1 00:00:00,520 --> 00:00:03,760 Speaker 1: This is Bloomberg Wall Street Week. We turn our attention 2 00:00:03,840 --> 00:00:08,320 Speaker 1: to the markets this week. USCPI members reinforcing concerns about inflation, 3 00:00:08,440 --> 00:00:11,559 Speaker 1: the financial stories that cheap our world a really different 4 00:00:11,600 --> 00:00:14,520 Speaker 1: reaction to Mark. It's more indications of just how hot 5 00:00:14,560 --> 00:00:16,959 Speaker 1: the US economy really is. Through the eyes of the 6 00:00:17,000 --> 00:00:21,400 Speaker 1: most influential voices Larry Summers, the former Treachery Secretary, Katherine Keening, 7 00:00:21,560 --> 00:00:25,240 Speaker 1: CEO of ny Moen, Samzel Sherman and founder of Equatic 8 00:00:25,360 --> 00:00:28,840 Speaker 1: Group Investment in Bloomberg wool Street Week with David Weston 9 00:00:29,000 --> 00:00:33,760 Speaker 1: from Bloomberg Radio. An irresistible force meets an immovable object 10 00:00:33,920 --> 00:00:37,440 Speaker 1: as inflation fever continues, but the central bank remedy to 11 00:00:37,520 --> 00:00:40,800 Speaker 1: bring it down shakes Global Wall Street to its core. 12 00:00:41,400 --> 00:00:44,599 Speaker 1: This is Bloomberg Wall Street Week. I'm David Weston, this 13 00:00:44,600 --> 00:00:47,840 Speaker 1: week's special contributor. Larry Summers on reacting to the bank 14 00:00:47,880 --> 00:00:51,919 Speaker 1: crisis without giving up the fight against inflation. I think 15 00:00:51,920 --> 00:00:57,240 Speaker 1: it's appropriate, at least on current facts, to raise rates 16 00:00:57,400 --> 00:01:02,240 Speaker 1: by twenty five basis points. The economists Danny Bettos on 17 00:01:02,280 --> 00:01:05,040 Speaker 1: whether we should have seen it coming, well, I think 18 00:01:05,040 --> 00:01:09,080 Speaker 1: we are seeing a realization that the banks are more 19 00:01:09,160 --> 00:01:11,920 Speaker 1: fragile than people thought they were. And Joshua Friedman of 20 00:01:12,040 --> 00:01:14,960 Speaker 1: Kenyon Valley Partners on what it all means for credit 21 00:01:15,160 --> 00:01:30,640 Speaker 1: and for private equity. Any other week we'd be talking 22 00:01:30,640 --> 00:01:33,920 Speaker 1: about the ECB decision on Thursday to raise rates. Despite 23 00:01:33,959 --> 00:01:37,400 Speaker 1: all the uncertainty surrounding the banks, the Governing Council today 24 00:01:37,720 --> 00:01:41,640 Speaker 1: decided to increase the three key ECB interest rates by 25 00:01:41,680 --> 00:01:45,120 Speaker 1: fifty basis points and a Russian fighter jet forcing down 26 00:01:45,120 --> 00:01:49,000 Speaker 1: a US drone over the Black Sea. This incident demonstrates 27 00:01:49,000 --> 00:01:52,360 Speaker 1: a lack of competence in addition to being unsafe and unprofessional, 28 00:01:52,600 --> 00:01:56,480 Speaker 1: and China is lowering its growth target to achieve and 29 00:01:56,560 --> 00:02:00,400 Speaker 1: around five percent growth. It's not an easy task. It's 30 00:02:00,440 --> 00:02:04,919 Speaker 1: going to require redoubled efforts. But this week we watched 31 00:02:04,920 --> 00:02:08,040 Speaker 1: as the foundations of the banking sector trembled in the 32 00:02:08,040 --> 00:02:11,040 Speaker 1: face of the failure of Silicon Valley Bank. There's never 33 00:02:11,120 --> 00:02:14,839 Speaker 1: just one cop roach like we've seen several banks here 34 00:02:14,919 --> 00:02:17,800 Speaker 1: fault end of Signature Bank. It was the second largest 35 00:02:17,840 --> 00:02:20,560 Speaker 1: bank failure in US history, followed by the third largest 36 00:02:20,600 --> 00:02:23,720 Speaker 1: bank failure in US history when Signature Bank was taken 37 00:02:23,720 --> 00:02:26,400 Speaker 1: over its wealth. And if that weren't enough, the systemically 38 00:02:26,400 --> 00:02:31,200 Speaker 1: important Credit Suite Teacher as it first announced material weaknesses 39 00:02:31,280 --> 00:02:34,560 Speaker 1: in its financial reporting controls, even as its chairman Uric 40 00:02:34,720 --> 00:02:38,680 Speaker 1: Kerner reassured Bloomberg's Francine Laque that it was not seeing 41 00:02:38,760 --> 00:02:42,960 Speaker 1: fund outflows material good influence. Yesterday still I had a 42 00:02:43,000 --> 00:02:45,639 Speaker 1: Climb meeting which was very positive from that one. So 43 00:02:45,639 --> 00:02:47,800 Speaker 1: so far it's come, but I think it's only days 44 00:02:47,800 --> 00:02:50,160 Speaker 1: TiAl goodness. But by the end of the week, the 