speaker 1: aware of that policy and was not a critic of
Speaker 1: it at the time. It did seemed to be UH
Speaker 1: an appropriate UH policy. I think since that point some
Speaker 1: critics of the FED had pointed out that the FED
Speaker 1: was very slow to begin raising raids in OH four
Speaker 1: and oh five and six, And of course we also
Speaker 1: had a housing bubble at the time, and so I
Speaker 1: guess one can try to make a connection between that
Speaker 1: policy and the housing bubble, and that may have been
Speaker 1: a factor, But I think there are a lot of
Speaker 1: other factors at work as well. Well. Let's discuss that.
Speaker 1: That's an interesting issue. I mean, clearly, anything priced in
Speaker 1: dollars or credit had a big move upwards. And whether
Speaker 1: it was commodities, gold, or mortgages, what other factors did
Speaker 1: you think were significant? Then? I think the other thing
Speaker 1: is we we had what appeared to be and what
Speaker 1: many including my self thought was a innovation uh in
Speaker 1: finance securitization UH. And the fact that in mortgages, as
Speaker 1: in other parts of the credit market, credits were being
Speaker 1: securitized and they were no longer on the balance sheets
Speaker 1: of banks and the FED another thought that made the
Speaker 1: financial system safer uh. And in theory maybe it did.
Speaker 1: But obviously in retrospect there were some accesses insecuritization and
Speaker 1: in derivatives, and I think the system was more fragile
Speaker 1: than a lot of folks thought at at the time.
Speaker 1: And certainly, and I think that was a big part
Speaker 1: of it. There was a lot of hey, the sausage
Speaker 1: is only as good as put into it, and we
Speaker 1: know there was a lot of bed you know, sub
Speaker 1: prime mortgages that had gone in exactly clearly clearly a factor.
Speaker 1: I have to ask you. You're the recipient of the
Speaker 1: Treasury Medal for Distinguished Service. What is this award? What
Speaker 1: what is it about? That has to be quite a
Speaker 1: uh well, it was a real thrill um, and it's
Speaker 1: not routinely awarded. I think in my case, the recognition
Speaker 1: reflected the fact that because through the coincidence of timing
Speaker 1: Berry I arrived, as I mentioned, during our recession. Remember,
Speaker 1: the prior expansion had lasted ten years, and so a
Speaker 1: lot of folks had sort of forgotten what does a
Speaker 1: recession look like? How do we know when we're out
Speaker 1: of it? Talk a little bit about monetary policy, and
Speaker 1: since we were just gusting the financial crisis earlier, what
Speaker 1: what are your views on how well the Federal Reserve
Speaker 1: performs during that period? Uh, during coming out of the
Speaker 1: financial crisis. Yeah, the global financial crisis. Well, I've said
Speaker 1: many times on a lot on Bloomberg Air, I give
Speaker 1: the Fed generally very high marks for crisis management under Bernankey. Obviously,
Speaker 1: you cut rates as far as you can. The Fed
Speaker 1: cut the funds rate to zero month or two after Lehman,
Speaker 1: so you really go to Plan B. And Plan B
Speaker 1: was doing quantitative easing, and in particular in the first
Speaker 1: QUI program focused on the mortgage market, so signing up
Speaker 1: all the as many as much mortgages as possible to
Speaker 1: drive rates to drive. And also remember at that time
Speaker 1: both Fannie and Freddie had been put into conservator ship,
Speaker 1: and so there was just a huge amount of uncertainty
Speaker 1: in the financial markets about what the mortgage market would
Speaker 1: look like without that backstop, and so the FED got
Speaker 1: in of the mortgage business. I think grudgingly. FED officials
Speaker 1: have said many times publicly that they're not thrilled to
Speaker 1: be the biggest holder of mortgages, but but they were
Speaker 1: put into that position given the crisis. So so I
Speaker 1: would give the FED quite high marks during that period
Speaker 1: oh eight o nine ten uh in in crisis management.
Speaker 1: I think if we fast forward more recently, if I
Speaker 1: would have a disagreement with the FED, I think that UM,
Speaker 1: the Fed's messaging has been inconsistent UM and a little
Speaker 1: bit hard to follow in terms of normalization for for rates,
Speaker 1: And in particular, an issue barrier that I look at
Speaker 1: a lot is this idea that the fedist targeting inflation.
Speaker 1: It says that the targets two percent and yet since
Speaker 1: they became an inflation target or formally in two thousand
Speaker 1: and twelve, inflation has been below two percent ever every year,
Speaker 1: and and so the FED sometimes says that that two
Speaker 1: percent should be an average, but they also said they
Speaker 1: don't want inflation to go about two percent, which means
Speaker 1: the average, of course will be below. So I do
Speaker 1: think that now that the FED has begun to normalize
Speaker 1: policy and there and we're at with the FED things
Speaker 1: of his full employment, UH, that I think it is
Speaker 1: appropriate to continue that normalization UH in in rates. And
Speaker 1: obviously the next issue, which I'm sure we'll want to
Speaker 1: talk about, UH is the Fed's approach to normalizing and
Speaker 1: shrinking that huge four point five twillion dollar balance sheet.
Speaker 1: So two points. I have two questions I have to
Speaker 1: ask you about. The first, is it sounds like when
Speaker 1: the FED is on their rate tightening cycle or in
Speaker 1: this case, normalization, they seem to be a little behind
Speaker 1: the curve both this cycle and let's call it oh
Speaker 1: three to oh six UM, seems that they're they'd rather
Speaker 1: go slowly, too slowly then too fast. Is that a
Speaker 1: fair well? I think I think it is, and I
Speaker 1: think I think in both episodes of FED officials have
Speaker 1: appealed to to risk management. UM. I think in particular, now,
Speaker 1: given that you know rates are low and we're in
Speaker 1: what what what I and others have called a new
Speaker 1: neutral for monetary policy. So your listeners should remember, before
Speaker 1: the crisis, there was a pretty broad consensus among central
Speaker 1: bankers that the Fed's policy rate, the funds rate, should
Speaker 1: be some number add or above four percent once you
Speaker 1: get to full employment. UM And I believe, and I
Speaker 1: think the evidence shows that for a variety of reasons,
Speaker 1: there's a new destination for the FED rate, which is
Speaker 1: gonna be say two or two and a half, not
Speaker 1: not four. Four is not a realistic number? Well think
Speaker 1: of think about it now, Think about how you would
Speaker 1: value equities or any asset class if you were discounting
Speaker 1: those cash flows at four percent as opposed to to
Speaker 1: to one or two. And I think when when people ask, well,
Speaker 1: why is it a new neutral? I think there are
Speaker 1: a couple of reasons. One, growth rates have slowed down.
Speaker 1: When you and I began our careers, growth in the
Speaker 1: economy and a good year was three and a half
Speaker 1: sometimes four percent. Productivity growth was two two and a
Speaker 1: half percent. Look at in the nineties. And so in
Speaker 1: a world where theo's growing up four percent, you sort
Speaker 1: of need a four percent interest rate, but in a
Speaker 1: world where the real growth in the economy is too
Speaker 1: In fact, basically, one thing Barry about the last several
Speaker 1: years that people may not know is that US has
Speaker 1: been a very stable economy in terms of volatility GDP
Speaker 1: growth in a good years two point three and a
Speaker 1: week years one point seven, but very tightly centered around
Speaker 1: that two percent number. And so with slow growth, slow
Speaker 1: productivity growth, and slow labor force growth, uh, the FED
Speaker 1: needs to normalize, but the destination will be much lower
Speaker 1: than before. So let's talk about the Fed's balance sheet
Speaker 1: four and a half trillion. I think that's off of
Speaker 1: the highs slightly basically at the peak. So here's the question.
Speaker 1: All these holdings, be the mortgage backed securities or treasuries,
Speaker 1: they're all dated. None of these are perpetual bonds were
Speaker 1: not like the UK, not yet. Why can't the FEDS
Speaker 1: simply let these roll off as they naturally come up
Speaker 1: on the maturity dates and gradually allow their book to normalize.
Speaker 1: And that would be one very plausible scenario. And and
Speaker 1: I think if you go back and read what FED
Speaker 1: officials said five or six years ago. That's what they
Speaker 1: thought they would be doing. They thought that eventually they
Speaker 1: would just step back, they would stop buying, and there's
Speaker 1: the treasuries mature. Uh, that balance sheet would shrank. And
Speaker 1: there's the mortgages prepay or people move or refinance those
Speaker 1: mortgages would would would roll off. Um. It's pretty clear now,
Speaker 1: based upon the Fed minutes that have been released this year,
Speaker 1: that they are not going to pursue that passive approach.
Speaker 1: What they're going to do is they're gonna try to
Speaker 1: smooth the path of balance sheet reduction. Uh. And I
Speaker 1: think they're doing so for a couple of reasons. When
Speaker 1: you say smooth, what do you mean by that? That
Speaker 1: means not just let them roll off, but but replace
Speaker 1: some of them as So. For example, what the FED
Speaker 1: minutes suggested at the last meeting Barry was that in
Speaker 1: any given month they would set a maximum cap on
Speaker 1: the amount of treasuries and mortgages that could roll off,
Speaker 1: and any any additional roll off above that cap, they
Speaker 1: would then step into the market and buy. So the
Speaker 1: Fed will be shrinking the balance sheet, but it will
Speaker 1: still be buying. Along this normalization path. They want they
Speaker 1: want to smooth it um and they're also in a
Speaker 1: situation whereby they made the case, which I agree with
Speaker 1: that when they did qwi at lowered rates. So if
Speaker 1: you're reversing, QI is probably gonna raise rates, and they're
Speaker 1: really unsure by how much. And because they're unsure, they
Speaker 1: want to really smooth this process out, which means it's
Speaker 1: going to be very gradual. And I think the other
Speaker 1: issue that your listeners should know, Barry, is there two
Speaker 1: big decisions for the FED to make. How fast do
Speaker 1: they let it roll off? And then what is the
Speaker 1: ultimate destination. They haven't really given us much insight on
Speaker 1: the ultimate destination, and I suspect that this FED may
Speaker 1: not in the end make a decision on the ultimate
Speaker 1: side for the balance sheet that maybe for the next
Speaker 1: FED chair to figure out. So I would expect that
Speaker 1: what Yelling and company are likely to do in June
Speaker 1: or later this year is to lay out, if you will,
Speaker 1: a glide path or a scenario for balance sheet reduction.
