1 00:00:11,480 --> 00:00:15,760 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:15,920 --> 00:00:21,040 Speaker 1: I'm Joe Wisenthal and unfortunately Tracy Ellaway is out this week. 3 00:00:21,480 --> 00:00:24,000 Speaker 1: But the good news is we have one of our 4 00:00:24,440 --> 00:00:28,880 Speaker 1: favorite recurring guests on the podcast. Today we're going to 5 00:00:28,920 --> 00:00:32,640 Speaker 1: be speaking with screenavs to Vedanta. He's the director of 6 00:00:32,720 --> 00:00:37,839 Speaker 1: research at the Jerome Levy Forecasting Center. Uh. Great voice 7 00:00:37,880 --> 00:00:41,240 Speaker 1: and great insights on markets and economics, and today we're 8 00:00:41,240 --> 00:00:43,640 Speaker 1: going to be talking a little bit about the Fed 9 00:00:44,320 --> 00:00:49,200 Speaker 1: monetary policy, bubbles, economic volatility and things like that. There's 10 00:00:49,240 --> 00:00:51,600 Speaker 1: a lot of um, there's a lot of belief out 11 00:00:51,680 --> 00:00:56,080 Speaker 1: there that the FED contributes to instability bubbles, but a 12 00:00:56,080 --> 00:00:58,520 Speaker 1: lot of the thinking is kind of muddled, sort of 13 00:00:58,760 --> 00:01:01,680 Speaker 1: overly simplistic. Idea is about a low rate just lead 14 00:01:01,720 --> 00:01:05,800 Speaker 1: to surgeon speculation. Uh. Screen of Oz has some more insightful, 15 00:01:05,920 --> 00:01:09,720 Speaker 1: complex ideas about the nature of central banking over the 16 00:01:09,800 --> 00:01:13,560 Speaker 1: last several decades and how it's contributed to less than 17 00:01:13,640 --> 00:01:17,360 Speaker 1: ideal outcomes in the economy. And I'm gonna talk to 18 00:01:17,440 --> 00:01:19,200 Speaker 1: him now, so sure. You thank you very much for 19 00:01:19,319 --> 00:01:21,560 Speaker 1: joining us. Thank you, thank you, Joe. I'm good to 20 00:01:21,560 --> 00:01:24,360 Speaker 1: be back. You know what's interesting before we get into 21 00:01:24,480 --> 00:01:29,160 Speaker 1: you wrote this paper recently on inflation targeting, But before 22 00:01:29,160 --> 00:01:31,240 Speaker 1: we get into that, it's funny. I was looking at 23 00:01:31,240 --> 00:01:35,360 Speaker 1: a chart recently of just inflation. You can measure it 24 00:01:35,360 --> 00:01:38,600 Speaker 1: obviously several different ways, and strip out of things over 25 00:01:38,640 --> 00:01:41,839 Speaker 1: the last fifteen years, and probably further if you strip 26 00:01:41,920 --> 00:01:46,160 Speaker 1: out oil prices, it's almost impossible to find any meaningful 27 00:01:46,840 --> 00:01:50,600 Speaker 1: up or down trend at all, even the economic collapse, 28 00:01:50,840 --> 00:01:53,640 Speaker 1: the boom or whatever. It's like, there's it's it kind 29 00:01:53,640 --> 00:01:56,040 Speaker 1: of just stays the same. It's a dead flat Yeah, 30 00:01:57,200 --> 00:01:59,880 Speaker 1: over read like this always strikes me. They get really excited. 31 00:02:00,320 --> 00:02:04,040 Speaker 1: The three months annualized rate of change in core CPI 32 00:02:04,160 --> 00:02:08,040 Speaker 1: excluding healthcare services is at its fastest level in three years, 33 00:02:08,040 --> 00:02:10,440 Speaker 1: and they get really excited. But then you zoom out. 34 00:02:10,520 --> 00:02:14,040 Speaker 1: It's like inflation hasn't changed dynamics in years. Yeah, and 35 00:02:14,080 --> 00:02:16,639 Speaker 1: we have got used to that. You know that that stability, 36 00:02:17,000 --> 00:02:18,840 Speaker 1: I mean that that even a small take up in 37 00:02:18,840 --> 00:02:21,959 Speaker 1: the three months gets people excited. You know how much 38 00:02:21,960 --> 00:02:26,200 Speaker 1: of they can be attributed to Fed policy in your view? 39 00:02:26,280 --> 00:02:29,840 Speaker 1: The fact that inflation trends are so stable, I mean, 40 00:02:30,080 --> 00:02:32,840 Speaker 1: what happens when inflation trends are stable? How much can 41 00:02:32,840 --> 00:02:36,040 Speaker 1: it be attributed to FED? I think certainly FED has 42 00:02:36,080 --> 00:02:38,600 Speaker 1: contributed to it. I mean, if you look at the 43 00:02:38,680 --> 00:02:42,040 Speaker 1: FED policy in the last twenty thirty years, what it 44 00:02:42,160 --> 00:02:46,240 Speaker 1: has done is implicitly they're not trying to I mean 45 00:02:46,280 --> 00:02:48,280 Speaker 1: a lot of people attribute a lot of motives to FED. 46 00:02:48,320 --> 00:02:50,000 Speaker 1: I just want to be careful. They're not trying to 47 00:02:50,040 --> 00:02:54,000 Speaker 1: do anything. They are trying to do within their mandate. Now, 48 00:02:54,080 --> 00:02:56,360 Speaker 1: it may be that the framework is wrong, which is 49 00:02:56,360 --> 00:02:59,920 Speaker 1: what I believe, um, but what they have tried to 50 00:03:00,000 --> 00:03:03,800 Speaker 1: do is they take two things very seriously low and stable. 51 00:03:04,400 --> 00:03:07,200 Speaker 1: The stable part of it is is a lot more 52 00:03:07,240 --> 00:03:09,760 Speaker 1: problematic than just the low part. In my opinion, it's 53 00:03:09,960 --> 00:03:11,880 Speaker 1: if you have low with a little bit of volatility 54 00:03:11,880 --> 00:03:15,280 Speaker 1: around it, that would be okay. Probably okay, maybe you 55 00:03:15,320 --> 00:03:17,720 Speaker 1: need to cheat it up a little bit, but but 56 00:03:17,840 --> 00:03:20,440 Speaker 1: you keep the stability. That you're pointing out is that 57 00:03:20,160 --> 00:03:23,280 Speaker 1: this is partly the FEDS doing. So let's start. You 58 00:03:23,320 --> 00:03:26,280 Speaker 1: wrote this paper and you took aim at a particular 59 00:03:26,639 --> 00:03:29,920 Speaker 1: particular approach to monetary policy or framework. I guess maybe 60 00:03:29,919 --> 00:03:33,080 Speaker 1: we want to be called called called inflation targeting. What 61 00:03:33,280 --> 00:03:36,920 Speaker 1: is inflation targeting? When did it start? When did the 62 00:03:37,040 --> 00:03:40,440 Speaker 1: FED adopt this current framework in your few The FED 63 00:03:40,520 --> 00:03:45,119 Speaker 1: actually officially started inflation targeting only in two thousand twelve UM, 64 00:03:45,160 --> 00:03:48,400 Speaker 1: but implicitly, if you look back, they probably have been 65 00:03:48,440 --> 00:03:51,880 Speaker 1: doing it since the early nineties or maybe mid nineties 66 00:03:51,960 --> 00:03:54,840 Speaker 1: at least, they have been doing that, and even before that, 67 00:03:54,880 --> 00:03:57,480 Speaker 1: you know, if you look at the seventies when people 68 00:03:57,520 --> 00:04:01,600 Speaker 1: really got, of course upset about inflation. So the original 69 00:04:01,640 --> 00:04:06,200 Speaker 1: Humphrey Orkins Act actually called for low unstable inflation inflation 70 00:04:06,240 --> 00:04:08,640 Speaker 1: to be like zero percent or you know, usually they 71 00:04:08,640 --> 00:04:10,960 Speaker 1: said that to zero is not possible to percent over 72 00:04:11,000 --> 00:04:14,560 Speaker 1: a long period of time. So it's been there. Implicitly, 73 00:04:14,680 --> 00:04:16,760 Speaker 1: we have been doing inflation targeting in one form or 74 00:04:16,760 --> 00:04:19,480 Speaker 1: the other at least since the mid nineties. What well, 75 00:04:19,480 --> 00:04:21,839 Speaker 1: what is it? What is so it's just this idea 76 00:04:21,960 --> 00:04:25,359 Speaker 1: that it's not enough to just have low inflation, but 77 00:04:25,440 --> 00:04:28,520 Speaker 1: that they should really worry about any sort of volatility. 