45 00:02:50,240 --> 00:02:53,160 Speaker 1: Swiss National Bank had to step in with guarantees of 46 00:02:53,200 --> 00:02:57,320 Speaker 1: liquidity as pressure built for some strategic resolution for Switzerland's 47 00:02:57,480 --> 00:03:02,320 Speaker 1: second largest bank, and the hits just kept on coming 48 00:03:02,360 --> 00:03:05,840 Speaker 1: as First Republic Bank came under siege, prompting Secretary Yelling 49 00:03:05,880 --> 00:03:08,200 Speaker 1: to put together a group of banks to inject thirty 50 00:03:08,200 --> 00:03:11,160 Speaker 1: billion dollars in depots posits into the bank, which as 51 00:03:11,160 --> 00:03:14,240 Speaker 1: of Friday's clothes did not appear to have stopped the doubts. 52 00:03:14,480 --> 00:03:16,840 Speaker 1: And as we head into the weekend now markets are 53 00:03:16,880 --> 00:03:19,760 Speaker 1: reacting to reports of UBS possibly stepping in to help 54 00:03:19,800 --> 00:03:22,959 Speaker 1: with problems at Credit Suite. Through it, all equities held 55 00:03:23,000 --> 00:03:25,680 Speaker 1: up reasonably well. The SMP five hundred ended up the 56 00:03:25,680 --> 00:03:28,920 Speaker 1: week up one point four percent. Then Azek was up 57 00:03:29,040 --> 00:03:32,639 Speaker 1: four point four percent. Investors flocked to the relative safety 58 00:03:32,720 --> 00:03:35,560 Speaker 1: of bonds, taking the yield on the ten year down 59 00:03:35,600 --> 00:03:38,000 Speaker 1: three DP basis points, ending the week just over three 60 00:03:38,000 --> 00:03:40,120 Speaker 1: point four percent, and the yield on the two year 61 00:03:40,240 --> 00:03:42,840 Speaker 1: fell over seven basis points to wind up just over 62 00:03:42,960 --> 00:03:45,320 Speaker 1: three point eight percent. Take us through it all. We 63 00:03:45,320 --> 00:03:48,480 Speaker 1: welcome now Peter Krauss. He's chairman and CEO of Aperture Investors, 64 00:03:48,480 --> 00:03:51,120 Speaker 1: So welcome back, Peter. Great to have you here. Did here, David? So, 65 00:03:51,160 --> 00:03:53,240 Speaker 1: as we sit here, it's hard to know exactly what 66 00:03:53,320 --> 00:03:55,520 Speaker 1: to address because it's moving. It's moving on both sides 67 00:03:55,520 --> 00:03:58,120 Speaker 1: of the Atlantic with credit suis ubs maybe over there, 68 00:03:58,360 --> 00:04:00,720 Speaker 1: we've still got new Republican and other issue here. So 69 00:04:00,840 --> 00:04:03,960 Speaker 1: as an investor, what do you do in these circumstances? Yeah, Look, 70 00:04:03,960 --> 00:04:06,960 Speaker 1: it's very difficult. Investing is alway to challenge, but in 71 00:04:07,240 --> 00:04:11,480 Speaker 1: these markets it's even more difficult. Risk is hard to 72 00:04:11,520 --> 00:04:14,520 Speaker 1: take right now because if we really don't know where 73 00:04:14,560 --> 00:04:16,680 Speaker 1: to take the risk, it's very difficult to put the 74 00:04:16,760 --> 00:04:20,120 Speaker 1: risk on. So I think right now, in today's markets, 75 00:04:20,279 --> 00:04:24,000 Speaker 1: probably investors shouldn't be committing more to a particular risk position. 76 00:04:24,320 --> 00:04:26,160 Speaker 1: I'm not sure they should reduce their risk, because it's 77 00:04:26,160 --> 00:04:28,039 Speaker 1: hard to know where to reduce the risk. None of 78 00:04:28,080 --> 00:04:29,840 Speaker 1: us thought the two year was going to rally a 79 00:04:29,960 --> 00:04:33,960 Speaker 1: hundred basis points in less than seven days. That's a dramatic, 80 00:04:34,040 --> 00:04:36,800 Speaker 1: dramatic move, and none of us had any thought that, 81 00:04:36,920 --> 00:04:39,480 Speaker 1: in fact, these banks were as unstable as they are. 82 00:04:39,920 --> 00:04:41,680 Speaker 1: So I think at the present time, if I was 83 00:04:41,760 --> 00:04:45,960 Speaker 1: investing incremental dollars, I'd probably have it in cash. So 84 00:04:46,560 --> 00:04:49,040 Speaker 1: as a practical matter, what we saw was silicon value. 85 00:04:49,080 --> 00:04:50,680 Speaker 1: Back in other places, it seemed to be a mismatch, 86 00:04:51,080 --> 00:04:54,000 Speaker 1: a mismatch with respect to duration and respect to liquidity. 