Speaker 1: They may begin to do that, and then it will
Speaker 1: be up to the next FED chair to implement as
Speaker 1: he or she sees fit. Let's talk a little bit
Speaker 1: about modern economic theory and some interesting and perplexing things
Speaker 1: that are taking place. Earlier, you mentioned productivity. It seems
Speaker 1: that we've sort of hit a productivity slump, and that
Speaker 1: raises the question do we have a productivity problem or
Speaker 1: do we have a problem measuring productivity? Great point, and
Speaker 1: I think the truth is it's probably some of both. Clearly,
Speaker 1: there are enormous amount of innovation, especially web based innovation,
Speaker 1: and it's tough to measure that we all we all
Speaker 1: know that, um. But I do think that for a
Speaker 1: variety of reasons, that there is also a real productivity
Speaker 1: slow down. Part of it may simply be as you
Speaker 1: move towards a service economy, it's intrinsically hard to measure,
Speaker 1: even old fashioned you can you can measure, but you
Speaker 1: can't measure if you subscribe to something on Apple iTunes
Speaker 1: and you're getting that service exactly music service, how do
Speaker 1: you actually measure? So I think, I think, I think
Speaker 1: there is an element to that. But I but I
Speaker 1: do think also that we're in a period of relatively
Speaker 1: slow prot growth in part area because we haven't had
Speaker 1: a lot of investment in this country really in about
Speaker 1: a dozen years. Uh and in particular asked capital stock
Speaker 1: has moved towards equipment that depreciates faster technology becomes obsolete.
Speaker 1: We probably have more of an investment shortfall than than
Speaker 1: we're even measuring. Is that at a corporate level, is
Speaker 1: that at a household level, is at a government level,
Speaker 1: or is it across the board? I think it's I
Speaker 1: think it's across. It's across the board. Also, you know,
Speaker 1: let's face it, in our system, we have different parts
Speaker 1: of the tax code that encourage different activities real estate,
Speaker 1: for example, and we have an abysmal tax when it
Speaker 1: comes to taxing corporations really in senting them to move
Speaker 1: to move abroad. So there's a lot we didn't we
Speaker 1: change recently some of the both under Bush and Obama.
Speaker 1: The capital depreciation that's been accelerated fairly rapidly versus you know,
Speaker 1: you're not writing down a truck over ten years the
Speaker 1: way there were. There were some elements of that, but
Speaker 1: I think that they I think a lot of them
Speaker 1: actually a lot of them actually expired. But getting back
Speaker 1: to your initial point, um, I think there is a
Speaker 1: measurement issue with productivity. But I do think apart from
Speaker 1: the measurement issue, we're in globally a period of pretty
Speaker 1: slow growth right now. But as I said, economists don't
Speaker 1: have a good track record at inflection points, so we
Speaker 1: can have a big surprise. Perfect example, who would have
Speaker 1: said ten years ago or even eight years ago that
Speaker 1: you would see the revolution and fracking and shale that
Speaker 1: we've seen. That was a technological revolution that's transformed the
Speaker 1: entire global energy market. Right. Remember, the thinking was, well,
Speaker 1: what's the big deal with fracking with oil at a hundred, Well,
Speaker 1: because of fracking oils at six and not a hundreds,
Speaker 1: that's a huge impact that ten years ago, fifteen years ago,
Speaker 1: nobody first and we haven't seen sixty in a long time.
Speaker 1: When oil, which which kind of brings up the whole
Speaker 1: debate about coal. When technology makes natural gas a with
Speaker 1: the Saudi Arabia of natural gas as well as the
Speaker 1: Saudi Arabia of coal, but when they make it so
Speaker 1: accessible and so inexpensive, why move mountains to get cold
Speaker 1: when it's so easy to pull gas out of the ground. Well,
Speaker 1: and and also Barry, the fact is because of the
Speaker 1: l en G technology, we can actually export our natural gas.
Speaker 1: And ten years ago the talkers we needed important natural gas.
Speaker 1: Now we're exportings. I just read the other day an
Speaker 1: article that said, for the first time, liquid natural gas
Speaker 1: is a global marketplace. It's not a regional market anymore.
Speaker 1: And it once was, and it's and you're actually starting
Speaker 1: to see that gas, which used to be very, very
Speaker 1: geographically segmented, there's basically now approaching a global market. And
Speaker 1: gash right, So you you referenced earlier UM the holdings
Speaker 1: in treasuries and the relative um rarity or or the
Speaker 1: limited supply of of of quality sovereign bonds. What are
Speaker 1: your thoughts on this talk about a fifty or a
Speaker 1: hundred year bonds here in the United States. Well, you know,
Speaker 1: there is a there is a an issue which is
Speaker 1: historically the Treasury is not issued beyond thirty years, no
Speaker 1: pun intended. UH. There is globally a demand. There's a
Speaker 1: certain community. UH. I think insurance companies, think other managers
Speaker 1: that really have an appetite for very long duration assets
Speaker 1: on match actuarial tables exactly UM, and so I think
Speaker 1: there could be a case for for doing so, UH,
Speaker 1: in particular long duration inflation index securities. UM. Say that again,
Speaker 1: long duration and so you have inflation, so we have tips,
Speaker 1: but they're relatively short again, well, but they go out
Speaker 1: to thirty years, but beyond beyond that because because essentially,
Speaker 1: for many individual investors, UH, potentially the biggest risk they
Speaker 1: face over the life cycle is you you do hall
Speaker 1: this hard saving, earned some decent returns, and then two
Speaker 1: or three years of fifteen percent inflation, and of course
Speaker 1: your younger listeners are saying, oh, fifteen percent inflation, that
Speaker 1: can't happen. That was my senior year in college. That
Speaker 1: was that was me in in grammar school, having to
Speaker 1: go to the gas. They get guests to mow the lawn,
Speaker 1: and um, we had, we had rates that we're pretty
Speaker 1: crazy back. So so I do think Barry that that
Speaker 1: I think there is a case for it. Apparently the
Speaker 1: Treasury under Secretary Manuch is exploring this, uh this idea.
Speaker 1: I think what gives them some pause is compared to
Speaker 1: the UK, where there's a voracious appetite for very long
Speaker 1: duration assets, there may not be so much of one
Speaker 1: in the US, and so the Treasury doesn't want to
Speaker 1: get into an area where it's having to offer up
Speaker 1: a much higher yield to lock in that money for
Speaker 1: fifty years. So I think it's under discussion. So the
Speaker 1: fear is that the Treasury is going to overpay to
Speaker 1: borrow that money. Yeah, what as if it was tied
Speaker 1: to something like infrastructure or some other Is that the
Speaker 1: politics of it or is that the structure of it? No,
Speaker 1: I think I think it could be tied to It
Speaker 1: could surely could be tied to infrastructure. And again I
Speaker 1: think it's under it's under discussion, But I think ultimately
Speaker 1: the decision is going to come down to how big
Speaker 1: is the appetite, Because if there really is an appetite
Speaker 1: for very long duration instruments, and the Treasury would not
Speaker 1: have to offer much higher yield in order to to
Speaker 1: sell those bonds, and I think they're still figuring that out.
Speaker 1: Let's talk a little bit about some of the private
Speaker 1: sector working done, because some of that stuff is really fascinating.
Speaker 1: You've you've consulted for the likes of JP Morgan, Credit Swiss,
Speaker 1: the Federal Reserve Bank of New York. What does that
Speaker 1: work look like, what's that process like? Well, it depends.
Speaker 1: I think in the case of Credit Swiss, that was
Speaker 1: almost twenty years ago, and I was essentially working with
Speaker 1: their facts team to build them econometric models of the
Speaker 1: of the currency market and currency evaluation, so they're essentially
Speaker 1: outsourcing some of that to me. I was actually sort
Speaker 1: of proud they actually still they were running that model
Speaker 1: about for about fifteen years or so. They since retired it,
Speaker 1: but uh so that was a good project. You know,
Speaker 1: the New York Fed has a lot of programs. In
Speaker 1: the case of there, I visited during the summer, worked
Speaker 1: on some papers, co authored with their staff. Spent some
Speaker 1: time back in the nineties when Rick Michigan was the
Speaker 1: director of research at the New York Fed, where he
Speaker 1: had a little kitchen cabinet of people who would come
Speaker 1: down every Friday and have have uh lunch. I love
Speaker 1: that idea of a kitchen cabinet around the New York
Speaker 1: Is that still going on, I believe so. I have
Speaker 1: not done it in in in a while, but it's
Speaker 1: quite an impressive group. You had. Chris Simms is a
Speaker 1: Nobel laureate, someone named Ben Bernanke was there every week,
Speaker 1: Rick Michigan, Mike Woodford, So it was it was a
Speaker 1: real treat to be part of that group. If you
Speaker 1: remember the book from the sixties, The Money Game by
Speaker 1: Adam Smith was the nomen Yes, he describes a similar
Speaker 1: sort of kitchen cabinet um that was run by Scarsdale Fats,
Speaker 1: and it was movers and shakers on Wall Street would
Speaker 1: get together on a Friday afternoon and discuss what they
Speaker 1: were doing, what they were looking at, what they were seeing,
Speaker 1: and there was all sorts of conspiratorial overtones. Meanwhile, it
Speaker 1: was just six guys sitting around chewing the fat over
Speaker 1: what stocks they liked and didn't and they they had
Speaker 1: far less power than than was ascribed to them. But
Speaker 1: I like the idea that taking place, UH with with
Speaker 1: the New York Fed. Speaking of the FED, you did
Speaker 1: work with a former FED chairman, Paul Volcan. I did,
Speaker 1: and there was one of the thrills of my professional career.