78 00:04:28,560 --> 00:04:31,000 Speaker 1: And that is that, right? What is there? What's the 79 00:04:31,080 --> 00:04:34,560 Speaker 1: main approach to achieving that goal? So the main approach 80 00:04:34,560 --> 00:04:36,520 Speaker 1: to achieving those goals and this is the tricky part 81 00:04:36,560 --> 00:04:40,480 Speaker 1: because the mechanism is never really clarified, you know, when 82 00:04:40,520 --> 00:04:43,240 Speaker 1: you ask monitorists or when you ask the economists they 83 00:04:43,240 --> 00:04:45,920 Speaker 1: would tell you, oh, it's all through expectations. But these 84 00:04:45,960 --> 00:04:48,359 Speaker 1: expectations channels, I mean, if you really look at expecting 85 00:04:48,400 --> 00:04:51,360 Speaker 1: inflation expectations, they have really not changed much or they 86 00:04:51,400 --> 00:04:54,640 Speaker 1: don't seem to have any relation to reality sometimes. So 87 00:04:54,920 --> 00:04:57,120 Speaker 1: you know, I don't know how the expectation channel works 88 00:04:57,120 --> 00:05:00,320 Speaker 1: except in textbooks. But the basic idea between in the 89 00:05:00,400 --> 00:05:05,039 Speaker 1: expectations channel is through some magic. I know it's they 90 00:05:05,080 --> 00:05:08,080 Speaker 1: would never say magic. That we all expect inflation to 91 00:05:08,120 --> 00:05:11,520 Speaker 1: be low and maybe around two. And if everyone sort 92 00:05:11,560 --> 00:05:14,320 Speaker 1: of accepts that, and if we all accept that the 93 00:05:14,400 --> 00:05:17,599 Speaker 1: FED will do whatever it takes to keep it there, 94 00:05:18,080 --> 00:05:20,480 Speaker 1: then that has the effect of actually keeping it there. 95 00:05:21,200 --> 00:05:24,359 Speaker 1: And probably the main way sort of mechanically that the 96 00:05:24,400 --> 00:05:28,920 Speaker 1: FED keeps it there is by being very vigilant raising 97 00:05:29,000 --> 00:05:31,919 Speaker 1: rates at any sort of hint that inflation might be 98 00:05:31,960 --> 00:05:37,040 Speaker 1: picking up to reinforce this notion among consumers among businesses 99 00:05:37,400 --> 00:05:39,839 Speaker 1: that they will do what it takes. That's right, and 100 00:05:39,839 --> 00:05:42,240 Speaker 1: and that is that is that is clear, that signaling 101 00:05:42,279 --> 00:05:44,440 Speaker 1: aspect of it, apart from raising rates. All the talk 102 00:05:44,520 --> 00:05:46,839 Speaker 1: that goes along with it is one aspect of it. 103 00:05:47,160 --> 00:05:49,119 Speaker 1: To be sure, you know, I mean, of course people 104 00:05:49,200 --> 00:05:51,120 Speaker 1: to some extent. You know, if there is a set 105 00:05:51,200 --> 00:05:53,919 Speaker 1: expectations that you know, prices go up by two persons, 106 00:05:53,920 --> 00:05:56,919 Speaker 1: so people get hikes about two pers and people are happy, 107 00:05:57,080 --> 00:05:59,920 Speaker 1: and you know, that's what gets set in the by 108 00:06:00,000 --> 00:06:03,000 Speaker 1: seeing mechanism. But it doesn't work through the expectations way 109 00:06:03,080 --> 00:06:05,560 Speaker 1: way that a lot of people think it works. But 110 00:06:05,640 --> 00:06:08,440 Speaker 1: that is that's how they sort of explain it, or 111 00:06:08,520 --> 00:06:13,080 Speaker 1: that isn't theory. Now you say inflation targeting officially only 112 00:06:13,120 --> 00:06:19,800 Speaker 1: has existed since de facto, it's existed since the mid nineties. Okay, 113 00:06:19,800 --> 00:06:23,000 Speaker 1: so then what was the pre the earlier approach. How 114 00:06:23,040 --> 00:06:26,760 Speaker 1: does that substantively differ from what the Fed did in 115 00:06:26,800 --> 00:06:29,720 Speaker 1: the sixties or the Seven Dayes or right in the 116 00:06:29,760 --> 00:06:33,800 Speaker 1: sixties and seventies. They were not particularly seventies, it's a 117 00:06:33,839 --> 00:06:36,719 Speaker 1: little bit different. But in the fifties and sixties, when 118 00:06:36,720 --> 00:06:39,679 Speaker 1: they would see the economy heating up and inflation starting 119 00:06:39,720 --> 00:06:41,320 Speaker 1: to pick up, they would just slam the brakes. But 120 00:06:41,320 --> 00:06:45,160 Speaker 1: they didn't particularly have an specific target in mind. They 121 00:06:45,200 --> 00:06:48,160 Speaker 1: were not trying to target inflation. But it was also 122 00:06:48,279 --> 00:06:52,360 Speaker 1: much more from the industrial side, much more, you know, 123 00:06:52,839 --> 00:06:55,240 Speaker 1: like a German type economy. There were large unions and 124 00:06:55,279 --> 00:06:58,200 Speaker 1: there would be large union type bargaining. So the price 125 00:06:58,279 --> 00:07:01,120 Speaker 1: mechanism was a little bit different. Agent plies mechanism. We 126 00:07:01,160 --> 00:07:03,440 Speaker 1: don't have that kind of a thing, so you know, 127 00:07:03,520 --> 00:07:06,680 Speaker 1: I mean prices were a lot more closely aligned with 128 00:07:06,760 --> 00:07:12,320 Speaker 1: wages and productivity. Okay, so they they still fought inflation. 129 00:07:12,360 --> 00:07:14,960 Speaker 1: They still wanted low inflation, and as you say, the 130 00:07:15,080 --> 00:07:18,280 Speaker 1: Humphrey Hawkins mandate required them to have that. But it 131 00:07:18,320 --> 00:07:21,440 Speaker 1: wasn't like we have this number, it's about two percent, 132 00:07:21,560 --> 00:07:23,400 Speaker 1: and we're going to do what it takes. We just 133 00:07:23,400 --> 00:07:25,280 Speaker 1: don't want inflation to go up. And if it looks 134 00:07:25,280 --> 00:07:27,040 Speaker 1: like it's going up, we're starting to go up, we're 135 00:07:27,040 --> 00:07:31,760 Speaker 1: gonna find it. That's correct. I think the difference in 136 00:07:31,760 --> 00:07:37,880 Speaker 1: in the post is especially post let's say, let's put 137 00:07:37,880 --> 00:07:40,880 Speaker 1: that as a cut off, is the mandate on stable 138 00:07:40,920 --> 00:07:44,800 Speaker 1: inflation and what they think contributes to the inflationary pressures. 139 00:07:44,840 --> 00:07:47,000 Speaker 1: You know, see in the past, they used to have 140 00:07:47,080 --> 00:07:49,720 Speaker 1: some kind of even if you try to recast it 141 00:07:49,760 --> 00:07:52,840 Speaker 1: into a model and try to backfit the data, they 142 00:07:52,880 --> 00:07:55,320 Speaker 1: did some tailor rule kind of a thing all through 143 00:07:55,600 --> 00:07:58,680 Speaker 1: up to They have been doing that ever since as well, 144 00:07:58,760 --> 00:08:03,520 Speaker 1: But they also have an extra emphasis or not just 145 00:08:03,640 --> 00:08:07,480 Speaker 1: the output gap, but on how fast you're reaching the 146 00:08:07,480 --> 00:08:09,720 Speaker 1: output gap. I mean, so you let's say you have 147 00:08:09,760 --> 00:08:13,280 Speaker 1: a huge output gap. Let's say not for for simplicity sake, 148 00:08:13,360 --> 00:08:15,840 Speaker 1: NIRO is five percent or unemployment is ten percent. The 149 00:08:15,840 --> 00:08:19,240 Speaker 1: gap is huge, right, and that NIRO made self overstate 150 00:08:19,480 --> 00:08:22,680 Speaker 1: and unemployment. I mean then the natural rate. But that's 151 00:08:22,680 --> 00:08:25,160 Speaker 1: a huge gap. But let's say you're accelerating. Should the 152 00:08:25,160 --> 00:08:28,440 Speaker 1: feed BI worried? Right? Should? Should the economy is accedent? 