87 00:04:54,040 --> 00:04:56,919 Speaker 1: As you had long term treasuries and other securities matched 88 00:04:56,960 --> 00:05:00,480 Speaker 1: up against deposits, people could withdraw right away. Where might 89 00:05:00,520 --> 00:05:02,719 Speaker 1: there be similar mismatches? Do you think in the system, 90 00:05:02,760 --> 00:05:05,760 Speaker 1: either in the banking system or beyond the banking system. Now, 91 00:05:05,800 --> 00:05:08,000 Speaker 1: I think that's an excellent point. I think one of 92 00:05:08,040 --> 00:05:10,440 Speaker 1: the challenges that the world has, this is not just 93 00:05:10,480 --> 00:05:14,159 Speaker 1: a US issue, is that for ten plus years, interest 94 00:05:14,240 --> 00:05:18,320 Speaker 1: rates have been very benign, inflation benign, volatility benign, and 95 00:05:18,440 --> 00:05:21,240 Speaker 1: people have gotten comfortable with that, and so they've invested 96 00:05:21,360 --> 00:05:24,920 Speaker 1: more money than they probably would historically into private assets, 97 00:05:25,160 --> 00:05:29,359 Speaker 1: into public private equity, into private credit, and places in 98 00:05:29,400 --> 00:05:32,400 Speaker 1: which they don't have liquidity, and now that interest rates 99 00:05:32,440 --> 00:05:34,799 Speaker 1: are much much higher in the front end, that cost 100 00:05:34,839 --> 00:05:37,640 Speaker 1: of that liquidity is actually significant. And what we're seeing 101 00:05:37,800 --> 00:05:42,160 Speaker 1: is the disintermediation of cash moving to where you can 102 00:05:42,200 --> 00:05:44,920 Speaker 1: get five percent in short rates, whereas before you were 103 00:05:44,960 --> 00:05:48,280 Speaker 1: getting zero. So, yes, it's happening in the banking system. 104 00:05:48,440 --> 00:05:51,920 Speaker 1: It's happening any place that is actually benefited from very 105 00:05:51,960 --> 00:05:54,799 Speaker 1: low rates and low volatility. It's happening in the insurance 106 00:05:54,839 --> 00:05:58,320 Speaker 1: business where actually people who have insurance policies are saying, well, 107 00:05:58,360 --> 00:06:01,320 Speaker 1: if I actually terminate my insurance policy and buy a 108 00:06:01,360 --> 00:06:04,239 Speaker 1: new one, or actually buy a public security like a bond, 109 00:06:04,279 --> 00:06:06,240 Speaker 1: I might get a better return. So we're going to 110 00:06:06,320 --> 00:06:10,400 Speaker 1: see this continue to roll through the economic environment, and 111 00:06:10,480 --> 00:06:13,240 Speaker 1: it's not over yet and it's going to continue. Part 112 00:06:13,279 --> 00:06:16,279 Speaker 1: of the problem is marketing to market. We haven't had it, 113 00:06:16,600 --> 00:06:19,159 Speaker 1: and obviously we've now learned the banking sector when it 114 00:06:19,160 --> 00:06:21,240 Speaker 1: comes to some of these long term treasures. You've been 115 00:06:21,240 --> 00:06:23,000 Speaker 1: on Wall Street week before talking about in some of 116 00:06:23,000 --> 00:06:25,520 Speaker 1: the private markets, private credit, private equity, and things like that, 117 00:06:26,040 --> 00:06:27,880 Speaker 1: how does that work its way through the system, because 118 00:06:27,880 --> 00:06:30,200 Speaker 1: sooner or later, if it's less worth less, we have 119 00:06:30,240 --> 00:06:32,760 Speaker 1: to recognize that. Yeah, I think that that's right. Look, 120 00:06:32,800 --> 00:06:35,520 Speaker 1: what we sort of don't want is we don't want 121 00:06:35,600 --> 00:06:38,800 Speaker 1: people with private assets to be forced to sell because 122 00:06:38,839 --> 00:06:42,600 Speaker 1: they're not liquid. They ultimately will be sold at significant discounts, 123 00:06:42,839 --> 00:06:45,360 Speaker 1: and the buyers of them are going to charge the 124 00:06:45,400 --> 00:06:48,760 Speaker 1: lat for little liquidity. So it would be better if 125 00:06:48,800 --> 00:06:52,080 Speaker 1: people who had those assets could hold them. But you're right, 126 00:06:52,320 --> 00:06:55,320 Speaker 1: they're valued at rates or levels that are probably higher 127 00:06:55,360 --> 00:06:57,960 Speaker 1: than what their actual value is, and so we have 128 00:06:58,000 --> 00:07:01,919 Speaker 1: to sort of engineer a change over time. So foundations, endowments, 129 00:07:01,920 --> 00:07:05,080 Speaker 1: pension plans, any investor that has a sizeable amount of 130 00:07:05,080 --> 00:07:07,479 Speaker 1: private equity or private capital is going to have to 131 00:07:07,480 --> 00:07:10,600 Speaker 1: figure out where to take their incremental dollars and invest 132 00:07:10,640 --> 00:07:13,560 Speaker 1: them in public securities. And I think another issue that 133 00:07:13,640 --> 00:07:17,480 Speaker 1: people have is they spend out of these foundations turn endowments. 