Speaker 1: So so tell Paul Volker, better known as Tall Paul,
Speaker 1: also known as Paul Volker for many years after he
Speaker 1: left that I should say, Paul Volkers one of my
Speaker 1: one of my heroes. You know, you talking about profiles
Speaker 1: and courage. But what Paul Volker did under enorm us
Speaker 1: UH pressure and with very high stakes to break the
Speaker 1: back of inflation UH in the early nineteen eighties and
Speaker 1: really bequeath really the foundations for a twenty five year
Speaker 1: bull market and bonds and stocks he gets far less
Speaker 1: credit than he showed. Is really the prime market. He's
Speaker 1: truly a thirty year bull market. And the recovery in
Speaker 1: both the U S economy and the U S stock market. Yeah,
Speaker 1: and and all based upon basically making the right decisions
Speaker 1: in a in a four or five year period. So
Speaker 1: literally one of the giants of economics. But to answer
Speaker 1: your question, after he left the FED, he spent many
Speaker 1: years at something called the Group of Thirty, which is
Speaker 1: basically an informal organization of former policymakers, and the Group
Speaker 1: of thirty commissioned to paper by me. I'm not a
Speaker 1: member of the Group of thirty. I'm not in that club,
Speaker 1: but they occasionally commissioned papers uh. And so Paul and
Speaker 1: his team asked me to write a paper right after
Speaker 1: the Asia financial crisis on sort of what the what
Speaker 1: the global UH currency markets would look like in the
Speaker 1: in the aftermath of that crisis. And so I took
Speaker 1: it as an opportunity to write along sixty page scholarly
Speaker 1: paper thinking about the foreign exchange markets after the Asia crisis.
Speaker 1: So it's a real, real treat to work, to work
Speaker 1: with him that that's that's quite fascinating. Yeah. Um, let's
Speaker 1: talk a little bit about PIMCO. Yeah, you're you're global
Speaker 1: strategist for them. Yeah, you're a managing partner and right,
Speaker 1: that's right. Tell us what that that work is like.
Speaker 1: So I've been with PIMCO for eleven years. It seems
Speaker 1: just like yesterday. So you've been there through a lot
Speaker 1: of pre and post here and a lot of indeed
Speaker 1: a lot of interesting times. And and so what do
Speaker 1: I do for Pimco. Well, I I basically work on
Speaker 1: global macro, focusing on the G ten economies. Given my
Speaker 1: interest in my research, I spent a lot of time
Speaker 1: thinking about the FED and other central banks. Obviously central
Speaker 1: banks are key to value bonds. PIMCO has a lot
Speaker 1: of clients, especially around the world, who I go see
Speaker 1: and then more recently, since two thousand and fourteen, the
Speaker 1: folks that have asked me to oversee our annual Secontar
Speaker 1: Forum process, which is really an integral part of pimco's
Speaker 1: investment process. We've been doing it for thirty six years.
Speaker 1: We bring an outside speakers three days a year just
Speaker 1: for the investors and the executives of the firm. To
Speaker 1: think about what the global economy is going to look
Speaker 1: like over the next three or five years. So you
Speaker 1: mentioned the new Normal and one of the earlier segments
Speaker 1: I talked about the New Neutral. Those are both themes
Speaker 1: that emerged from our Secontar Forum process, and so that's
Speaker 1: now essentially my my role is to coordinate that that effort.
Speaker 1: That that's fascinating. How do you integrate global monetary and
Speaker 1: global fiscal policy into ideas of either fixed income investing
Speaker 1: or any type of investing. Yeah, well, and I think
Speaker 1: that's obviously that's that's that's crucial for me to add
Speaker 1: value to to the operation. I think I'll give you
Speaker 1: I'll give you a concrete um example. Uh, this whole
Speaker 1: idea that we talked about it a moment ago, about
Speaker 1: the new about the new neutral. That is something that
Speaker 1: I began to think about based on my academic work, uh,
Speaker 1: working with something that we would call a forward looking
Speaker 1: version of a tailor rule. Work I did with Mark
Speaker 1: Gertler and Jardy Galliott at n y U. So we
Speaker 1: were pretty early on in the in the late nineties
Speaker 1: and sort of focusing on a rules based monetary policy.
Speaker 1: But one of the things about the original tailor rules,
Speaker 1: it assumed that this neutral policy rate was constant, and
Speaker 1: I began to be persuaded that, in fact, we're in
Speaker 1: a world where where neutral is not constant. In fact,
Speaker 1: it's going to be lower the destination for the funds rate.
Speaker 1: And so I basically was making the case internally that
Speaker 1: we needed to factor this in. That became what we
Speaker 1: call our new neutral thesis, and it's been a really
Speaker 1: important part of the way that we've been investing for
Speaker 1: the last three years. So so let me get you
Speaker 1: to define this. Yeah, dynamic stochastic general equilibrium modeling. Oh,
Speaker 1: my mouthful, And that's pretty much the name of one
Speaker 1: of your papers. Yeah, well, and that's that's the that's
Speaker 1: the name of the branch of economics that I work in. Uh.
Speaker 1: That's an example where the jargon is probably relevant to
Speaker 1: other members of that club, but I think to the
Speaker 1: general public is probably not all that important. Essentially, what
Speaker 1: it means is that you're building a model of the
Speaker 1: economy which is going to be modeling the economy over time,
Speaker 1: so it's dynamic over time, but it also allows for
Speaker 1: stuff to happen. Stuff happened, so shocks to happen, so
Speaker 1: you want to know how the economy evolves when it's
Speaker 1: hit by shocks, you know, oil shocks, supply shocks, fiscal shocks,
Speaker 1: and so that's the stochastic part of the equation. It's
Speaker 1: um it's in Otherwise it sounds much worse than it
Speaker 1: really yah, than it really is exactly. UM. I previously
Speaker 1: had your PIMCO colleague Paul McCulley on. He's somebody I
Speaker 1: met fishing in Maine, of all places, and he is
Speaker 1: a big Himan Minsky fan who was infamous for saying
Speaker 1: um stability breeds instability. Do you think that's true? And
Speaker 1: given this period of stability we've seen, are we potentially
Speaker 1: breeding a more instability? Well, first of all, just since
Speaker 1: you mentioned Paul, just to know he's teaching at Cornel.
Speaker 1: Just just mentioned I. One of the real high points
Speaker 1: of of my time at PEMCA was a chance to
Speaker 1: work very closely with Paul for six, seven or eight
Speaker 1: years uh. And I learned so much from him. Uh.
Speaker 1: And in particular when when I got there and oh six,
Speaker 1: he was already on the Minsky uh soapbox. And I
Speaker 1: must admit at that time I had some vague recollection
Speaker 1: of reading miss Minsky and graduate school. But but obviously
Speaker 1: that was a very very prescient call on On on
Speaker 1: his part to your broader question. Clearly in retrospect, and
Speaker 1: believe me, Barry, I did not have a crystal ball
Speaker 1: in oh five and oh six, but but clearly in retrospect, Uh,
Speaker 1: the stability of the of the two thousands did breed
Speaker 1: instability through as we mentioned, the securitization and the credit
Speaker 1: derivatives and all of that, on all of that stuff.
Speaker 1: So what I'd like to say is, I think general
Speaker 1: the old saying is, you know, generals are good at
Speaker 1: fighting the last war. So I'm very convinced, Barry that
Speaker 1: two things, there will be another financial crisis, and I'm
Speaker 1: convinced of the other thing is it will not look
Speaker 1: like the last crisis. Is We're always quite good at
Speaker 1: making sure the next crisis looks different. And that's where
Speaker 1: I think the real power of Ryan Harton Rogoff is
Speaker 1: is we keep persuading ourselves that things are different because
Speaker 1: we're not going to have another you know, subprime meltdown,
Speaker 1: but it will show up somewhere else. You know, greed
Speaker 1: is a constant fact of life. And I think in
Speaker 1: some ways the system still is fragile because of the
Speaker 1: interconnectedness Now globally, it's no longer a US market or
Speaker 1: a French market. What happens in Beijing or ri Odd
Speaker 1: impacts all of our markets as well. Ow uh So,
Speaker 1: I think one thing that we do know is the
Speaker 1: big global huge banks have much more capital uh than
Speaker 1: they did before, and as we mentioned, they have more
Speaker 1: liquid assets. But that just means I think the risk
Speaker 1: migration is somewhere else in the system, and I think
Speaker 1: we know less about that. Frankly, we have been speaking
Speaker 1: with Professor Richard Clarida, global strategist for Pimco and professor
Speaker 1: at Columbia University. Be sure and check out my daily
Speaker 1: column on Bloomberg View dot com. You can follow me
Speaker 1: on Twitter at rihlts. We love your comments, feedback and
Speaker 1: suggestions right to us at m IB podcast at Bloomberg
Speaker 1: dot net. I'm Barry Hults. You've been listening to Masters
Speaker 1: in Business on Bloomberg Radio. People think that when you
Speaker 1: are a refugee in very seculated to America, they know
Speaker 1: your problems and that they don't understand that that's the
Speaker 1: beginning of everything. I was not born a refuge I
Speaker 1: was made one learn More and Embrace Refugees dot org,
Speaker 1: brought to you by the AD Council. Welcome to the podcast, Richard.
Speaker 1: Thank you so much for doing this. This is fascinating
Speaker 1: And um you were on my my shortlist of people
Speaker 1: to reach out to, so I'm glad we managed to
Speaker 1: get together. Yeah, there are a bunch of things I
Speaker 1: want to get to before I get to my standard questions.
Speaker 1: This is me going through all my pages. I hate
Speaker 1: when it gets printed two sided because I can't find stuff. Um,
Speaker 1: I asked about dynamic stochastic general equilibrium modeling. You went
Speaker 1: You went right into academia straight out of college. Is
Speaker 1: that always the plan? Well, it was so I went
Speaker 1: straight from the University of Illinois, where I must say
Speaker 1: I got an incredible education, one of the great land
Speaker 1: grant universities and was an economics major land grant universities.
Speaker 1: What is that that? That was a program that started
Speaker 1: under Abraham Lincoln and the idea was that there would
Speaker 1: be federal land given to states if they would build universities.
Speaker 1: UM on it and there were some support. Yeah, so
Speaker 1: very very much public private partnership. You know. Alexander Hamilton's
Speaker 1: approach yes, and so University of Illinois, Michigan. They're called
Speaker 1: the Land Grant UH Universities UM, and I think tuitioning
Speaker 1: was six d dollars a term or a year in
Speaker 1: incredible education. And then was an econ major UH and
Speaker 1: applied to graduate school and in one of the huge
Speaker 1: surprises and life changing events of my life, actually got
Speaker 1: into Harvard. No, no expectation that would happen. And so
Speaker 1: which was where were you expecting to go? Well, I
Speaker 1: applied to some other good, good schools, but you know,
Speaker 1: kids from coal mining towns and downstate Illinois UH didn't
Speaker 1: didn't go to Harvard. But but but I was admitted
Speaker 1: and went there. And then in those days you could
Speaker 1: get a PhD in four years. Typically now it takes
Speaker 1: five or six. And so that I went straight from
Speaker 1: college to Harvard, and then I went straight from Harvard
Speaker 1: to my first job as an assistant professor at at
Speaker 1: Yale back in not not a bad set of affiliations,
Speaker 1: and my office was right next to someone named Jim Tobin.