153 00:08:28,520 --> 00:08:30,600 Speaker 1: Should the FEBIBI worried because the gap is so big? 154 00:08:30,680 --> 00:08:33,040 Speaker 1: But they seem to data, I mean, the empirical work 155 00:08:33,080 --> 00:08:35,560 Speaker 1: shows that they seem to be really concerned if you're 156 00:08:35,600 --> 00:08:38,079 Speaker 1: accelerating very fast, even if the gap is huge. So 157 00:08:38,200 --> 00:08:41,439 Speaker 1: even if there's it's clear that al right, everyone thinks 158 00:08:41,480 --> 00:08:44,200 Speaker 1: that ten percent is a very long way from full employment. 159 00:08:44,280 --> 00:08:47,439 Speaker 1: Like what we saw obviously in the immediate during the 160 00:08:47,559 --> 00:08:51,880 Speaker 1: natural crisis, there's almost no level if if if we 161 00:08:51,960 --> 00:08:54,760 Speaker 1: suddenly got hot growth, right, it doesn't matter how big 162 00:08:54,760 --> 00:08:58,160 Speaker 1: that gap is. That makes FED officials nervous at that, 163 00:08:58,160 --> 00:09:00,319 Speaker 1: that's right, and you who you saw that early in 164 00:09:00,400 --> 00:09:02,760 Speaker 1: the in the expansion, right, they will not. People keep 165 00:09:02,760 --> 00:09:04,640 Speaker 1: saying now, in hindsight, oh, the Fed should have been 166 00:09:04,640 --> 00:09:06,760 Speaker 1: more accommodative. They should have said this, said that. But 167 00:09:06,800 --> 00:09:09,480 Speaker 1: you know, like four two thirty six years ago when 168 00:09:09,480 --> 00:09:11,920 Speaker 1: they did the pay per tantum thing. I mean, you know, 169 00:09:12,000 --> 00:09:14,280 Speaker 1: when things heat up a little bit, they react to 170 00:09:14,320 --> 00:09:17,480 Speaker 1: the heating up, and I think that's kind of new. 171 00:09:19,320 --> 00:09:21,960 Speaker 1: So you did not see that in the sixties and seventies. 172 00:09:22,400 --> 00:09:25,240 Speaker 1: If there was a big output gap, if it was 173 00:09:25,320 --> 00:09:26,880 Speaker 1: clear that there was a lot of people who are 174 00:09:27,000 --> 00:09:29,120 Speaker 1: left to come back in the workforce, they would be 175 00:09:29,160 --> 00:09:32,000 Speaker 1: they would welcome fast growth because that would get them 176 00:09:32,040 --> 00:09:35,199 Speaker 1: to the goal fast. So was that green Span who 177 00:09:35,360 --> 00:09:38,199 Speaker 1: sort of was the first I mean in a way, 178 00:09:38,240 --> 00:09:41,480 Speaker 1: I mean sometimes it's interesting because green SPAN's legacy I 179 00:09:41,520 --> 00:09:45,079 Speaker 1: think over the years is I think people deteriorated a 180 00:09:45,160 --> 00:09:47,360 Speaker 1: little bit, but you could make me you know, sometimes 181 00:09:47,440 --> 00:09:49,960 Speaker 1: I think that he made some interesting choices and would 182 00:09:50,000 --> 00:09:54,240 Speaker 1: certainly seemed to tolerate the boom a little bit in 183 00:09:54,240 --> 00:09:57,520 Speaker 1: a way that maybe modern central bankers will be more uncomfortable. Left. Yeah, 184 00:09:57,800 --> 00:10:00,600 Speaker 1: the longer you stay, the greater it sounds that your 185 00:10:00,600 --> 00:10:04,520 Speaker 1: emits get stublished because something will go wrong, you know, Um, yeah, 186 00:10:04,559 --> 00:10:06,480 Speaker 1: I mean he did in the nine nineties to do 187 00:10:06,559 --> 00:10:08,800 Speaker 1: some extent for sure. He let the boom boom run. 188 00:10:09,520 --> 00:10:11,760 Speaker 1: And and that is right. I mean, see, there are 189 00:10:11,760 --> 00:10:15,720 Speaker 1: two aspects to it letting the boom run is it's 190 00:10:15,760 --> 00:10:19,280 Speaker 1: not necessarily bad. But the problem with letting the boom 191 00:10:19,360 --> 00:10:22,880 Speaker 1: run in the backdrop of an inflation topeting frameworok, with 192 00:10:22,960 --> 00:10:25,360 Speaker 1: the Fed states it's going to keep inflation control leads 193 00:10:25,400 --> 00:10:27,960 Speaker 1: to build up a leverage and the financial exercise that's 194 00:10:27,960 --> 00:10:30,839 Speaker 1: the issue, right, And so this gets to kind of 195 00:10:31,080 --> 00:10:34,000 Speaker 1: one of your key points, but also sort of what 196 00:10:34,200 --> 00:10:38,920 Speaker 1: seems like the unspoken or increasingly vocalized problem with all 197 00:10:38,960 --> 00:10:41,480 Speaker 1: of this, which is that so far we've just been 198 00:10:41,559 --> 00:10:47,800 Speaker 1: talking about this sort of push pole relationship between unemployment 199 00:10:47,840 --> 00:10:51,000 Speaker 1: and inflation. But then there's this added dimension of financial 200 00:10:51,080 --> 00:10:54,040 Speaker 1: leverage and speculation. Right, So we had a very good 201 00:10:54,040 --> 00:10:57,120 Speaker 1: economy throughout much of the nineties, but when things are 202 00:10:57,160 --> 00:10:59,520 Speaker 1: good for a long time, people get reckless with speculation, 203 00:10:59,559 --> 00:11:18,679 Speaker 1: and we've a right, that's right in the beginning, as 204 00:11:18,720 --> 00:11:21,480 Speaker 1: I mentioned as like, you know, it's kind of amazing, 205 00:11:21,520 --> 00:11:24,240 Speaker 1: like inflation doesn't do anything. So on one level of 206 00:11:24,280 --> 00:11:27,120 Speaker 1: the economy has been incredibly stable, and that's some prices. 207 00:11:27,800 --> 00:11:31,160 Speaker 1: But this pursuit of stability on the inflation front, in 208 00:11:31,320 --> 00:11:35,320 Speaker 1: your view, creates instability elsewhere, right, because when you have 209 00:11:35,880 --> 00:11:39,400 Speaker 1: such stable inflation, the fact is making two kinds of 210 00:11:39,800 --> 00:11:42,400 Speaker 1: promises effectively. Right when you're saying that inflation is going 211 00:11:42,440 --> 00:11:45,240 Speaker 1: to be stable. Look, if you are an investor in credit, 212 00:11:45,400 --> 00:11:48,400 Speaker 1: it's telling you that you don't need to worry about 213 00:11:48,440 --> 00:11:54,120 Speaker 1: inflation e wroting your real returns the value of payments. Yeah, 214 00:11:54,240 --> 00:11:58,240 Speaker 1: and you also, Dean, don't need to worry about deflation, 215 00:11:58,240 --> 00:12:00,000 Speaker 1: which would be really bad because the defaults would pick 216 00:12:00,200 --> 00:12:04,240 Speaker 1: if they're making you a very narrow coutodel promise. And 217 00:12:04,440 --> 00:12:07,720 Speaker 1: if you're that, what does it encourage you? To encourage 218 00:12:07,720 --> 00:12:09,120 Speaker 1: you so that Fred is going to do whatever it 219 00:12:09,160 --> 00:12:11,200 Speaker 1: takes to do that right to hit that mandate. Yeah, 220 00:12:11,720 --> 00:12:15,679 Speaker 1: so you should go ahead and make make loans. And 221 00:12:15,720 --> 00:12:17,440 Speaker 1: that's why you see if you look at this era, 222 00:12:17,520 --> 00:12:19,520 Speaker 1: that's when you've had these junk bonds. There