134 00:07:17,520 --> 00:07:22,120 Speaker 1: So if your private equity investment is not actually selling 135 00:07:22,160 --> 00:07:24,840 Speaker 1: companies and producing cash, then you're gonna have to take 136 00:07:24,840 --> 00:07:26,960 Speaker 1: that cash from the public side, which is going to 137 00:07:27,040 --> 00:07:32,200 Speaker 1: put more pressure on that unequal or imbalanced ratio. So 138 00:07:32,280 --> 00:07:34,320 Speaker 1: I think this is again not going to get solved 139 00:07:34,560 --> 00:07:37,239 Speaker 1: over the short run, and it could create some acute 140 00:07:37,320 --> 00:07:39,680 Speaker 1: cases in which people have to sell these assets. Where 141 00:07:39,680 --> 00:07:41,760 Speaker 1: does this TELEFED. We've got a FED meeting coming up 142 00:07:41,800 --> 00:07:44,680 Speaker 1: next week. We had the ECP this week say the 143 00:07:44,760 --> 00:07:47,960 Speaker 1: course as it was anticipated with the fifty basis point increase, 144 00:07:48,000 --> 00:07:49,240 Speaker 1: What does it say to the FED? Does the FED 145 00:07:49,280 --> 00:07:51,240 Speaker 1: need to be worried about financial stability? At this point? 146 00:07:51,600 --> 00:07:55,160 Speaker 1: FED is worried about financial stability. They've proved that over 147 00:07:55,200 --> 00:07:57,800 Speaker 1: the weekend they did exactly what they should have done, 148 00:07:57,840 --> 00:08:01,360 Speaker 1: which was to stabilize the two bankings situations that the 149 00:08:01,440 --> 00:08:05,960 Speaker 1: FDIC took over and the transaction that you discussed earlier 150 00:08:06,080 --> 00:08:09,960 Speaker 1: where large US New York banks put money into the 151 00:08:10,040 --> 00:08:13,720 Speaker 1: end of First Republic. Having said that, inflation is still 152 00:08:13,840 --> 00:08:16,120 Speaker 1: very high, and we have to think about the fact 153 00:08:16,120 --> 00:08:20,200 Speaker 1: that inflation affects the broad economy, not just the banks. 154 00:08:20,440 --> 00:08:24,520 Speaker 1: And if we don't continue to fight inflation, then the 155 00:08:24,520 --> 00:08:26,000 Speaker 1: bill we're gonna have to pay at the end it's 156 00:08:26,000 --> 00:08:28,360 Speaker 1: going to be even bigger. So I think that the 157 00:08:28,600 --> 00:08:31,680 Speaker 1: liquidity that was created by the bank actions over the 158 00:08:31,720 --> 00:08:34,640 Speaker 1: weekend created space for the FED to actually continue to 159 00:08:34,640 --> 00:08:37,600 Speaker 1: take rates up by twenty five basis points. Will they 160 00:08:37,600 --> 00:08:40,440 Speaker 1: continue to watch the banking situation more carefully, Of course 161 00:08:40,440 --> 00:08:43,319 Speaker 1: they will. That could change in the future if a 162 00:08:43,400 --> 00:08:47,120 Speaker 1: systemic bank fails, that may actually change the Fed's position, 163 00:08:47,360 --> 00:08:49,480 Speaker 1: But for right now, I think the FED probably moves 164 00:08:49,520 --> 00:08:52,640 Speaker 1: twenty five basis points. Would you expect going forward investors 165 00:08:52,679 --> 00:08:54,760 Speaker 1: would be a little less so willing to put it 166 00:08:54,800 --> 00:08:56,880 Speaker 1: in private and maybe you stick on the public market. 167 00:08:57,040 --> 00:08:59,480 Speaker 1: I do think the cost of liquidity has now gone 168 00:08:59,520 --> 00:09:02,480 Speaker 1: up antically and where it was kind of a no 169 00:09:02,559 --> 00:09:05,319 Speaker 1: brainer to put money in private assets given what you 170 00:09:05,320 --> 00:09:08,000 Speaker 1: would get in public assets or certainly in short data 171 00:09:08,080 --> 00:09:11,520 Speaker 1: public assets, that's changed dramatically, and so I do think 172 00:09:11,559 --> 00:09:14,120 Speaker 1: on the margin for two reasons. One the rebalancing issue 173 00:09:14,160 --> 00:09:17,800 Speaker 1: we discussed, and two is the relative attractiveness of the 174 00:09:17,920 --> 00:09:22,040 Speaker 1: yields of public securities versus private securities. I also think 175 00:09:22,120 --> 00:09:24,560 Speaker 1: that there is going to be a reckoning in the 176 00:09:24,600 --> 00:09:28,320 Speaker 1: private capital or the private credit world, where the loans 177 00:09:28,360 --> 00:09:29,920 Speaker 1: that have been made have been made over the last 178 00:09:29,960 --> 00:09:32,760 Speaker 1: ten years in a very benign credit environment. People look 179 00:09:32,800 --> 00:09:35,720 Speaker 1: at the credit history of those assets and see very 180 00:09:35,720 --> 00:09:38,400 Speaker 1: few losses and feel comfortable with that. That could change. 