Speaker 1: So talk about talk about an eye opening experience as
Speaker 1: a twenty six year old assistant professor. And the fellow
Speaker 1: next door is Nobel laureate and legend Jim Toe. Did
Speaker 1: you get to interact with you very much? Absolutely? Yeah.
Speaker 1: It's funny because as I speak with people over the
Speaker 1: course of the show, it's always fascinating when you find
Speaker 1: out Mayer Stateman, the professor at Santa Clara, his thesis
Speaker 1: advisor was Peter Bernstein. Yeah, like just crazy. I really
Speaker 1: had no idea he was an academic. That just that.
Speaker 1: That's fascinating. So so that was the plan. Yes, right,
Speaker 1: so and then him yell, you've been since nine almost
Speaker 1: thirty years. How have students changed over that period? Wow,
Speaker 1: that's a great question. I would make the following observations.
Speaker 1: First of all, there's a lot more interest in economics
Speaker 1: now than thirty years ago. So the number of economics
Speaker 1: majors at places like Columbia University of Illinois is double
Speaker 1: or triple what it was one of your thirty years
Speaker 1: at whose expense? Is it that much less frenchise or
Speaker 1: they're coming up coming out of somewhere. I won't I
Speaker 1: won't speculate where, but they're coming into economics. Given the
Speaker 1: given the cost of colleges, one would think that a
Speaker 1: move towards is this going to help me get a
Speaker 1: job and paying off these loans might be driving something
Speaker 1: that that could that could well that could well be
Speaker 1: so I the other the other things. Certainly when I'm
Speaker 1: now talking about maybe in the graduate program, is it
Speaker 1: is truly now a global market for students who are
Speaker 1: applying to graduate school. So when I was a graduate student,
Speaker 1: I think in my class at Harvard, of the twenty
Speaker 1: five students who I entered with, I think twenty one
Speaker 1: were educated in US UH colleges um and I think
Speaker 1: in the typical US pH d program now a fewer
Speaker 1: than half the students are US students because there's a
Speaker 1: global market from people in Europe, South America, Asia, and
Speaker 1: so the number of applications to US pH d programs
Speaker 1: from around the world has just gone up by leaps.
Speaker 1: And also it's a very international student body. You know.
Speaker 1: I've seen data that says half of the sea level
Speaker 1: Silicon Valley UM executives are farm born. Come here and say, hey,
Speaker 1: we like it here, let's be let's build a company.
Speaker 1: Are you seeing these students staying here, getting jobs, staying
Speaker 1: in America or do they take this knowledge and go
Speaker 1: back to wherever it It depends? I think many of
Speaker 1: them desire to stay here, uh if if they can,
Speaker 1: but certainly there are global opportunities as well. But I
Speaker 1: think the third thing I would mention, and now I'm
Speaker 1: gonna maybe a little bit of an odd thing to say, um,
Speaker 1: but I think the amount that the mathematical background now
Speaker 1: of students in US PhD programs, um it is really
Speaker 1: off the charts. So programs do now do a very
Speaker 1: good job of sorting students by pure math ability. UM.
Speaker 1: I don't know if that's necessarily an unallied positive. I
Speaker 1: think there's more to economics than math, and I think
Speaker 1: in some ways that maybe dates my vintage of people.
Speaker 1: So for me, economics is always about understanding the economy
Speaker 1: and tutorly, and then the math was sort of a
Speaker 1: tool to to get at it. But I do think
Speaker 1: now that there is the pendulum is definitely swung towards
Speaker 1: beginning with the math and sort of reverse engineering the economics,
Speaker 1: which always makes me uncomfortable. So even when I teach
Speaker 1: a PhD course, before I launch into the math, I
Speaker 1: try to do the intuitive version, and so I may
Speaker 1: be the last generation of people who still do it
Speaker 1: that that way, where you start with the economics and
Speaker 1: then you do the math later. Your your Columbia colleague,
Speaker 1: Emmanuel Derman. Yeah, this financial engineering school. And he was
Speaker 1: telling me that he's just watched over twenty years it
Speaker 1: go from more mostly Americans with a smattering of um
Speaker 1: foreign born students to more and more farign born students.
Speaker 1: And he said, the quality of the math skills of
Speaker 1: kids coming in these are all PhD level, brilliant students.
Speaker 1: And that's just the cost of entry. If you build
Speaker 1: from there, it's quite it's quite fascinating. Um So, let's
Speaker 1: let's go over a couple of other questions I missed.
Speaker 1: I want to see what I didn't get to that
Speaker 1: I thought was important. Oh so we we talked about
Speaker 1: the financial crisis. What do you think are some of
Speaker 1: the bigger misconceptions about monetary and fiscal policy? And following
Speaker 1: the crisis, we we had a huge monetary response but
Speaker 1: not much of a fiscal response. What what do you
Speaker 1: what was the impact of that. Well, let's let's start
Speaker 1: with with the second part of your question. Uh. There,
Speaker 1: um So, I think the consensus among academic and economist
Speaker 1: and policymakers going into the crisis was that in practice
Speaker 1: in the US fiscal policy UH is not a particularly
Speaker 1: effective tool because of the lags and implementation and the
Speaker 1: politics involved in getting bills through. In the view as
Speaker 1: you should really just have monetary policy focusing on counter
Speaker 1: cyclical objectives. You know, as rates have gone to zero,
Speaker 1: we've gone into quantitative easing, and the year if they've
Speaker 1: gone to negative rates, I think certainly the profession is
Speaker 1: more receptive to thinking about fiscal UH. Fiscal policy. You know, Barry,
Speaker 1: we did have a big fiscal response in two thousand
Speaker 1: and nine. We had a one trillion dollar deficit that year.
Speaker 1: So but but you're right that we went actually from
Speaker 1: stimulus and O nine to a period of a fiscal
Speaker 1: austeria D after two thousand and ten or or or so. UH.
Speaker 1: And and and I think I think as a practical matter,
Speaker 1: UH most of commers would agree that there are a
Speaker 1: lot there's a lot of positive that fiscal policy can
Speaker 1: do in terms of infrastructure, in terms of encouraging investment
Speaker 1: and the like. But I think in terms of being
Speaker 1: a supple tool for countercyclical UH uses it it has
Speaker 1: a lot of problems. How how long of a lag
Speaker 1: do we typically see with monetary policies implementation, How soon
Speaker 1: as it felt well the old Yeah, exactly. So there's
Speaker 1: no implementation lag of monetary policy. In fact, the Fed
Speaker 1: doesn't even have to wait for a meeting if if
Speaker 1: the situation calls that you can have an intermeding move
Speaker 1: as we know. So there's no there's no implementation lag
Speaker 1: of monetary policy. But there is a lag from when
Speaker 1: policy impacts the real economy. You know. Milton Friedman famously
Speaker 1: said at one time that you know, monetary policy operates
Speaker 1: with long and variable lags. I think more recent research
Speaker 1: is indicated that the lags perhaps because the economy has
Speaker 1: become more financialized, the lags that perhaps not so uh,
Speaker 1: not so long. And in particular now FED officials like
Speaker 1: Bill Dudley, who I think does a great job, talk
Speaker 1: about financial conditions as being an input into the FEDS calculation. Um.
Speaker 1: I think the best example of the challenges with counter
Speaker 1: circle fiscal policy as you look back in the President
Speaker 1: Obama administration when we had a big recession, they wanted
Speaker 1: to do kind of circle policy. Uh, there's some talk
Speaker 1: about doing infrastructure. I think you can look it up
Speaker 1: on Google. President already yeah, he said, I found the
Speaker 1: herd out the hard way. There aren't a lot of
Speaker 1: shovel ready projects. So that's sort of an example of
Speaker 1: the implementation. But if you think about it, coming out
Speaker 1: of a financial crisis, you don't want shovel ready products projects.
Speaker 1: You want long scale things that will put people back
Speaker 1: to work. Start that. You know, if you're really dealing
Speaker 1: with a keensie stimulus to replace the private sector shortfall,
Speaker 1: well why not have a two three four year post
Speaker 1: crisis project instead of all right, we're going to repay
Speaker 1: a few roads and then we're done. Yeah, yeah, no,
Speaker 1: I I agree, and I and I think that that
Speaker 1: We'll see what comes out of the discussions in Washington
Speaker 1: on on on infrastructure. But I think clearly the economy
Speaker 1: needs better and more infrastructure. But but so far there's
Speaker 1: a staleman about putting more in place. Is it is
Speaker 1: it the spending aspect of it is or is it
Speaker 1: a lack of consensus on what needs to be spent upon.
Speaker 1: I think it's all the above. I mean, infra infrastructure,
Speaker 1: if it's done appropriately, UH should generate future tax revenues
Speaker 1: with more economic growth, I think. I think so that
Speaker 1: needs to be factored in. I think the element is
Speaker 1: how you select projects and how you prioritize obviously, you
Speaker 1: know that that sometimes is also a bottleneck in these
Speaker 1: uh in these things. Yeah. So, but by the way,
Speaker 1: here are my my standard questions, and I'm holding them
Speaker 1: off because I know so many of these we we
Speaker 1: blew through because as we were chatting, Um, each of
Speaker 1: your comments led to a different question, and so I really,
Speaker 1: I really hardly used my my usual questions, UM, new normal,
Speaker 1: no signs inflation? Uh, okay, so we could talk next question.
Speaker 1: So I referenced the FED as as being the only
Speaker 1: game in town when there was monetary policy but not
Speaker 1: fiscal policy. Is that still the case today because we
Speaker 1: haven't seen a whole we were expecting a wall, We
Speaker 1: were expecting some infrastructure respecting a lot of things. Hey,
Speaker 1: we're kinda you know, it's it's we're halfway through the
Speaker 1: first year. We really haven't seen a lot of motion
Speaker 1: on any of these things. Yeah, well, exactly so. And
Speaker 1: I think the economy right now East, according to the FED,
Speaker 1: is close to full uh employment. So you're we're probably
Speaker 1: not at a point bearer where we need, you know,
Speaker 1: a lot of counter cyclical policy. But you're right, there
Speaker 1: had been some view coming out of the election. By
Speaker 1: now we would have some tax reform, infrastructure and uh
Speaker 1: the like patriation of which could be which could be used.