was no 223 00:12:19,559 --> 00:12:22,040 Speaker 1: susting called junk bond. Before there used to be investment 224 00:12:22,040 --> 00:12:24,440 Speaker 1: grade bonds that would become junk, but there was no 225 00:12:24,520 --> 00:12:27,360 Speaker 1: market called junk bonds the whole junk bond market has 226 00:12:27,440 --> 00:12:29,960 Speaker 1: been explosive in this. You know, I think this is 227 00:12:30,040 --> 00:12:33,000 Speaker 1: just an incredibly important point, and I think one that 228 00:12:33,040 --> 00:12:35,160 Speaker 1: we should just slow down for a second for people 229 00:12:35,240 --> 00:12:38,560 Speaker 1: to understand this idea that if I make a loan 230 00:12:38,640 --> 00:12:42,520 Speaker 1: to you, there's two ways I can lose. Right, So, 231 00:12:42,559 --> 00:12:46,120 Speaker 1: if inflation shoots up, and you know, you have to 232 00:12:46,120 --> 00:12:49,559 Speaker 1: pay me back a hundred dollars every month, and inflation surges, 233 00:12:49,920 --> 00:12:52,679 Speaker 1: the value of that hundred dollars a month is less. 234 00:12:52,679 --> 00:12:55,240 Speaker 1: So that was an unfortunate choice by me. On the 235 00:12:55,240 --> 00:12:57,160 Speaker 1: other hand, if there's a recession, you might lose your 236 00:12:57,240 --> 00:12:59,040 Speaker 1: job and not be able to pay me back at all. 237 00:12:59,480 --> 00:13:03,000 Speaker 1: And so what you're describing with this inflation targeting and 238 00:13:03,040 --> 00:13:06,040 Speaker 1: by keeping it very stable, and you say they're essentially 239 00:13:06,080 --> 00:13:09,200 Speaker 1: making two bads, is the FED is taking both sort 240 00:13:09,200 --> 00:13:12,160 Speaker 1: of normal risks for lenders off the table, right, And 241 00:13:12,200 --> 00:13:15,200 Speaker 1: that's just a fantastic for lenders. That is fantastic for lenders. 242 00:13:15,240 --> 00:13:17,520 Speaker 1: But what it does in a secular census built up 243 00:13:17,600 --> 00:13:20,360 Speaker 1: leverage in the system, which is to be very different 244 00:13:20,440 --> 00:13:22,680 Speaker 1: from which I want to distinguish this. You know, there's 245 00:13:22,679 --> 00:13:26,680 Speaker 1: a lot of model play in economic debates, policy debates 246 00:13:26,720 --> 00:13:29,880 Speaker 1: that how we need to purge the excesses from building up, 247 00:13:29,920 --> 00:13:32,160 Speaker 1: you know, like you know Andrew Mellon saying that stuff, 248 00:13:32,320 --> 00:13:35,000 Speaker 1: and that's doing that kind of thing is incredibly painful 249 00:13:35,040 --> 00:13:37,400 Speaker 1: for the most disadvantaged people in society. So I just 250 00:13:37,440 --> 00:13:39,079 Speaker 1: want to be careful. It's not that the FED should 251 00:13:39,080 --> 00:13:41,360 Speaker 1: be hiking rates, you know, perfectly when things are really bad. 252 00:13:41,720 --> 00:13:43,559 Speaker 1: That's not what they should be doing. I think it 253 00:13:43,679 --> 00:13:47,680 Speaker 1: is the mandate per se that creates. So the issue 254 00:13:47,800 --> 00:13:51,520 Speaker 1: is when inflation is low, and so let's say the 255 00:13:51,559 --> 00:13:53,719 Speaker 1: three month moving I've just went about two percent, but 256 00:13:53,840 --> 00:13:57,280 Speaker 1: we have like five percent away from anywhere near closing 257 00:13:57,280 --> 00:13:59,520 Speaker 1: the slack. It's early in the cycle where the FED 258 00:14:00,040 --> 00:14:04,160 Speaker 1: is this slamming down. That really is the problem, which 259 00:14:04,160 --> 00:14:06,480 Speaker 1: also has been shown in a recent paper. What the 260 00:14:06,520 --> 00:14:10,160 Speaker 1: guy I mentioned in the beginning is that they're everyone 261 00:14:10,200 --> 00:14:13,400 Speaker 1: criticizes the FED, and there's all different kinds of criticisms, 262 00:14:13,559 --> 00:14:17,000 Speaker 1: and there is this view that, uh, you know, the 263 00:14:17,040 --> 00:14:19,400 Speaker 1: Feed prints a bunch of money that people go out 264 00:14:19,400 --> 00:14:23,680 Speaker 1: and make speculative um speculative investments. And you're describing a 265 00:14:23,800 --> 00:14:27,280 Speaker 1: very different mechanism than what I think is sort of 266 00:14:27,320 --> 00:14:30,480 Speaker 1: the typical I don't know, the sort of gold bug 267 00:14:30,640 --> 00:14:36,320 Speaker 1: kind of Austrian crankish, you know, I think there is 268 00:14:36,800 --> 00:14:39,360 Speaker 1: I think a lot of people have this like that 269 00:14:39,520 --> 00:14:41,400 Speaker 1: is the mechanism they would agree, They're like, yeah, the 270 00:14:41,400 --> 00:14:43,280 Speaker 1: fet is causing bubble? Is this because they print all 271 00:14:43,320 --> 00:14:46,280 Speaker 1: this money and they keep interest rates really low and 272 00:14:46,320 --> 00:14:49,800 Speaker 1: then people rushed to buy a speculative assets And you're 273 00:14:50,040 --> 00:14:52,520 Speaker 1: what you're saying kind of is that there is a 274 00:14:52,560 --> 00:14:56,520 Speaker 1: connection between FED policy and speculation and too much leverage. 275 00:14:56,560 --> 00:14:59,600 Speaker 1: It's just different than a common mechanism this previous And 276 00:14:59,680 --> 00:15:02,800 Speaker 1: I don't criticize the FED for doing what their mandate says, 277 00:15:02,800 --> 00:15:04,840 Speaker 1: which is trying to pursue full employment. You know that 278 00:15:04,880 --> 00:15:06,840 Speaker 1: if you're slamming the brakes, I mean, so slam the 279 00:15:06,880 --> 00:15:09,400 Speaker 1: break in two thous eight and we did that. What happened, right? 280 00:15:09,440 --> 00:15:11,800 Speaker 1: I mean you you are the human cost of doing 281 00:15:11,840 --> 00:15:14,440 Speaker 1: these kind of things is incredible, which somehow people seem 282 00:15:14,480 --> 00:15:18,280 Speaker 1: to I mean paper over when they talk about I 283 00:15:18,320 --> 00:15:21,480 Speaker 1: think the issue, My issue is if we want to 284 00:15:21,520 --> 00:15:25,880 Speaker 1: address these issues of cleaning up everything and have a 285 00:15:25,880 --> 00:15:30,400 Speaker 1: stable economy and stable growth, we need to think rethink policy. 