181 00:09:38,640 --> 00:09:41,440 Speaker 1: And if people then begin to understand well, those populations 182 00:09:41,760 --> 00:09:45,360 Speaker 1: of loans are not quite as free from credit risk 183 00:09:45,400 --> 00:09:48,000 Speaker 1: as I thought. That will also make people think a 184 00:09:48,040 --> 00:09:50,160 Speaker 1: little bit more about putting money in the public side 185 00:09:50,400 --> 00:09:52,480 Speaker 1: versus the private side. What does this mean for if 186 00:09:52,480 --> 00:09:54,400 Speaker 1: I can call it this the real economy, I mean, 187 00:09:54,760 --> 00:09:57,000 Speaker 1: for example, to be very direct with you, is a 188 00:09:57,000 --> 00:09:59,440 Speaker 1: recession more likely today than it was a week ago. Yes, 189 00:10:00,120 --> 00:10:02,520 Speaker 1: to be very direct with you, I think that the 190 00:10:02,600 --> 00:10:06,360 Speaker 1: FED has been saying again since it started raising rates, 191 00:10:06,400 --> 00:10:11,480 Speaker 1: they want to restrict financial conditions. If you restrict financial conditions, 192 00:10:11,520 --> 00:10:14,560 Speaker 1: by definition, you have to slow growth. Of course, the 193 00:10:14,600 --> 00:10:16,960 Speaker 1: FED is trying to slow growth without creating a recession. 194 00:10:17,280 --> 00:10:19,480 Speaker 1: That is a very hard thing to do. With the 195 00:10:19,520 --> 00:10:24,200 Speaker 1: banking crisis, you're probably also seeing financial conditions both loosen 196 00:10:24,280 --> 00:10:26,760 Speaker 1: as a result of the Fed's action, but also tighten 197 00:10:26,880 --> 00:10:30,400 Speaker 1: as a result of regional banks husbanding their cash and 198 00:10:30,520 --> 00:10:33,680 Speaker 1: not lending as aggressively and wearing more about credit risk 199 00:10:33,920 --> 00:10:36,920 Speaker 1: and therefore on the margin, probably not lending. So I 200 00:10:37,000 --> 00:10:39,559 Speaker 1: suspect on the real economy, by the end of the 201 00:10:39,640 --> 00:10:43,280 Speaker 1: year there will be a significant slowing, potential recession, and 202 00:10:43,320 --> 00:10:45,920 Speaker 1: that's what we need, because we're not going to get 203 00:10:45,920 --> 00:10:48,560 Speaker 1: inflation down unless that happens. Peters, so great to have 204 00:10:48,559 --> 00:10:51,679 Speaker 1: your here again. That's Peter Krauss of Aperture Investments coming up. 205 00:10:51,760 --> 00:10:54,880 Speaker 1: Economists editor in chief Zanni Bedos joins us about yet 206 00:10:54,920 --> 00:10:57,640 Speaker 1: another banking crisis. Well, we may risk by counting the 207 00:10:57,720 --> 00:10:59,920 Speaker 1: government to make it all go away. This is Wall 208 00:11:00,000 --> 00:11:08,640 Speaker 1: Street Week. I'm Bloomberg. This is Bloomberg Wall Street Week 209 00:11:08,880 --> 00:11:19,040 Speaker 1: with David Weston from Bloomberg Radio. This is Wall Street Week. 210 00:11:19,120 --> 00:11:21,280 Speaker 1: I'm David Weston. It has been quite a week in 211 00:11:21,320 --> 00:11:24,679 Speaker 1: the markets, and particularly triggered by some crises in several banks. 212 00:11:24,880 --> 00:11:26,679 Speaker 1: But now it's time to take a step back and 213 00:11:26,720 --> 00:11:30,040 Speaker 1: maybe think about broader consequences of what we have seen 214 00:11:30,160 --> 00:11:31,920 Speaker 1: this week and help us do that. We're welcome to 215 00:11:32,120 --> 00:11:35,880 Speaker 1: Zanny Minton Batto. She is editor in chief of the Economist. So, Zannie, 216 00:11:35,960 --> 00:11:37,760 Speaker 1: welcome back. It's great to have you here. Thank you 217 00:11:37,760 --> 00:11:39,240 Speaker 1: for having me. It's great to be back here. So 218 00:11:39,280 --> 00:11:42,160 Speaker 1: you had you were covering the two eight two thousand 219 00:11:42,160 --> 00:11:45,040 Speaker 1: and nine great great financial crisis. Do you have PTSD? 220 00:11:47,040 --> 00:11:49,840 Speaker 1: I certainly have a sense of I'm as You're right. 