Speaker 1: And I mentioned in an earlier segment, you know, our
Speaker 1: our corporate tax code is really an abomination. It doesn't
Speaker 1: raise a whole lot of money, and it encourages multinational
Speaker 1: companies to locate abroad. So there's a lot that we
Speaker 1: can do there. But but I think really the mode
Speaker 1: that we're in now is, you know, the FED wants
Speaker 1: to normalize. I think a point I've made uh many
Speaker 1: times on on Bloomberg and other places is I think
Speaker 1: right now we have to think of the FED with
Speaker 1: the funds rate at less than a percent, with inflation
Speaker 1: around two, policy is now still very accommodative in the US.
Speaker 1: So I prefer not to call the Fed as as
Speaker 1: necessarily tightening rates. I think I think here Yelling's correct.
Speaker 1: I think the Fed is removing accommodation. I think as
Speaker 1: we remove a common addation, we get to a point,
Speaker 1: perhaps uh into into team where you can think of
Speaker 1: policy as being tight. But with a fully employed economy
Speaker 1: and inflation around too and the federal funds rate at
Speaker 1: ninety basis points, this is not a tight monetary policy.
Speaker 1: You've used the phrase normalization. We're moving from a emergency footing, yeah,
Speaker 1: back to a more normal rate, and the emergency is over.
Speaker 1: That's the emergency is over. So so I have to
Speaker 1: go to the abomination that is the tax code. This
Speaker 1: is very much a series of Christmas ornaments, unrelated, all
Speaker 1: hung on on the tax code as as responses to
Speaker 1: specific lobbying by specific things. Let's talk about what the
Speaker 1: US corporate tax code should look like. So what do
Speaker 1: you think would make the most amount of sense if
Speaker 1: you had if you got tagged by this White House
Speaker 1: and they said, give us five things we should do.
Speaker 1: What would your response base? Well, I would I would
Speaker 1: make a couple of points with a proviso that I'm
Speaker 1: not a tax expert, but but what I would say
Speaker 1: is we need lower rate, lower rates and a broader base,
Speaker 1: and we need a code. I would go through the
Speaker 1: code with a magnifying glass and a microscope to get
Speaker 1: rid of anything that would encourage a US company to
Speaker 1: locate production abroad when it could do that production in
Speaker 1: in the US. UM. And there are different ways to
Speaker 1: do that, UM. But I, to me, my principle would
Speaker 1: be lower rates because we do have very high rates
Speaker 1: now a base actual rates effectively there about but effectively
Speaker 1: because of all the especially for multinational companies, and if
Speaker 1: you're a US based company, you more or lesser paying
Speaker 1: close to that rate. So multinationals I would really go
Speaker 1: I guess my bottom principle be lower rates, a broader base,
Speaker 1: and really go through with a magnifying glass and a microscope.
Speaker 1: Any item in the code that actively encourages a company
Speaker 1: to locate abroad, and we have a out of those now,
Speaker 1: so what what about the repatriated earnings? For example? Those
Speaker 1: are sitting abroad doing doing, doing nothing, um. And the
Speaker 1: reason they're broad is our code is said, if you
Speaker 1: quote keep your form profits abroad, you know you're not
Speaker 1: facing a US level of tensation. So I think any
Speaker 1: deal that we do see in Washington will have you know,
Speaker 1: a levy on those overseas profits brought into the US.
Speaker 1: And then going forward, we really need a code that
Speaker 1: doesn't encourage companies to do that in the first place.
Speaker 1: What's a reasonable rate for corporate taxes? Trump wants. The
Speaker 1: number we've been hearing from from people in the House
Speaker 1: has been what what do you think is both reasonable
Speaker 1: economically and politically feasible. I don't put you on the spot, No,
Speaker 1: I understood. I I think. I think if you actually
Speaker 1: do a real reform all a Reagan in eighties six, uh,
Speaker 1: when you're doing when you are broadening the base, uh,
Speaker 1: and you could afford much lower rates, certainly some in
Speaker 1: the range of in a serious tax reform I think
Speaker 1: would be would be feasible and appropriate and would make
Speaker 1: us competitive. And then the conversation that's come out of
Speaker 1: Paul Ryan's office was making small businesses theoretically one of
Speaker 1: the prime economic engines of growth, and he wants to
Speaker 1: make the LLC rate the small companies, partnerships, etcetera. Wants
Speaker 1: that rate to be the equivalent of the corporate rates.
Speaker 1: Is that a realistic possibility? Well, I think, I think,
Speaker 1: And again with the proviser that I I focus on
Speaker 1: money and not taxes. My understanding of that issue, um,
Speaker 1: is that it would have to be structured in a
Speaker 1: very careful way, or otherwise you open up a big
Speaker 1: gap between the personal rate and the corporate because, as
Speaker 1: you know, a lot of those LLCs are now probably
Speaker 1: familiar with that pay at the personal rate, and so
Speaker 1: um and so um it would it would not be
Speaker 1: ample to go down that road. I'm not saying it
Speaker 1: couldn't happen, but but it would have to be structured
Speaker 1: in a way that you're not essentially uh, you know,
Speaker 1: eliminating tax at the individual as individuals, we can all
Speaker 1: become corporations to lower at tax rates. Partnerships so so
Speaker 1: so the rate the base. What about all those favored
Speaker 1: UM one office and and specific UH special interest lobbied
Speaker 1: UH breaks for in the tax code. Is it possible
Speaker 1: to get rid of those in exchange for a lower
Speaker 1: rate or is that just not realistic? You know, doing
Speaker 1: Barry doing true tax reform UH is actually hard. The
Speaker 1: last time we really did in the US was was
Speaker 1: thirty plus years ago. UH. So I think that the
Speaker 1: most likely scenario, based on history, UM, is that we
Speaker 1: do get a reduction in corporate race, we get some
Speaker 1: base broadening UM potentially some movement on infrastructure. But but
Speaker 1: I think that it's a pretty much of a large
Speaker 1: shot now that we get a true tax reform UH
Speaker 1: in this process. I hope I'm wrong. I'd love to
Speaker 1: see it. But but is that a function of just
Speaker 1: a loss of momentum and other politics or is it.
Speaker 1: It's so complex, and I have to I think the
Speaker 1: eighties six episodes instructive and so of my some of
Speaker 1: my friends get bored when I say this, but well,
Speaker 1: it was instructive about that episode. And I should mention
Speaker 1: that that I had the good fortune early in my
Speaker 1: career to work at the Counts of Economic Advisors in
Speaker 1: the Reagan administration. So on my wall is a picture
Speaker 1: with me and the Oval President Reagan UM and so
Speaker 1: I was there in eighties six as a junior economist,
Speaker 1: and so it was a vivid impression on me. And
Speaker 1: what people have to remember about that is that that
Speaker 1: process was bipartisan from the get go. Bill Bradley, you know,
Speaker 1: hall of fame basketball player and legendary senator from New Jersey,
Speaker 1: was a big proponative doing tax form. Dick Geppard in
Speaker 1: the House, Dan Rostenkowski, you know, the kingmaker from Illinois,
Speaker 1: were big parts of of that. So I think the
Speaker 1: long shot now is, at least as of June two seventeen,
Speaker 1: we don't see a lot of bipartisan consensus on tax
Speaker 1: reform like we did in eighty six. And was Jack
Speaker 1: Kemp around that point is we're just getting just getting
Speaker 1: started in the House. Yeah, so that that's you're describing
Speaker 1: what is essentially a different era, different both economics, tax policy,
Speaker 1: and politics. And when that bill passed, I don't have
Speaker 1: the exact numbers in front of me, but I as
Speaker 1: I recall when it did pass the Senate, it was
Speaker 1: with well over sixty votes and and so yeah, it
Speaker 1: was definitely a bipartisan bill. So I have a friend
Speaker 1: who will go nameless, but he's involved in the Trump
Speaker 1: administration and he knows that fiscally, I'm fairly conservative. Socially,
Speaker 1: I'm much more liberal than than Trump is. And when
Speaker 1: the travel Band first came out the direct messages back
Speaker 1: and forth, I said, listen, you have a narrow window
Speaker 1: to get some corporate tax reform through. I know he
Speaker 1: doesn't like to take counsel from other people. You gotta
Speaker 1: get this nonsense to stop, because this window isn't gonna
Speaker 1: be open forever. And this is really the single most
Speaker 1: important thing facing the U. S. Economy. If you could
Speaker 1: get a major corporate of corporate tax reform, a lower
Speaker 1: rate of broader brace, and repatriate a few turillion dollars overseas,
Speaker 1: you're teeing up the next two or three decades of economics.
Speaker 1: So stop messing around with a travel ban, and you
Speaker 1: think this window is gonna be open forever. It's not.
Speaker 1: And what I'm hearing from you is a sense that
Speaker 1: that window is closing. Well it it. I hope I'm wrong.
Speaker 1: I hope we're wrong, but right now it appears to
Speaker 1: be the The other thing. Remember Barry about the way
Speaker 1: Washington works, and again I spent most of my career
Speaker 1: outside of Washington, but a couple of tours of duty
Speaker 1: there is We think about a president having a four
Speaker 1: year term, but if you to people who have actually
Speaker 1: done it. I've gotten to know some former chiefs of staff.
Speaker 1: For example, when you're in the White House, you don't
Speaker 1: think you've got four years. You're thinking you've maybe got
Speaker 1: fourteen months because basically you've got the midterm elections and
Speaker 1: your popularity. And at that point we'll determine whether the
Speaker 1: coomass gritters are gonna either be accommodative or are going
Speaker 1: to run away from you in the next day. And
Speaker 1: then you might say, well, but then in year three
Speaker 1: you get past the midterm elections, well, then in year
Speaker 1: three that we're all speculating on what the next presidential
Speaker 1: election is gonna look like so it's fourteen an eight
Speaker 1: year president maybe has twenty four months. That's amazing to
Speaker 1: actually get stuff done. Reagan was the exception because he
Speaker 1: got a lot done at the end of his second term.
Speaker 1: But but in his popularity also people forget his popularity
Speaker 1: then was through the roof. I mean, if you look
Speaker 1: at the past couple of presidents, Bush had a huge
Speaker 1: popularity surgeon, you know, one and eleven, and that gradually faded.