286 00:15:30,720 --> 00:15:33,040 Speaker 1: But not there's no point in criticizing the FED because 287 00:15:33,040 --> 00:15:35,680 Speaker 1: they've been given the mandate of trying to manage the 288 00:15:35,680 --> 00:15:38,000 Speaker 1: globe macro economy, and these are the tools that they have. 289 00:15:38,520 --> 00:15:40,920 Speaker 1: What are they supposed to do with it? So what 290 00:15:41,120 --> 00:15:43,640 Speaker 1: what should they do? I mean? So is the is 291 00:15:43,680 --> 00:15:47,000 Speaker 1: the issue that the FED in any mandate doesn't have 292 00:15:47,080 --> 00:15:49,600 Speaker 1: the tools to do this, and that we need more 293 00:15:49,600 --> 00:15:53,040 Speaker 1: more aggressive fiscal policy in some way, and that essentially, 294 00:15:53,480 --> 00:15:56,720 Speaker 1: no matter what happened, if we lean entirely on monetary 295 00:15:56,800 --> 00:16:00,800 Speaker 1: policy for macroeconomic stabilization, that will never pably lead to 296 00:16:00,920 --> 00:16:03,840 Speaker 1: these kind of risky dead build ups. Yes, you need 297 00:16:03,880 --> 00:16:07,760 Speaker 1: fiscal policy because fiscal policy, apart from being stabilizing, you know, 298 00:16:07,800 --> 00:16:10,320 Speaker 1: in a in a macro sense, they flow of financial flows, 299 00:16:10,360 --> 00:16:13,280 Speaker 1: you know, profits and everything. It also in a balance 300 00:16:13,320 --> 00:16:15,840 Speaker 1: sheets sense, what you're doing with fiscal policy, you're adding 301 00:16:15,840 --> 00:16:18,560 Speaker 1: more safe assets to balance sheets. Therefore you're making them 302 00:16:18,560 --> 00:16:21,720 Speaker 1: more resilient, right right, I mean you're adding more treasury 303 00:16:21,760 --> 00:16:24,280 Speaker 1: bonds to portfolios. You're making it more safe. You know. 304 00:16:24,320 --> 00:16:28,200 Speaker 1: What's weird to me is going back to the mechanism 305 00:16:28,320 --> 00:16:33,160 Speaker 1: view which inflation targeting leads to build ups. Is I 306 00:16:33,200 --> 00:16:35,680 Speaker 1: think that you know the FED, as you put it, 307 00:16:35,720 --> 00:16:38,560 Speaker 1: has created nirvana for lenders. So they're a banker, if 308 00:16:38,560 --> 00:16:41,080 Speaker 1: you're a lender, if you have capital, this is the 309 00:16:41,160 --> 00:16:43,920 Speaker 1: absolute sweet spot. Shouldn't this be like what all the 310 00:16:43,960 --> 00:16:47,560 Speaker 1: conspiracy theorists adopt, because this actually kind of seems like 311 00:16:47,960 --> 00:16:50,440 Speaker 1: you know, the real tinfoil had types who think the 312 00:16:50,480 --> 00:16:54,720 Speaker 1: FED is like secretly with the elites and all that. 313 00:16:55,040 --> 00:16:58,280 Speaker 1: Shouldn't they adopt the view that what the FED is 314 00:16:58,320 --> 00:17:03,600 Speaker 1: doing is, say, day up an economic Goldilocks. That's just 315 00:17:03,640 --> 00:17:06,840 Speaker 1: absolutely beautiful. If you're the if you're the entities that 316 00:17:06,880 --> 00:17:08,920 Speaker 1: have money and the ability to land. That is that 317 00:17:09,080 --> 00:17:11,479 Speaker 1: is actually true in some sense. I mean they're not 318 00:17:11,520 --> 00:17:14,560 Speaker 1: doing it there. I mean there's no grand constitucy, not 319 00:17:14,840 --> 00:17:18,159 Speaker 1: intentional we're going to do this to enriched creditors, but 320 00:17:18,280 --> 00:17:22,240 Speaker 1: the facto they've created a great scenario if you're a lender, 321 00:17:22,560 --> 00:17:24,679 Speaker 1: that is correct. That's absolutely true, and that's why it 322 00:17:24,680 --> 00:17:27,119 Speaker 1: has been associated with the rice of finance right in 323 00:17:27,240 --> 00:17:30,080 Speaker 1: the rice of the financial sector in the last thirty years, 324 00:17:30,119 --> 00:17:32,840 Speaker 1: you know, overall, in gross value added, in profits and 325 00:17:32,880 --> 00:17:35,480 Speaker 1: in everything. You know, it's clearly been associated with this. 326 00:17:35,600 --> 00:17:37,159 Speaker 1: You know, I don't want to pin it all on 327 00:17:37,280 --> 00:17:40,200 Speaker 1: the FED policy. Lots of each complicated issues going on, 328 00:17:40,520 --> 00:17:44,479 Speaker 1: but certainly there is contribution from FED policy. Why did uh, 329 00:17:45,640 --> 00:17:48,679 Speaker 1: there's actually a real diversion. But can you mentioned inflation? 330 00:17:48,880 --> 00:17:51,080 Speaker 1: They would like slam the brakes to two thousand eight. 331 00:17:51,840 --> 00:17:54,280 Speaker 1: I think in Europe they got really unnerved by oil 332 00:17:54,320 --> 00:17:56,840 Speaker 1: and eleven. Why did it? Like like the modern era, 333 00:17:56,960 --> 00:17:59,600 Speaker 1: did central markers still get so freaked out by oil prices? 334 00:17:59,600 --> 00:18:02,080 Speaker 1: Because nineteen seventies and if you look at most of them, 335 00:18:02,359 --> 00:18:06,119 Speaker 1: of the people who are in central banks, these are 336 00:18:06,160 --> 00:18:09,920 Speaker 1: people whose formative views were in the seventies, all of them, right, 337 00:18:10,240 --> 00:18:12,760 Speaker 1: So that's why inflation when when people get I mean, 338 00:18:12,840 --> 00:18:15,960 Speaker 1: David Graeber just wrote something and all economies got really 339 00:18:16,040 --> 00:18:18,600 Speaker 1: upset about, right, But they don't do some soul searching. 340 00:18:18,720 --> 00:18:24,240 Speaker 1: Why has inflation gotten so much preponderance in the economic literature? 341 00:18:24,359 --> 00:18:27,760 Speaker 1: Inflation inflation, inflation, inflation targeting, inflation, that costs of interestion 342 00:18:28,040 --> 00:18:30,119 Speaker 1: And actually if you look at the data, this is 343 00:18:30,240 --> 00:18:33,240 Speaker 1: very much from the mainstream. The very major paper written 344 00:18:33,240 --> 00:18:35,840 Speaker 1: by Nakamura who used to be at Columbia but she's 345 00:18:35,880 --> 00:18:39,760 Speaker 1: now at Berkeley. I think fantastic paper. She just did 346 00:18:39,760 --> 00:18:42,919 Speaker 1: amazing work with this, she and her authors elusive costs 347 00:18:42,920 --> 00:18:44,960 Speaker 1: of inflation. So she went back and looked at the 348 00:18:45,000 --> 00:18:48,800 Speaker 1: nineteen seventies data. She did all this micro fish work 349 00:18:48,880 --> 00:18:52,800 Speaker 1: to get that data, and and she found that the 350 00:18:52,840 --> 00:18:55,400 Speaker 1: costs of inflation that people talk about on the textbook 351 00:18:55,480 --> 00:18:57,719 Speaker 1: or in the models new Kcane models, but simply not 352 00:18:57,760 --> 00:19:00,680 Speaker 1: there in the seventies. Whatever the costs that people talk about, 353 00:19:01,520 --> 00:19:04,040 Speaker 1: this is in terms of real costs in the economy, 354 00:19:04,240 --> 00:19:08,200 Speaker 1: in terms of well, what is the theoretical idea behind 355 00:19:08,240 --> 00:19:11,840 Speaker 1: the idea that inflation is bad? So the inflation what 356 00:19:11,840 --> 00:19:15,520 Speaker 1: what what they're saying is it distorts relative prices. If 357 00:19:15,520 --> 00:19:18,880 Speaker 1: there's high inflation and therefore high variability and inflation high 358 00:19:18,920 --> 00:19:24,040 Speaker 1: volatility information, it creates the distortion in the relative prices, 359 00:19:24,119 --> 00:19:29,640 Speaker 1: and thereby it creates wrong signals for allocation of capital, 360 00:19:29,680 --> 00:19:33,800 Speaker 1: allocation of output, allocation of resources. That's so the essential 361 00:19:34,000 --> 00:19:37,919 Speaker 1: belief that inflation should be both low and stable is 362 00:19:37,960 --> 00:19:41,119 Speaker 1: this idea that if we just like get prices fairly 363 00:19:41,160 --> 00:19:44,639 Speaker 1: predictable and stable, then all the other decisions that are 364 00:19:44,640 --> 00:19:48,200 Speaker 1: actually important for the economy. Company is making investments and 365 00:19:48,240 --> 00:19:50,680 Speaker 1: so forth, they do a better job at that that 366 00:19:51,080 --> 00:19:54,360 Speaker 1: the economy, and then theoretically all these other things are 367 00:19:54,359 --> 00:19:56,960 Speaker 1: like downstream from inflation. They do a better job of that. 368 00:19:57,520 --> 00:20:01,439 Speaker 1: And so we've been talking about the speculative access that 369 00:20:01,480 --> 00:20:05,080 Speaker 1: emerged to inflation targeting. But go on, what is what 370 00:20:05,119 --> 00:20:07,159 Speaker 1: are the costs in terms of other aspects of the 371 00:20:07,160 --> 00:20:09,480 Speaker 1: real economy, Because again, if you look over the last 372 00:20:09,480 --> 00:20:13,680 Speaker 1: fifteen years, they've obviously achieved inflation is very low and stable, 373 00:20:14,440 --> 00:20:17,280 Speaker 1: but I mean for most of that time employment has 374 00:20:17,320 --> 00:20:19,720 Speaker 1: been far away from anything that anyone call full employment. 