221 00:11:49,880 --> 00:11:52,640 Speaker 1: I lived in Washington throughout that crisis, and I'm here. 222 00:11:52,679 --> 00:11:55,079 Speaker 1: I was here in the US this last weekend when 223 00:11:55,120 --> 00:11:58,320 Speaker 1: the whole news broke about Silicon Valley Bank, and there 224 00:11:58,400 --> 00:12:00,720 Speaker 1: was definitely a sense of daja. It's not on the 225 00:12:00,720 --> 00:12:04,760 Speaker 1: scale yet, but it's also I think more systemic than 226 00:12:05,200 --> 00:12:07,640 Speaker 1: people thought even a week ago. So I think we 227 00:12:07,679 --> 00:12:13,440 Speaker 1: are seeing a realization that the banks are more fragile 228 00:12:13,480 --> 00:12:16,880 Speaker 1: than people thought they were. Because after the twenty eight 229 00:12:16,880 --> 00:12:18,920 Speaker 1: financial crisism, we can we can talk about this, but 230 00:12:19,080 --> 00:12:23,280 Speaker 1: there was a huge amount of regulation and recapitalization and 231 00:12:23,320 --> 00:12:26,200 Speaker 1: focus on strengthening the banks. But two things kind of 232 00:12:26,440 --> 00:12:29,160 Speaker 1: we've now realized happens since then. One is that some 233 00:12:29,360 --> 00:12:32,679 Speaker 1: of that regulatory framework was rolled back in twenty seventeen 234 00:12:32,679 --> 00:12:35,920 Speaker 1: and eighteen, and so Silicon Valley Bank would have been 235 00:12:35,960 --> 00:12:40,000 Speaker 1: required to have much more rigorous supervision and to have 236 00:12:40,120 --> 00:12:42,800 Speaker 1: had a kind of what's called a plan for its 237 00:12:42,840 --> 00:12:46,040 Speaker 1: own demise, which the systemically important big banks have to have. 238 00:12:46,400 --> 00:12:48,720 Speaker 1: And the original rules were that any bank bigger than 239 00:12:48,720 --> 00:12:51,000 Speaker 1: without it's more than fifty billion would have to do that. 240 00:12:51,000 --> 00:12:53,400 Speaker 1: That was raised to two hundred and fifty billion, and 241 00:12:53,440 --> 00:12:56,199 Speaker 1: so Silicon Valley Bank and others didn't were no longer 242 00:12:56,240 --> 00:12:59,360 Speaker 1: subject to that. Rigger had they been subject to it, 243 00:13:00,080 --> 00:13:03,079 Speaker 1: this might not have happened. Secondly, and more importantly, the 244 00:13:03,520 --> 00:13:07,000 Speaker 1: whole reorganization after two thousand and two thousand and nine 245 00:13:07,320 --> 00:13:09,960 Speaker 1: was designed to focus on problems of credit because that 246 00:13:10,040 --> 00:13:13,120 Speaker 1: was the cause of the financial crisis. Inflation was loan 247 00:13:13,240 --> 00:13:17,600 Speaker 1: that people worried about deflation. No one worried about duration risk, 248 00:13:17,760 --> 00:13:21,120 Speaker 1: no one worried about what happened to the value of 249 00:13:21,600 --> 00:13:25,960 Speaker 1: treasuries on banks balance sheets when interest rates rose very sharply. 250 00:13:26,120 --> 00:13:28,840 Speaker 1: That wasn't sund part of the thinking in two and nine, 251 00:13:28,840 --> 00:13:32,400 Speaker 1: two ten, when these regularly reforms were done. And now 252 00:13:32,440 --> 00:13:34,720 Speaker 1: we're in an environment where we've had obviously the fastest 253 00:13:34,720 --> 00:13:38,880 Speaker 1: interest rate rise in decades, and we're seeing the consequences 254 00:13:38,920 --> 00:13:42,560 Speaker 1: that actually these large holdings of government bonds, which would 255 00:13:42,600 --> 00:13:45,560 Speaker 1: deem to be part of making banks safer, are less 256 00:13:45,600 --> 00:13:48,240 Speaker 1: safer than you thought because the banks have effectively, if 257 00:13:48,240 --> 00:13:50,199 Speaker 1: you marking to market, they have big losses on them. 258 00:13:50,360 --> 00:13:52,760 Speaker 1: At the same time, we do have the Sunday announcement 259 00:13:53,000 --> 00:13:55,600 Speaker 1: that basically said everything's gonna be fine. We'll back up 260 00:13:55,640 --> 00:13:58,320 Speaker 1: all the pleasant no matter why everything seems super systemic. 261 00:13:58,400 --> 00:14:00,440 Speaker 1: The government steps in makes it all better. We did 262 00:14:00,480 --> 00:14:02,880 Speaker 1: have that, and that's the I think when we look 263 00:14:02,920 --> 00:14:04,520 Speaker 1: back at this episode, that is going to be the 264 00:14:04,600 --> 00:14:09,480 Speaker 1: extraordinary development that on Sunday, not only were all depositors 265 00:14:09,640 --> 00:14:12,640 Speaker 1: in those two banks bailed out, and of course there 266 00:14:12,720 --> 00:14:15,360 Speaker 1: was an FDIC limit of two hundred and fifty thousand, 267 00:14:15,440 --> 00:14:18,680 Speaker 1: that's you know, exemption made all depositors bailed out. But 268 00:14:18,800 --> 00:14:22,960 Speaker 1: in addition, the FED instituted for one year supposedly a 269 00:14:23,000 --> 00:14:27,480 Speaker 1: facility that