Speaker 1: And Obama's popularity really was the last six last year
Speaker 1: of his presidency and beyond he was most popular out
Speaker 1: of office. And I'm not saying that sarcastically. If you
Speaker 1: really only have fourteen months, that really changes the dynamic
Speaker 1: of what can be accomplished. Reagan really is the except,
Speaker 1: I guess to some degree, Clinton Clinton got a lot
Speaker 1: done as well, not counting notwithstanding the impeachment and and
Speaker 1: and by the way, in both cases, it helps to
Speaker 1: have a booming economy and seven of your you know,
Speaker 1: Clinton's economy and Reagan's economy were a lot of ways
Speaker 1: very similar, and that they had legs. They had strong
Speaker 1: growth in year seven, year year eight, and very much
Speaker 1: technology driven a whole lot of new industrial about absolutely
Speaker 1: and to our earlier point, both enjoying the fruits of
Speaker 1: Paul Wolkers. Thank you, thank you, Paul my hero. So
Speaker 1: on that note, let's jump to some of our favorite questions.
Speaker 1: So the standard questions I ask all of my guests,
Speaker 1: some of which I created, some of which actually came
Speaker 1: from listeners, including uh no, this question is my question,
Speaker 1: which is tell us something that people don't know about
Speaker 1: your background. Well, very I'll tell I'll tell you something.
Speaker 1: A lot of people to know my background. I am
Speaker 1: a very avid amateur musician, and I've recorded my first CD.
Speaker 1: I have a copy for you and all original tunes
Speaker 1: and which absolutely recorded with some of the best session
Speaker 1: players on the planet, and two of the tracks were
Speaker 1: recorded at Abbey Road Studios for those of us Studio studio.
Speaker 1: So that's a little present for you and I. Well,
Speaker 1: I play a little acoustic guitar and some bass. But
Speaker 1: my real my real realization is I'm at a point
Speaker 1: now where if I hear a song, I am able
Speaker 1: to work top session players through this technology, send them
Speaker 1: my song files. They overdubbed their parts and I mixed
Speaker 1: them in my home studio on Connecticut. Yeah, so that's
Speaker 1: how um Ben Gibbert of of Deathcap for Cuties created
Speaker 1: Postal Service, the name of the now today you do
Speaker 1: it electronically. The name Postal Service comes from them mailing
Speaker 1: tapes back and forth up from I think it was
Speaker 1: California to Seattle and back. So you're doing this all
Speaker 1: digitally online and you're you're, yeah, working with tops in anyway.
Speaker 1: It's available on iTunes. Richard Clarena. The album is called
Speaker 1: Time No Changes. So that's that's amazing. And we were
Speaker 1: talking earlier about Lawrence Juber. Yeah, go to YouTube search
Speaker 1: for for Lawrence Juber Beatles. I mean he has a
Speaker 1: whole universe of his own original recordings, which if you're
Speaker 1: at all a guitarist you'll find. Yeah, but the Beatles
Speaker 1: stuff is back back to Derrick Thompson's comment, it's familiar
Speaker 1: enough that it catches your ear, but it's different enough
Speaker 1: that it it throws you off step and and that Um,
Speaker 1: I'm trying to remember who the graphic designer was an
Speaker 1: engine architect in the thirties who called it um most
Speaker 1: advanced yet acceptable. Maya was Musically, it's how far away
Speaker 1: can you get? From what you're familiar with and yet
Speaker 1: still have enough recognition that it's accessible. And that's one
Speaker 1: of the reasons I find the Juber Beatles and McCartney stuff.
Speaker 1: It's it's clearly, oh I know this song, I know
Speaker 1: this melody, but it's such a different arrangement that it stands.
Speaker 1: It's not just a cover. I mean, when you hear
Speaker 1: Beatles covers, they're either too similar or two different. It's
Speaker 1: very tough to cover the Beatles. Believe me, I tried
Speaker 1: it earlier. When when you hear Juber stuff, you can say, oh,
Speaker 1: that is the sweet spot. Beat mean, the melody is
Speaker 1: note for note perfectly, the arrangement is so and there's
Speaker 1: no overdubs or electronics. It's just him plants remarkable, Um
Speaker 1: cutting room this week you should use definitely, and I
Speaker 1: it's an early show. It's like seven thirty that I
Speaker 1: was gonna say for an early rising is great. So
Speaker 1: thank you for the c D. I will definitely uh
Speaker 1: reference that uh and and listen to it this weekend. Um,
Speaker 1: you mentioned James Tobin. Tell us about some of your
Speaker 1: early mentors. Well, I would list three. Um. I was
Speaker 1: very lucky in college to have a mentor professor University
Speaker 1: of Illinois, gentleman who I'm still great professors at Georgetown now,
Speaker 1: guy named Matthew CANZONERI and went to Matt's office as
Speaker 1: a sophomore, and I basically said, I've taken your course,
Speaker 1: So what does someone have to do to actually become
Speaker 1: an economics professor? Like what is how do you actually
Speaker 1: go from being an undergraduate and economics professor? And he
Speaker 1: took out a legal pat and he said, you need
Speaker 1: to take these courses and you need to do have
Speaker 1: this math and this preparation. And he basically gave me
Speaker 1: a template that I followed. And so that mentorship and
Speaker 1: that support as a ninth year old, twenty year old
Speaker 1: undergraduate was was incredibly viable for me. And I'll be
Speaker 1: forever grateful. And we're still friends and I we still
Speaker 1: you know, with each other. At Harvard, I had the
Speaker 1: good fortune to work with a guy named Benjamin Friedman.
Speaker 1: Ben is an incredible economist, and one thing I learned
Speaker 1: from Ben is Ben always thought good economics was about
Speaker 1: the questions that we asked, not about the methodology we use.
Speaker 1: And I've always tried to remember that because economics can
Speaker 1: get our Kane in mathematical So in my own work,
Speaker 1: I always try to start with with an interesting question
Speaker 1: and then let the methodology work out as it will.
Speaker 1: And I learned that from from Ben. So I think
Speaker 1: i'd name those those two. That's that's that's really quite fascinating.
Speaker 1: You knew it nineteen exactly what you wanted to do. Yeah,
Speaker 1: I know it was clear. I mean not everybody that
Speaker 1: that's quite I actually lived. I I knew at eighteen
Speaker 1: because I took principles of economy much at the University
Speaker 1: of Illinois from a very dynamic professor, and I just said,
Speaker 1: that's that's what I'm doing. I want to be an
Speaker 1: economics professor. Yeah, I won't tell you what my first
Speaker 1: economics course was like, not have made any sense to me. Wait,
Speaker 1: humans are rational profit um so, so what about investors?
Speaker 1: What investors out there have influenced the way you look
Speaker 1: at markets and the economy. Yeah, I think I would.
Speaker 1: I would name you mentioned him in an earlier segment.
Speaker 1: I bring it up again, Paul McAuley. I think given
Speaker 1: that my background is in macro economics, I tend to
Speaker 1: be influenced by people who try to use macro to
Speaker 1: think about markets, and I think I think Paul is
Speaker 1: a genius in that he's very creative, he's not tethered
Speaker 1: to convention or custom, and has got a great gut
Speaker 1: for macro and markets. So I probably mentioned Paul very
Speaker 1: much in that in that category. Now he's gonna come
Speaker 1: to me and said, you know, Clara said I was
Speaker 1: a genius. I have to listen to that. When I do,
Speaker 1: it's like, now, now you pay corner. Let me give
Speaker 1: you an anecdote. So I did a paper for a
Speaker 1: Boston FED conference in two thousand and ten on the
Speaker 1: financial crisis, and so in researching that, I went back
Speaker 1: and read all of the people who claimed they had
Speaker 1: called the financial crisis uh, and I basically concluded that
Speaker 1: there are only two people who basically not only got
Speaker 1: it right, but got the reasoning right. And McCauley was one,
Speaker 1: and Rogy Roger and mcgreing rog And at Chicago was
Speaker 1: the other. So a lot of people are saying we
Speaker 1: could have a crisis, but they got the reasons wrong.
Speaker 1: The other the people who actually saw the fragility in
Speaker 1: the financial system and the Minsky stability creating instability, really
Speaker 1: McCulley and to some extent roging. That's that's fascinating. If
Speaker 1: I remember Rajin spoke at Jackson Hall in seven, very
Speaker 1: people like what is this guy talking? Yeah, it was
Speaker 1: very much not only prescient, but timely, because there have
Speaker 1: been people who have been calling the calling for the
Speaker 1: crisis every year for the past twenty years. They don't
Speaker 1: they don't get credit exactly, but oh seven, yeah, August
Speaker 1: of seven. That's a good call. That's a really good call.
Speaker 1: Let's talk about books. This is very often listeners favorite
Speaker 1: UM segment. What what sort of books do you read? What?
Speaker 1: What have you enjoyed? What do you recommend? Well, I'll
Speaker 1: I'll just give you ones that have made an impact
Speaker 1: on me as opposed to what's on my nightstand now
Speaker 1: I named I name three UM. I would start with,
Speaker 1: I think a classic in both its scholarship and influences,
Speaker 1: a book that some of your listeners may or may
Speaker 1: not know, called The Best and the Brightest by David
Speaker 1: Howiebert Stam, which is a model of how to do
Speaker 1: concise biographies of a number of individuals who were all interacting.
Speaker 1: So there's been so much mythology about the Kennedy administration,
Speaker 1: but Halbert Stam is of course passed away brilliant writer
Speaker 1: and reporter and just goes these wonderful character sketches of
Speaker 1: all the people from different backgrounds McNamara, the Kennedy's, the
Speaker 1: Bundyes and Hall the how they all led to this
Speaker 1: what we now know group think in crisis collapse over Vietnam.
Speaker 1: So I name that. I would also name a book
Speaker 1: that's been very often cited but had a big impact
Speaker 1: on me, Jared Diamonds, Guns, Germs and Steel, as a
Speaker 1: model of how to What's great about him is that
Speaker 1: he spans multiple disciplines, and so academics oftentimes focus very
Speaker 1: narrowly on one little thing, and his understanding and breadth
Speaker 1: of pulling in different disciplines history and sociology and anthropology
Speaker 1: is really uh remarkable in that Another one which very
Speaker 1: popular but I thought was a model of of being
Speaker 1: both clever and well thought through as the Gladwell tipping
Speaker 1: point argument, which I remember from an essay he did
Speaker 1: in The New Yorker and then turned that into a
Speaker 1: book and now in an industry. Uh So, those those
Speaker 1: would be three that I would that that I would
Speaker 1: mention in terms of recently, again getting back to the
Speaker 1: muse Element. There's a wonderful, uh exhaustive biography of the
Speaker 1: Beatles by Mark Lewison called uh all those Years. Uh.