375 00:20:19,840 --> 00:20:22,240 Speaker 1: So they're also failing on that front. Yeah, I mean, 376 00:20:22,240 --> 00:20:24,879 Speaker 1: if you look at the standard Nucincan model, this is 377 00:20:24,920 --> 00:20:27,760 Speaker 1: how absurd it is. And people, this is when the 378 00:20:27,760 --> 00:20:29,560 Speaker 1: economists are going to give me a lot of blowback 379 00:20:29,600 --> 00:20:32,919 Speaker 1: on it. How absurd it is. The cost of having 380 00:20:32,960 --> 00:20:37,320 Speaker 1: a little bit volatile inflation that distarts relative prices. Apparently, okay, 381 00:20:37,680 --> 00:20:40,240 Speaker 1: do the data doesn't show that at all. It's more 382 00:20:40,359 --> 00:20:44,120 Speaker 1: than cost of recessions, much more than the cost of recessions. 383 00:20:44,160 --> 00:20:50,720 Speaker 1: In their their view, recessions are preferable to having inflation 384 00:20:50,840 --> 00:20:52,919 Speaker 1: be a little more volatile. That is how it is. 385 00:20:52,960 --> 00:20:54,919 Speaker 1: But in the last thirty years since seventy nine, not 386 00:20:55,000 --> 00:20:58,800 Speaker 1: thirty years, forty years now unemployment rate has been above NIDO. 387 00:20:59,280 --> 00:21:01,640 Speaker 1: I don't believe even I do. But let's take that 388 00:21:01,880 --> 00:21:05,240 Speaker 1: is the non what's it for, the non accelerating inflation 389 00:21:05,320 --> 00:21:07,399 Speaker 1: rate of unemployment? And so we don't even I know, 390 00:21:07,440 --> 00:21:09,399 Speaker 1: you don't even believe that this number actually exists. But 391 00:21:09,440 --> 00:21:11,840 Speaker 1: the premise of that is that of this idea that 392 00:21:12,000 --> 00:21:14,960 Speaker 1: NIRA exists, is that there is a level of unemployment 393 00:21:15,359 --> 00:21:19,080 Speaker 1: below which suddenly inflation really takes. But the vast majority 394 00:21:19,119 --> 00:21:21,439 Speaker 1: of time we've been above that, we have been more 395 00:21:21,480 --> 00:21:23,240 Speaker 1: than two thirds of the time since in the last 396 00:21:23,280 --> 00:21:26,240 Speaker 1: four years, seventy the time we have been above NIDOL, 397 00:21:26,960 --> 00:21:29,320 Speaker 1: So seventy percent of the time we had about running 398 00:21:29,320 --> 00:21:33,080 Speaker 1: the economy on slack. Just imagine. So that why and 399 00:21:33,119 --> 00:21:36,000 Speaker 1: why why does it this get more attention in the 400 00:21:36,040 --> 00:21:39,560 Speaker 1: academic literature the fact that I don't know, I mean, 401 00:21:39,560 --> 00:21:42,640 Speaker 1: why why the same thing that is what I'm trying 402 00:21:42,680 --> 00:21:44,840 Speaker 1: to save. Because I tweeted the other day this the 403 00:21:44,960 --> 00:21:47,360 Speaker 1: chart of like inflation being stable and someone's like, oh, 404 00:21:47,400 --> 00:21:49,400 Speaker 1: so you're what you're saying is the FED is doing 405 00:21:49,400 --> 00:21:53,960 Speaker 1: its job, and well no, because they have two mandates, 406 00:21:54,000 --> 00:21:56,840 Speaker 1: so they're like they're one of them is doing one mandate, 407 00:21:56,920 --> 00:21:59,520 Speaker 1: the Low and Stable Inflation mandate. Yeah, I guess you 408 00:21:59,520 --> 00:22:02,600 Speaker 1: could say they're doing their job, but it's clearly they're 409 00:22:02,640 --> 00:22:05,320 Speaker 1: failing on the second one. It's an exorbitant cost of 410 00:22:05,359 --> 00:22:09,680 Speaker 1: achieving a mandate for whose benefits are very nebulous. That's 411 00:22:09,720 --> 00:22:12,080 Speaker 1: what it is. The FAN is a dual mandate of 412 00:22:12,119 --> 00:22:16,680 Speaker 1: low and stable inflation as well as UH maximum employment. 413 00:22:17,359 --> 00:22:20,960 Speaker 1: It's to all central bankers more or less. I think 414 00:22:20,960 --> 00:22:23,520 Speaker 1: those are not that the second one, the employment part 415 00:22:23,560 --> 00:22:26,719 Speaker 1: of the mandate, is the lesser among equals. I do 416 00:22:26,800 --> 00:22:28,800 Speaker 1: think they do. And in the other case, they don't 417 00:22:28,800 --> 00:22:30,800 Speaker 1: even have that mandate, like you c doesn't have their mandate. 418 00:22:30,840 --> 00:22:34,400 Speaker 1: You see these mandates, So they don't even have the mandate. 419 00:22:34,720 --> 00:22:38,480 Speaker 1: So well, they don't care about it. So let's go 420 00:22:38,560 --> 00:22:41,760 Speaker 1: back to policies that could ameliorate this. And I think 421 00:22:41,800 --> 00:22:44,919 Speaker 1: the key thing is, you know, you're not talking about liquidation. 422 00:22:44,960 --> 00:22:46,879 Speaker 1: You're not saying, oh, yeah, we gotta like raise rates 423 00:22:46,920 --> 00:22:50,000 Speaker 1: and squeeze out the bad debts and cause a recession. 424 00:22:50,600 --> 00:22:53,480 Speaker 1: But this what you're saying is that from a much 425 00:22:53,520 --> 00:22:59,320 Speaker 1: bigger secular standpoint, it's not about twenty nineteen, stocks are 426 00:22:59,400 --> 00:23:03,520 Speaker 1: high and debt actually nervous. It's that for decades we've 427 00:23:03,600 --> 00:23:06,600 Speaker 1: run a regime in both ups and downs. Correct that 428 00:23:06,680 --> 00:23:10,720 Speaker 1: contribute to a build up of uh risky debt. And 429 00:23:10,720 --> 00:23:14,680 Speaker 1: we had your colleague on the podcast and David Leaving 430 00:23:14,680 --> 00:23:17,640 Speaker 1: a few weeks ago, he talked about that risky debt. 431 00:23:18,040 --> 00:23:20,600 Speaker 1: But this is not a cyclical thing. It's just it's 432 00:23:20,640 --> 00:23:22,800 Speaker 1: a it's a fixture of the economy. That's right, it's 433 00:23:22,800 --> 00:23:25,359 Speaker 1: a fixure. It's a fixture of the economy. And so 434 00:23:25,400 --> 00:23:28,719 Speaker 1: how do we that that contributes to instability? Like it 435 00:23:28,800 --> 00:23:30,679 Speaker 1: leads to the kind of thing that we had in 436 00:23:30,680 --> 00:23:33,399 Speaker 1: two thousand and eight and then before that in the 437 00:23:33,440 --> 00:23:36,520 Speaker 1: banking problems. So how do you deal with that? I 438 00:23:36,560 --> 00:23:39,159 Speaker 1: think you certainly your fiscal policy has to play a 439 00:23:39,240 --> 00:23:42,040 Speaker 1: much more active role number one. Number two. You know, 440 00:23:42,080 --> 00:23:46,800 Speaker 1: Minsky said this also that regulation will always the innovation 441 00:23:46,800 --> 00:23:49,760 Speaker 1: will always be ahead of regulation, but you do need 442 00:23:49,800 --> 00:23:53,119 Speaker 1: to put to keep on improving on regulation. So the 443 00:23:53,280 --> 00:23:55,159 Speaker 1: faiths approach generally has been Okay, we're able to do 444 00:23:55,200 --> 00:23:57,479 Speaker 1: monetary policy with interest rates or something like that, but 445 00:23:57,520 --> 00:24:02,200 Speaker 1: we're not really going to do much regulate ree one 446 00:24:02,240 --> 00:24:05,080 Speaker 1: form or the other like in the green span, resisted 447 00:24:05,119 --> 00:24:08,720 Speaker 1: doing anything but with margin that people people are talking about. 