banks could get liquidity at the par value 270 00:14:27,920 --> 00:14:30,400 Speaker 1: of any treasuries and any government bonds that they hold. 271 00:14:30,640 --> 00:14:32,920 Speaker 1: And the idea of a lender of last resort is 272 00:14:33,000 --> 00:14:37,280 Speaker 1: to lend freely, quickly against good collateral and out of 273 00:14:37,360 --> 00:14:40,640 Speaker 1: punitive rate. But what we've seen really in the last 274 00:14:40,680 --> 00:14:43,880 Speaker 1: few years, a few decades actually has been an expansion 275 00:14:44,640 --> 00:14:48,520 Speaker 1: of the Federal reserves kind of definition of what being 276 00:14:48,520 --> 00:14:51,360 Speaker 1: a lender of last resort is, lending against much more collateral, 277 00:14:51,760 --> 00:14:54,440 Speaker 1: lending more freely, becoming After two thousand and eight two 278 00:14:54,440 --> 00:14:56,520 Speaker 1: thousand nine, people talked of the FED as a market 279 00:14:56,560 --> 00:15:00,040 Speaker 1: maker of last resort much broader. And what happen and 280 00:15:00,120 --> 00:15:02,440 Speaker 1: Las Sunday was a very big shift because in effect, 281 00:15:02,880 --> 00:15:07,280 Speaker 1: it wasn't imposing any haircut on the bank's ability to borrow. 282 00:15:07,440 --> 00:15:09,760 Speaker 1: They can borrow a POW, which meant in effect they're 283 00:15:09,760 --> 00:15:13,600 Speaker 1: getting subsidized by the Federal for their liquidity. And it's 284 00:15:13,600 --> 00:15:15,640 Speaker 1: supposed to be a one year facility. I don't know. 285 00:15:15,760 --> 00:15:17,840 Speaker 1: Those kind of one year facilities have a habit of changing, 286 00:15:17,840 --> 00:15:20,760 Speaker 1: and that's a big shift in what the Fed does. Ny, 287 00:15:20,800 --> 00:15:22,640 Speaker 1: it's so great to have you back on Walsteran. Thank 288 00:15:22,640 --> 00:15:24,480 Speaker 1: you so much for being here. That that's any Minton 289 00:15:24,560 --> 00:15:29,720 Speaker 1: Bettos of The Economist. Welcome now Dave Gitlin, he's chairman 290 00:15:29,760 --> 00:15:33,120 Speaker 1: and CEO of Carrier Global Corporation and he joins us. Now, 291 00:15:33,160 --> 00:15:34,920 Speaker 1: thank you so much for being here with us on 292 00:15:35,080 --> 00:15:37,360 Speaker 1: Wall Street week. So we've had a busy week in 293 00:15:37,400 --> 00:15:39,960 Speaker 1: the markets. A lot has gone on, triggered really by 294 00:15:40,000 --> 00:15:42,880 Speaker 1: the sort of banking crisis started with Silicon Valley Bank. 295 00:15:43,280 --> 00:15:45,560 Speaker 1: I wonder for you, who runs a company that actually 296 00:15:45,560 --> 00:15:48,120 Speaker 1: makes things, sells things in the real world, what effect 297 00:15:48,160 --> 00:15:50,200 Speaker 1: does it hell on you. Well, first, the good news 298 00:15:50,320 --> 00:15:52,640 Speaker 1: is that we have known material exposure to the regional banks. 299 00:15:52,640 --> 00:15:55,880 Speaker 1: The banks involved particularly they're more broadly the regional banks, 300 00:15:55,920 --> 00:15:59,160 Speaker 1: so we're protected there. Our relationships are with the bulgh 301 00:15:59,160 --> 00:16:01,600 Speaker 1: bracket franks. So rates are lower, but do you see 302 00:16:01,640 --> 00:16:04,000 Speaker 1: any tightening of credit? Do you see any reluctance to 303 00:16:04,080 --> 00:16:06,040 Speaker 1: extend credit at this point? Is that picking up at 304 00:16:06,040 --> 00:16:07,960 Speaker 1: all or do you have to anticipate that possibility. We 305 00:16:08,000 --> 00:16:11,280 Speaker 1: have to anticipate anticipate that possibility. We haven't seen that yet. 306 00:16:11,720 --> 00:16:14,160 Speaker 1: But rates coming down is over a positive thing for 307 00:16:14,200 --> 00:16:16,080 Speaker 1: our market because you know, we look at some of 308 00:16:16,080 --> 00:16:18,440 Speaker 1: the rates going up has had a delling effect on 309 00:16:18,440 --> 00:16:21,400 Speaker 1: the new housing market. So we should see some benefit 310 00:16:21,480 --> 00:16:24,560 Speaker 1: in housing as rates start to come down, and our 311 00:16:24,640 --> 00:16:27,120 Speaker 1: larger customers on the property side, as rates come down, 312 00:16:27,160 --> 00:16:29,720 Speaker 1: that'll be a positive thing for commercial construction as well. 313 00:16:29,760 --> 00:16:31,760 Speaker 1: We have the Federal Reserve meeting next week and there's 314 00:16:31,760 --> 00:16:33,360 Speaker 1: a lot of debate about what they're likely