Speaker 1: He's spent eleven years just doing the period from nineteen
Speaker 1: fifty five to sixty two. It's come out in two versions.
Speaker 1: One is the version that that's about four hundred pages
Speaker 1: that you can get, you know, at any place. And
Speaker 1: then in the UK they released actually the first manuscript
Speaker 1: he submitted, which is fourteen hundred pages. And so if
Speaker 1: if you want to know everything on every day, what
Speaker 1: newspaper they were reading, and how much they paid for
Speaker 1: a beer at the pub in ninety six, then you
Speaker 1: want you want the original manuscript version of have you
Speaker 1: seen the Black Um Black Covered Beatles Book? I think
Speaker 1: Spitzer Spit Bob Spitz that one too. I haven't gotten
Speaker 1: to it yet, but it's like also almost a thousand pages.
Speaker 1: It's monstrous, and people who have plowed through it said
Speaker 1: it's wonderful. It is, but it's just an intimidating but
Speaker 1: but but Louis but Lewison is the is the gold stand.
Speaker 1: Give me one more that you're reading recently or currently. Um,
Speaker 1: I'm I'm I'm trying to keep up on um. I'm
Speaker 1: trying to keep up on on geopolitics and China actually,
Speaker 1: and for for the most part, books are not as useful.
Speaker 1: So I'm trying to get step I'm trying to get
Speaker 1: steeped because I think what's going on now Barry is
Speaker 1: a remarkable transition. And the thing about China is one
Speaker 1: of my friends told me a guy named Dave Smick.
Speaker 1: I don't know if you know Dave Spick, but by
Speaker 1: the way, would be a great guest recommend Dave. Dave
Speaker 1: is a fascinating fellow. And in Dave's line on on
Speaker 1: China was um thing he said, Rich. The thing about
Speaker 1: China is that they're billion people, but they're only six
Speaker 1: who know what's going on, and they're not and they're
Speaker 1: not talking. So I think we're all we're sort of
Speaker 1: all on the fly with with China. But what's going
Speaker 1: on there, both economically and now the transition potentially geopolitically
Speaker 1: and militarily, it's really going to transform the next ten years.
Speaker 1: And so anything I can get on China by and
Speaker 1: for I guess of those Kissingers probably the best. So
Speaker 1: Kissingers written really written a book on China that is
Speaker 1: a must must read. I've been the CFRs regular updates
Speaker 1: on China are they have boots on the ground. They're fascinating,
Speaker 1: and the thought of any sort of book is immediately
Speaker 1: dated because seen stuff seems to be changing so rapid.
Speaker 1: But that that's scenario where the Internet and having networks
Speaker 1: of people either directly or indirectly can be very valuable
Speaker 1: because you know, we can assemble things now. Uh, you
Speaker 1: know on our computer screens that twenty years ago would
Speaker 1: have been possible, it would have been impossible. So on China,
Speaker 1: I'm doing it sort of on the fly. Yeah, So
Speaker 1: let's talk about what's changed since you became an economist.
Speaker 1: What is different in the industry today versus ten years ago. Well,
Speaker 1: as I said, I think the preparation, I think the
Speaker 1: sorting in terms of getting into graduate programs is is
Speaker 1: very effective at word, getting in people with like six
Speaker 1: sigma math skills. I guess I'm a bit of a
Speaker 1: bit of a skeptic that that's all you need to
Speaker 1: do economics. So that would be one thing. The other thing,
Speaker 1: of course, is big data. That's the buzzword now. But
Speaker 1: I think about my early efforts as an empirical macro economist,
Speaker 1: and how what a big deal it was, you know,
Speaker 1: to get a data set and to clean a data set,
Speaker 1: and we just now take it for granted because on
Speaker 1: our Bloomberg term. I mean still I'm not that Bloomberg
Speaker 1: needs the plug, but I'm a kid in the candy
Speaker 1: store in a Bloomberg terminal. I mean, the amount of
Speaker 1: data available is just astonishing. It's astonishing, and your ability
Speaker 1: to to sort it and compare and into it. So
Speaker 1: so I think we're just at the infancy, you know,
Speaker 1: in the sort of baseball analogy. We're not even out
Speaker 1: of the first ending in terms of what big data
Speaker 1: is going to do. The challenge a big data, of course,
Speaker 1: is there's gonna be a lot of a lot of
Speaker 1: dead ends and a lot of false promises. But I'm
Speaker 1: absolutely convinced in next ten years, someone or some group
Speaker 1: of entrepreneurs are going to get big data right, and
Speaker 1: it's gonna it's to transform economics and probably every other
Speaker 1: social science. I read the policy I read not too
Speaker 1: long ago. Steve Balmer, former CEO and Microsoft, has been
Speaker 1: assembling and releasing these giant data sets for people to play.
Speaker 1: You know, for example, earlier we talked about now casting
Speaker 1: the idea that instead of forecasting the future, you're trying
Speaker 1: to track the present. Uh And now casting is all
Speaker 1: about about big data. And we could be at a
Speaker 1: point in ten years where when by the time the
Speaker 1: GDP numbers come out, nobody even really cares because we
Speaker 1: will have processed all of that on our Bloomberg terminal. Now,
Speaker 1: don't you think day to day, week to week, month
Speaker 1: and month GDP activity is so volatile, Not that it's
Speaker 1: volatile in a negative way, but the weekly and monthly
Speaker 1: cycle is so all over the map that it's very
Speaker 1: hard to extract a credible because so far, I think
Speaker 1: it's the Atlanta and the New York beds have the
Speaker 1: GDP now exactly, and neither of them have been especially
Speaker 1: active well, and in it shows you how hard it
Speaker 1: is to look. US economy makes seventeen trillion dollars worth
Speaker 1: of stuff every year, and that doesn't even count all
Speaker 1: the churning of existing assets. So it is a complex beast.
Speaker 1: But but I but I think that there are there
Speaker 1: are things we're learning from from this that are going
Speaker 1: to be useful. And I am Barry I can tell
Speaker 1: you I definitely see it in financial markets look, for example,
Speaker 1: the Bloomberg surprise index. So this whole idea instead of
Speaker 1: is the data stronger weak? Is the data stronger weaker
Speaker 1: than expected? That's that's revolutionizing the way people think about everything.
Speaker 1: Every everything's relative expectation. When people before, folks like Bloomberg
Speaker 1: archive that you sort of knew it, but there was
Speaker 1: no data set on primet. We used to see it
Speaker 1: with quotaly earning surprise and sometimes you'd have a good
Speaker 1: number in the market, stock would sell off, and sometimes
Speaker 1: you'd have a lousy number and it would rally. And
Speaker 1: really the question isn't what are the earnings, it's exactly
Speaker 1: what you reference. What are the earnings relative to expectations?
Speaker 1: Is this an upside or downside surprise? A negative number
Speaker 1: could be an upside surprise, and positive number could be
Speaker 1: a downside. It's very countintuitive until you start realized thinking
Speaker 1: about what's already reflecting. But that's an area where the
Speaker 1: data is now available, and even fifteen years ago it
Speaker 1: wasn't that that that's quite fascinating. What do you so
Speaker 1: big data? What do you see as the next major
Speaker 1: shifts in economics? Well, everyone says behavioral and I don't
Speaker 1: want to reign too much on the behavioral parade. I
Speaker 1: think that already had well. I think behavioral economics is
Speaker 1: very important. Here's what the stumbling block is. The stumbling
Speaker 1: block is we have very good insights into individual behavioral
Speaker 1: um departures from rationality, and we focus on this a
Speaker 1: lot of pin power. Our c I. O. Dan Iverson
Speaker 1: is very interested in this. In fact that our form
Speaker 1: we had a speaker, a woman named talently share It, who,
Speaker 1: by the way, with beating on optimism bias. Yes, yes,
Speaker 1: and so she does the neuroscience. Our brains are wired
Speaker 1: to be optimists, dig and it's pretty neat stop. So,
Speaker 1: by the way, there's an evolutionary reason for that, and
Speaker 1: that's her argument. If you're not optimistic, so ten of
Speaker 1: us are going to go down and were kill a mammoth.
Speaker 1: And if we're successful, hey, the group will have meat
Speaker 1: well winter. Yeah, a few of us may not make
Speaker 1: it back, but the species you've you've nailed. And so
Speaker 1: we actually had her at our forum and may talking
Speaker 1: about optimism bias to a bunch of bond traders. So
Speaker 1: so so behavior is very relevant the the area that
Speaker 1: it's either going to be a stumbling block or will
Speaker 1: be a breakthrough is to put behavioral economics in general
Speaker 1: equilibrium with markets. Right, So, yes, you know you've done
Speaker 1: this very successfully as an investor. You know that there's momentum,
Speaker 1: there's pessimism, optimism, and markets there there's a psychology in
Speaker 1: markets um. But at some point people are buying and
Speaker 1: selling and it's got to add up. So I think
Speaker 1: we're still falling short of having a general equilibrium model
Speaker 1: of how different behaviors interact. Uh, But that would be
Speaker 1: the next big thing if we could get what I
Speaker 1: would call a general equilibrium of behavioral economics. You know,
Speaker 1: I'm in the middle of a I'm reluctant to call
Speaker 1: it a debate. It's really an argument within this seemed
Speaker 1: to lab about the issue of how we perceive or
Speaker 1: misperceived risk. And I think when you look at the
Speaker 1: actual numbers of a total number of deaths relative to
Speaker 1: things like heart disease, cancer, falling out of bed, more
Speaker 1: many more people diets, you you're falling out of bed
Speaker 1: or in the shower, that that that are killed by terrorists.
Speaker 1: But but his argument is, well, you're looking at it
Speaker 1: in a normal distribution. It's really a fat tail event.