448 00:24:08,720 --> 00:24:10,560 Speaker 1: I don't know whether that's the right approach, but one 449 00:24:10,600 --> 00:24:14,000 Speaker 1: has to think about a variety of regulatory tools. Like 450 00:24:14,080 --> 00:24:15,720 Speaker 1: in the in the in the in the housing bubble 451 00:24:15,760 --> 00:24:18,240 Speaker 1: and it was going, you could have kept interest rate slow, 452 00:24:18,520 --> 00:24:20,520 Speaker 1: but try to come down on the on the risky 453 00:24:20,600 --> 00:24:23,040 Speaker 1: landing puts more guidances. They did come up with the guidance, 454 00:24:23,040 --> 00:24:26,600 Speaker 1: But what's like in two thousand and six with the guidance. Powell, 455 00:24:27,400 --> 00:24:32,040 Speaker 1: the current Frenhair seems cognizant of this tension. Uh. He 456 00:24:32,160 --> 00:24:35,520 Speaker 1: does not seem like he has any appetite too um 457 00:24:36,000 --> 00:24:39,640 Speaker 1: slow the economy via interest rates. He doesn't seem particularly 458 00:24:39,640 --> 00:24:43,919 Speaker 1: concerned about inflation. Maybe less concerned probably than even some 459 00:24:43,960 --> 00:24:47,480 Speaker 1: of his predecessors. He does seem concerned. I think it 460 00:24:47,560 --> 00:24:51,400 Speaker 1: was um. I think it was Jackson Holt summer twenty eighteen, 461 00:24:51,480 --> 00:24:54,879 Speaker 1: and he talked about how imbalances don't really show up 462 00:24:54,880 --> 00:24:58,639 Speaker 1: in inflation, but they show up in financial excess, so 463 00:24:58,760 --> 00:25:01,639 Speaker 1: they find So do you have some hope that the 464 00:25:01,720 --> 00:25:06,920 Speaker 1: Fed in its current direction is maybe thinking about at 465 00:25:06,960 --> 00:25:09,400 Speaker 1: least identifying the problem a little bit more, if not 466 00:25:09,440 --> 00:25:13,080 Speaker 1: necessarily coming up with the tools to curb speculation other 467 00:25:13,119 --> 00:25:16,879 Speaker 1: than through the rage channel, at least identifying that the 468 00:25:16,960 --> 00:25:20,040 Speaker 1: current setup is kind of insufficient for all the real 469 00:25:20,119 --> 00:25:22,040 Speaker 1: concerns that are out there. I think so. I think 470 00:25:22,280 --> 00:25:24,560 Speaker 1: if you see even the academically treature, a lot of 471 00:25:24,600 --> 00:25:28,399 Speaker 1: work is being done on on the macroprudential staff and 472 00:25:28,640 --> 00:25:31,119 Speaker 1: on and even you know, the dog trunk. Whether the 473 00:25:31,160 --> 00:25:33,440 Speaker 1: legislation is perfect or not, I do not know legislation 474 00:25:33,480 --> 00:25:35,480 Speaker 1: is ever perfect, but you know it's a working progress. 475 00:25:35,520 --> 00:25:38,520 Speaker 1: But you can see that it certainly has contributed to 476 00:25:38,600 --> 00:25:42,480 Speaker 1: frictions and you know, complete easy lending and easy policies. 477 00:25:42,520 --> 00:25:44,840 Speaker 1: So if we don't get the same crazy things happening, 478 00:25:45,040 --> 00:25:48,879 Speaker 1: do you think that economists who are doing their work 479 00:25:48,960 --> 00:25:52,679 Speaker 1: now and then over the coming years um and maybe 480 00:25:52,800 --> 00:25:57,639 Speaker 1: entering academia or central banking will carry the scars of 481 00:25:57,760 --> 00:26:01,080 Speaker 1: mass unemployment with them and put an emphasis more on 482 00:26:01,080 --> 00:26:04,320 Speaker 1: the employment side fifteen years from now, twenty years from now, 483 00:26:04,359 --> 00:26:07,400 Speaker 1: in the same way that central bankers in the nineties 484 00:26:07,600 --> 00:26:11,280 Speaker 1: had their formative years the inflation of the seventies. Probably, 485 00:26:11,320 --> 00:26:13,080 Speaker 1: but I don't see that much of it. I mean, 486 00:26:13,160 --> 00:26:15,600 Speaker 1: I I do read quite a bit of I don't 487 00:26:15,640 --> 00:26:17,000 Speaker 1: see that much of, but what I do see a 488 00:26:17,000 --> 00:26:19,280 Speaker 1: lot as much more of the macro prudential stuff, you know, 489 00:26:19,440 --> 00:26:22,520 Speaker 1: or the financial crisis and the financial friction modeling. I 490 00:26:22,520 --> 00:26:25,400 Speaker 1: think that advices are still probably people who are still 491 00:26:25,520 --> 00:26:28,760 Speaker 1: very much focused on inflation. It's funny like I, I mean, 492 00:26:28,760 --> 00:26:30,240 Speaker 1: I know what you're saying, and I you know, I 493 00:26:30,280 --> 00:26:34,120 Speaker 1: don't read much academic literature, but I am surprised at 494 00:26:34,119 --> 00:26:37,280 Speaker 1: the number of you know, smart people that I follow 495 00:26:37,280 --> 00:26:40,320 Speaker 1: out there who are like still like pretty kind of 496 00:26:40,359 --> 00:26:45,119 Speaker 1: dead enders on the sort of new Kanzian models that 497 00:26:45,200 --> 00:26:47,199 Speaker 1: you describe. Despite I mean, to me, it's just a 498 00:26:47,320 --> 00:26:50,560 Speaker 1: sort of lay observer of this who's not steeped in 499 00:26:50,600 --> 00:26:54,320 Speaker 1: the literature. It looks like they've mostly failed. It looks 500 00:26:54,359 --> 00:26:57,679 Speaker 1: like a they haven't delivered much stability and be that 501 00:26:57,760 --> 00:27:00,720 Speaker 1: the models they have, for say, even anticipated when inflation 502 00:27:00,800 --> 00:27:03,520 Speaker 1: is going to take it off. Everyone seems to have 503 00:27:03,520 --> 00:27:06,679 Speaker 1: embarrassed themselves on this and yet playing large. There's a 504 00:27:06,680 --> 00:27:08,920 Speaker 1: lot of people who don't strike me as having done 505 00:27:09,000 --> 00:27:12,080 Speaker 1: a particular amount of soul searching or you know, how 506 00:27:12,119 --> 00:27:15,520 Speaker 1: long it takes to learn the apparatus learned the math 507 00:27:15,640 --> 00:27:19,280 Speaker 1: behind it, recording behind it, how much investment in human 508 00:27:19,320 --> 00:27:22,000 Speaker 1: capital it takes to do that, and are you going 509 00:27:22,000 --> 00:27:23,840 Speaker 1: to throw it away? Think about it if you had 510 00:27:23,880 --> 00:27:27,120 Speaker 1: put it that cost, I know, you know, that's that's 511 00:27:27,160 --> 00:27:29,480 Speaker 1: really what it is. I mean before we go so, 512 00:27:30,520 --> 00:27:33,520 Speaker 1: you know, the the sort of extreme other end of 513 00:27:33,760 --> 00:27:36,160 Speaker 1: the sort of new Canadian idea is the sort of 514 00:27:36,359 --> 00:27:40,119 Speaker 1: modern monetary theory school, which essentially says the FEDS should 515 00:27:40,119 --> 00:27:42,320 Speaker 1: just set interest right to zero and they should all 516 00:27:42,359 --> 00:27:45,000 Speaker 1: just go on vacation and that all of the sort 517 00:27:45,040 --> 00:27:50,880 Speaker 1: of task of fighting inflation and uh, maintaining macroeconomic stability 518 00:27:50,920 --> 00:27:54,760 Speaker 1: should be left to fiscal policymakers or policymakers in general, 519 00:27:54,800 --> 00:27:58,760 Speaker 1: are including non fiscal tools, regulatory tools, price controls, whatever 520 00:27:58,800 --> 00:28:02,680 Speaker 1: it is to fight inflation, maybe other supply side things 521 00:28:02,680 --> 00:28:05,959 Speaker 1: in terms of busting up busting up rent seekers and cartels. 