Speaker 1: And if a terrorist gets a biological weapon or a
Speaker 1: nuclear weapon and the numbers are just throw those all out,
Speaker 1: it's millions. And part of me is I understand the
Speaker 1: fat tail to the guy who wrote the black swan, though,
Speaker 1: does everything begin to look like a fat tail? And
Speaker 1: are we being pessimistic and fearful and giving into a
Speaker 1: worst things which is kind of how terrorists operate and
Speaker 1: they want to and and Barry, I have to tell
Speaker 1: you that certainly, one thing that I've observed and that
Speaker 1: we've noticed again compared when we began our career, if
Speaker 1: you had told us in the nineteen late eighties or
Speaker 1: early nineties, fast forward in the seventeen there will be five,
Speaker 1: six or seven wars in the Middle East. They're all
Speaker 1: shooting each other. Everybody's blowing each other up. Oh. And
Speaker 1: by the way, North Korea has got a nuclear warhead,
Speaker 1: and and I see BM Oh and by the way,
Speaker 1: someone full plane into the World Trade Center. You would
Speaker 1: basically say, you know, the SMP will be down right.
Speaker 1: So we're in a world where there is this overlay
Speaker 1: of all the stuff that can happen, all these black
Speaker 1: swarms that can happen, and you have financial markets you know,
Speaker 1: move on. So I the one way to look at
Speaker 1: that is to say the market has looked at it
Speaker 1: discounted the likely possibility of that occurring, and is looking
Speaker 1: at the probabilities that although the that that something awful
Speaker 1: isn't gonna happen. And then the counter argument as well,
Speaker 1: the markets seem to think the same thing around oh
Speaker 1: seven and look what happened. Man. So it's really a
Speaker 1: fascinating um question. Let's let's talk about failure. Tell us
Speaker 1: about a time something you try to do uh and failed.
Speaker 1: What was that? Why? What did you learn from the
Speaker 1: experience of something not working out as expected? Well, I
Speaker 1: think what I would I would say early in my
Speaker 1: career I made a misjudgment of failure to think that
Speaker 1: I was going to be a mathematical economist and make
Speaker 1: my breakthrough by sitting in a room with equations and
Speaker 1: some and reveal some ultimate mathematical truth. And I spent
Speaker 1: about five years doing that, not very successfully to myself
Speaker 1: for others. And I really realized that what I got
Speaker 1: into economics was to actually be trying to understand the
Speaker 1: world the way it was, not the way it fit
Speaker 1: into a model. So I had to shift gears away
Speaker 1: from thinking of myself as an abstract mathematician to someone
Speaker 1: who began to think of himself as doing empirical work too,
Speaker 1: more or less understand the world as messy as it was.
Speaker 1: And I get back to the point I made about
Speaker 1: Ben Freedman, give me the advice, which is economics is
Speaker 1: about the questions we asked, not about the methodology that
Speaker 1: that we use. But it took me about five years
Speaker 1: to to sort of realize that that that's really interesting.
Speaker 1: It was I don't I don't picture you as a
Speaker 1: equation guy. I was a question. I was, um, tell
Speaker 1: us about something you do outside of the office, What
Speaker 1: do you do to keep I already I already plugged
Speaker 1: the plug to c D. So that's the relax Oh, absolutely,
Speaker 1: a method of unwinding. Well. It also helps me to
Speaker 1: commute because I live in Connecticut, so I spend you know,
Speaker 1: two and a half hours plus a day on Metro
Speaker 1: North and through the wonders of technology. Thank you, Steve Jobs.
Speaker 1: You know, I have a lot of my musical projects
Speaker 1: on my iPad, so I can do editing and stuff
Speaker 1: on the train. In terms of away from that, I'm
Speaker 1: sort of a weekend golfer with my boys. Uh, they're
Speaker 1: much better than I am. So it's it counts as
Speaker 1: both some golf time and family time. And you know,
Speaker 1: in my forties I took up downhill skiing and I'll
Speaker 1: never be great, but one week a year I go
Speaker 1: skiing and I love it. So that's sort of my
Speaker 1: sort of my outside the office. And I love to
Speaker 1: go for walks with my wife in eectiquette. Yeah, where
Speaker 1: do you go skiing? Well, that's the great thing. We've
Speaker 1: been skiing a lot of people. So we've been to Europe,
Speaker 1: We've been to the Dolomines in Italy, we've been to
Speaker 1: to the Swiss Alps, we've been out to Deer Valley,
Speaker 1: to Taws and so you get to see different parts
Speaker 1: of the world that way. One week a year, yeah,
Speaker 1: maybe two. Yeah, that's all I can afford. So so
Speaker 1: quick footnote in grad school, my best friends undergrad had
Speaker 1: been Dartmouth and he had been on the ski team
Speaker 1: and I used to go to Hunter another local mountains
Speaker 1: and I thought I was okay, and he suggested we
Speaker 1: join a ski group in our last year of grad
Speaker 1: school where we would take a bunch of college kids
Speaker 1: on some ski tour group and this way, broke grad
Speaker 1: students would get transportation, lift tickets, food housing. And so
Speaker 1: we did that and he was just amazing. And all
Speaker 1: I would do is try and keep up with him
Speaker 1: and not hit a tree. Those were my two goals.
Speaker 1: And you really it's one of those things I mentioned
Speaker 1: done in Kruger earlier. It's one of those things where
Speaker 1: you quickly are disabused of any false impression that you
Speaker 1: have some sort of skills in that area. It's like, oh,
Speaker 1: I can make it down the mountain without falling down.
Speaker 1: He's plowing through moguls at sixty and just blowing my mind.
Speaker 1: But that's what four years at Dartmouth will get you
Speaker 1: into a decent grad school and and great uh skiing skills. Um.
Speaker 1: So you work with a lot of students, you work
Speaker 1: with millennials. What sort of advice would you give to
Speaker 1: someone who was just starting their care year or thinking
Speaker 1: about starting a career in economics. Well, I've been doing
Speaker 1: some thinking on that and and I guess the one
Speaker 1: thing I would mentioned in this regard because I think
Speaker 1: relative to when when we were coming up, it's students
Speaker 1: have more of a choice now. Um, And I think
Speaker 1: that a lot of students starting out are attracted uh
Speaker 1: naturally to you know, being the next Mark Zuckerberg or
Speaker 1: or you know, or Bill Gates, and you know, sort
Speaker 1: of you sort of immediately go into an entrepreneurial wage
Speaker 1: or not an organization, and obviously that worked out great
Speaker 1: for them. I guess the thing that I observe is,
Speaker 1: I think I've always been part of organizations that I've
Speaker 1: been proud of, I've learned enormously, and obviously you know
Speaker 1: I So I'm a big believer that if you have
Speaker 1: some choices in your career, aligning yourself with quality organizations
Speaker 1: is a positive. You know, we think of negatives in
Speaker 1: this corporate politics and there's back stepping and all that stuff,
Speaker 1: but that's also true in the entrepreneurial world as well.
Speaker 1: So I think I think a career path where you
Speaker 1: if you have some choice both working within and learning
Speaker 1: within quality organizations and and also doing the entrepreneurial path
Speaker 1: at some point makes sense. But I think some folks
Speaker 1: immediately go from college, eating without college, right into that
Speaker 1: I'm going to be the next Mark Zuckerberg, And I
Speaker 1: don't know if that's necessarily going to serve them well.
Speaker 1: You need the skill set that you can only learn
Speaker 1: learning an organization. As a kid, I used to hear
Speaker 1: people want to become the next Michael Jordan's. The odds
Speaker 1: of that are just so hard, so long. And think
Speaker 1: he played in North Carolina, which is a very good organization.
Speaker 1: That's why I went right from high school to the NBA.
Speaker 1: That's why in a good organization. So so there are
Speaker 1: things to be garnered from from quality um UH surroundings
Speaker 1: And and our final question, and one of my favorites,
Speaker 1: what is it that you know about the world of
Speaker 1: economic ex global macroeconomics, investing today that you wish you
Speaker 1: knew years Yeah, And and I think to me the
Speaker 1: financial crisis UH was a real eye opener on this.
Speaker 1: I you know, I think the one thing that at
Speaker 1: least I and I think a lot of us understand
Speaker 1: now about global the global financial system UM is that,
Speaker 1: in some very important respects UM, it only operates with
Speaker 1: a level of transparency and oversight and regulation UM because
Speaker 1: in the absence of that, there are just too many
Speaker 1: incentives and there's too much money floating around. And I'm
Speaker 1: talking about things that are illegal. But I'm saying that
Speaker 1: I think a lot of the global financial system before
Speaker 1: the crisis was essentially priced and traded on a view
Speaker 1: that there was an implicit put option to some central
Speaker 1: bank somewhere the Greenspan put well as it had been
Speaker 1: alluded to um and and I think the failure to
Speaker 1: recognize that was was very was very costly. So now
Speaker 1: whenever I look at global macro, anything involving credit, or
Speaker 1: anything involving lending and borrowing, the first question I asked,
Speaker 1: how who do Marcus think has got the put option
Speaker 1: on this? And how and how is it priced? And
Speaker 1: I think a lot of a lot of mistakes and
Speaker 1: finance are about either opaque or miss price put options
Speaker 1: to central banks or governments. We have been speaking with
Speaker 1: Professor Richard Clarida. Richard, thank you so much for being
Speaker 1: so generous with your time. If you want to find
Speaker 1: more of Professor Clarda's writings, you can go to the
Speaker 1: NBER website. You have a page at Columbia University. And
Speaker 1: where else can they find information about your c D
Speaker 1: or anything else? Well, this the the CD is on
Speaker 1: iTunes and on Apple Music. So you just type in
Speaker 1: Richard Clarida and the name is Time no changes. It
Speaker 1: will pop right up. Fantastic. If you enjoyed this conversation,
Speaker 1: be sure and look up an Inch or down an
Speaker 1: inch on Apple iTunes or SoundCloud overcast Bloomberg dot com
Speaker 1: and you can see any of the other hundred plus
Speaker 1: g We're coming up on a hundred and fifty other
Speaker 1: such conversations. I would be remiss if I did not
Speaker 1: thank my engineer uh Medina Parwana, my booker and producer
Speaker 1: Taylor Riggs, and my head of research Michael bat Nick,
Speaker 1: for all of their assistance in putting these questions and
Speaker 1: interviews together. We love your comments, feedback and suggestions right
Speaker 1: to me at m IB podcast at Bloomberg dot net.
Speaker 1: I'm Barry Ridholts. You've been listening to Masters in Business
Speaker 1: on Bloomberg Radio.