522 00:28:06,600 --> 00:28:09,360 Speaker 1: Is that too far? Like, what is the proper role 523 00:28:09,520 --> 00:28:14,040 Speaker 1: for in your view, for monetary policy to help curb 524 00:28:14,119 --> 00:28:17,800 Speaker 1: some of the excesses in the economy. And you know, 525 00:28:17,880 --> 00:28:20,679 Speaker 1: how far should we go in the other spectrum to 526 00:28:20,760 --> 00:28:24,119 Speaker 1: where you said we need more active fiscal policy? But 527 00:28:24,520 --> 00:28:27,080 Speaker 1: is there you know, how far actually do we go well, 528 00:28:27,119 --> 00:28:29,040 Speaker 1: you know, I don't go that far. I am more 529 00:28:29,119 --> 00:28:32,280 Speaker 1: in the camp of Tom Pally, who has been a 530 00:28:32,320 --> 00:28:35,320 Speaker 1: critique of m MT. I'm not a critic, bitter critical amity, 531 00:28:35,359 --> 00:28:37,720 Speaker 1: and I consider them my friends. So but I am 532 00:28:37,720 --> 00:28:39,840 Speaker 1: more on the Tom Palley camp that monetary policy is 533 00:28:39,880 --> 00:28:43,080 Speaker 1: too important a tool to be left in the in 534 00:28:43,120 --> 00:28:45,840 Speaker 1: the garage there and then the pool box and not 535 00:28:45,920 --> 00:28:48,680 Speaker 1: to be used. I think it has a role to play. 536 00:28:48,760 --> 00:28:51,080 Speaker 1: So that's what we really need. We need to rethink. 537 00:28:51,160 --> 00:28:52,960 Speaker 1: And I certainly don't think we can just keep it 538 00:28:53,000 --> 00:28:55,080 Speaker 1: at zero and keep it at that, you know, so 539 00:28:55,240 --> 00:28:58,280 Speaker 1: some role to play still, but it's just this overreliance 540 00:28:58,400 --> 00:29:00,880 Speaker 1: that's created the dead bold That's right. That is exactly 541 00:29:00,920 --> 00:29:04,720 Speaker 1: the issue I think the problem in in thinking about 542 00:29:04,760 --> 00:29:07,120 Speaker 1: any policies. We have to be humble. I mean, and 543 00:29:07,160 --> 00:29:09,520 Speaker 1: Minsky said this, that you are never going to be 544 00:29:09,680 --> 00:29:13,880 Speaker 1: Capitalism is is an innovative animal. It's a complex system 545 00:29:13,880 --> 00:29:16,040 Speaker 1: which will adapt and change as you make more rules. 546 00:29:16,080 --> 00:29:18,520 Speaker 1: People who are innovate and find their way out of rules. 547 00:29:18,560 --> 00:29:21,400 Speaker 1: So you cannot think that you're ever going to team 548 00:29:21,480 --> 00:29:24,920 Speaker 1: this beast. So that in in in a way, but 549 00:29:25,240 --> 00:29:28,320 Speaker 1: we have to find ways in which we minimize the 550 00:29:28,360 --> 00:29:31,400 Speaker 1: pain for vast majority of the people. That's the key issue, 551 00:29:31,640 --> 00:29:33,880 Speaker 1: and then we can you know, we used to have 552 00:29:33,920 --> 00:29:36,080 Speaker 1: recessions in there in the fifties and sixties. They were 553 00:29:36,440 --> 00:29:39,880 Speaker 1: severe recessions, but they didn't have lasting scars. Unlike the 554 00:29:39,960 --> 00:29:42,560 Speaker 1: last several recessions, each one of them. We take like 555 00:29:42,600 --> 00:29:44,880 Speaker 1: six years to come out of it in terms terms 556 00:29:44,920 --> 00:29:47,320 Speaker 1: of get back to full employment. You know, that's the 557 00:29:47,520 --> 00:29:49,800 Speaker 1: that's the damage we do. Even though this is a 558 00:29:49,920 --> 00:29:53,160 Speaker 1: you know, we're having this conversation about some big secular 559 00:29:53,240 --> 00:29:57,240 Speaker 1: themes right now in the US economy. Do you see 560 00:29:57,400 --> 00:30:01,040 Speaker 1: signs of other aspects of the private credit market that 561 00:30:01,200 --> 00:30:04,400 Speaker 1: concern you right now? No? I mean the the corporate 562 00:30:04,400 --> 00:30:08,960 Speaker 1: credit corporate that has gone up. People, corporate corporate leverages 563 00:30:09,200 --> 00:30:12,680 Speaker 1: near record levels. Uh. And that's partly because you know, 564 00:30:12,760 --> 00:30:16,240 Speaker 1: interest rates are low and that enables people to when 565 00:30:16,280 --> 00:30:18,600 Speaker 1: earning sealed is high. But you do not have too 566 00:30:18,680 --> 00:30:22,719 Speaker 1: much capacity for growth. You don't need to invest. So 567 00:30:22,800 --> 00:30:24,840 Speaker 1: what you do is you do the buybacks, which people 568 00:30:25,080 --> 00:30:27,080 Speaker 1: keep criticizing. But what else are they supposed to do 569 00:30:27,120 --> 00:30:28,680 Speaker 1: with the money, I mean giving their money? And they're 570 00:30:28,720 --> 00:30:32,120 Speaker 1: doing it all right, well, sure of us. Great to 571 00:30:32,160 --> 00:30:34,480 Speaker 1: have you on. Always love talking to you and I 572 00:30:34,480 --> 00:30:38,239 Speaker 1: appreciate your appearing again on. Thank you so much, Thank you. 573 00:30:50,920 --> 00:30:53,960 Speaker 1: I hope you enjoyed the episode today. Sure, he is 574 00:30:54,000 --> 00:30:56,719 Speaker 1: always one of my favorite people to talk to. And 575 00:30:56,760 --> 00:31:01,000 Speaker 1: I think this idea that you know that the FED 576 00:31:01,120 --> 00:31:04,280 Speaker 1: has created a sort of nirvana for creditors is such 577 00:31:04,320 --> 00:31:08,720 Speaker 1: an important concept because there's a lot of confusion about 578 00:31:08,920 --> 00:31:12,960 Speaker 1: the relationship between monetary policy and asset bubbles and so forth, 579 00:31:12,960 --> 00:31:15,720 Speaker 1: and I find this framework to be uh, this this 580 00:31:15,840 --> 00:31:19,200 Speaker 1: explanation to be very compellingant I hope you did too. 581 00:31:19,240 --> 00:31:23,320 Speaker 1: So this has been another episode of the Odd Lots podcast. 582 00:31:23,400 --> 00:31:26,400 Speaker 1: I'm Joe Wisenthal. You can follow me on Twitter at 583 00:31:26,400 --> 00:31:28,840 Speaker 1: the Stalwart. And even though she wasn't here, you should 584 00:31:28,840 --> 00:31:33,120 Speaker 1: follow Tracy on Twitter. She's at Tracy Alloway. And definitely 585 00:31:33,120 --> 00:31:36,280 Speaker 1: follow a Strinavas on Twitter. He's at T three one 586 00:31:36,320 --> 00:31:39,840 Speaker 1: of my favorite follows. Just great all around. Be sure 587 00:31:39,840 --> 00:31:42,920 Speaker 1: to follow our producer on Twitter, Laura Carlson. She's at 588 00:31:43,000 --> 00:31:46,160 Speaker 1: Laura M. Carlson. And check out all of the Bloomberg 589 00:31:46,200 --> 00:31:50,920 Speaker 1: podcasts on Twitter set the handle at podcasts. Thanks for listening. 590 00:32:00,560 --> 00:32:00,600 Speaker 1: O