to do. 315 00:16:33,720 --> 00:16:35,880 Speaker 1: Talk about the other side of this equation. We're seeing 316 00:16:35,880 --> 00:16:38,840 Speaker 1: the situation with the banks. We'll need to support them. 317 00:16:39,000 --> 00:16:40,640 Speaker 1: At the same time, we do have inflation. We're still 318 00:16:40,680 --> 00:16:44,000 Speaker 1: getting inflation numbers on how does that affect carrier's business. Well, 319 00:16:44,080 --> 00:16:47,040 Speaker 1: if you're a company that has the ability to raise 320 00:16:47,120 --> 00:16:49,840 Speaker 1: price and keep price but also reduced costs, that spread 321 00:16:49,840 --> 00:16:52,920 Speaker 1: can be very beneficial. So we look over the last 322 00:16:52,960 --> 00:16:55,280 Speaker 1: eighteen months and many of our businesses we've raised price 323 00:16:55,360 --> 00:16:58,880 Speaker 1: six times, so we've been coming off very significant price increases. 324 00:16:58,920 --> 00:17:01,120 Speaker 1: We raise price over billion and a half dollars last 325 00:17:01,200 --> 00:17:03,440 Speaker 1: year on a base of twenty billions, so we realized 326 00:17:03,960 --> 00:17:07,000 Speaker 1: last year over seven and a half percent of price increases. 327 00:17:07,520 --> 00:17:10,320 Speaker 1: While we have been experiencing inflation, we look at this 328 00:17:10,400 --> 00:17:13,120 Speaker 1: year inflation is not over. We came out with new 329 00:17:13,160 --> 00:17:15,800 Speaker 1: price increases in January to kind of keep pace with 330 00:17:15,880 --> 00:17:19,280 Speaker 1: the inflationary pressures that we see. But at the same time, 331 00:17:19,359 --> 00:17:21,879 Speaker 1: we will be brutally tenacious on taking costs out of 332 00:17:21,880 --> 00:17:24,919 Speaker 1: the business. We reduced GNA from nine percent to seven percent. 333 00:17:25,280 --> 00:17:28,280 Speaker 1: We're going very aggressively after working with our supply chain 334 00:17:28,320 --> 00:17:30,960 Speaker 1: partners to really partner with suppliers that want to be 335 00:17:31,000 --> 00:17:33,320 Speaker 1: on the journey with us to take costs out. We're 336 00:17:33,320 --> 00:17:36,600 Speaker 1: going back after the basics of getting productivity in our factories, 337 00:17:36,640 --> 00:17:41,440 Speaker 1: so maintain increased price as appropriate and then aggressively reduce costs. 338 00:17:41,480 --> 00:17:44,399 Speaker 1: Are you facing much pressure on the labor side. We are. 339 00:17:44,440 --> 00:17:46,919 Speaker 1: We are. It's mostly acute in the United States. We 340 00:17:46,960 --> 00:17:49,359 Speaker 1: don't have as many you know, we have about fifty 341 00:17:49,400 --> 00:17:51,600 Speaker 1: five thousand people eighty percent of them are outside the 342 00:17:51,680 --> 00:17:54,400 Speaker 1: United States, and most of the labor pressures we see 343 00:17:54,520 --> 00:17:57,240 Speaker 1: still are in the United States, but we're starting to 344 00:17:57,280 --> 00:18:00,000 Speaker 1: see some loosening there. Where are the customers right now, 345 00:18:00,200 --> 00:18:02,800 Speaker 1: maybe are they moving to How is your business changing? 346 00:18:03,119 --> 00:18:06,800 Speaker 1: We look both geographically and bi vertically. Geographically, you know, 347 00:18:06,840 --> 00:18:08,760 Speaker 1: it does look like slower growth in the United States 348 00:18:08,800 --> 00:18:10,480 Speaker 1: and Europe. But I will tell you I was just 349 00:18:10,560 --> 00:18:14,040 Speaker 1: in Saudi last week. The opportunity for infrastructure spend in 350 00:18:14,040 --> 00:18:17,280 Speaker 1: Saudi Arabia is tremendous. It's a once in a generation opportunity. 351 00:18:17,359 --> 00:18:19,159 Speaker 1: But we met with the PIF that has more than 352 00:18:19,160 --> 00:18:21,919 Speaker 1: seven hundred billion dollars that they're investing and with the 353 00:18:21,960 --> 00:18:24,240 Speaker 1: Giga projects that they're investing in. They're going to invest 354 00:18:24,240 --> 00:18:28,160 Speaker 1: more than seven hundred billion dollars in Nielm in erosian 355 00:18:28,240 --> 00:18:30,359 Speaker 1: A housing projects. So we want to be front and 356 00:18:30,400 --> 00:18:34,320 Speaker 1: center as they build out significant infrastructure in Saudi Arabia. 357 00:18:34,400 --> 00:18:36,760 Speaker 1: India looks very encouraging right now, so we want to 358 00:18:36,800 --> 00:18:39,719 Speaker 1: invest very strongly in India. And I think China's going 359 00:18:39,720 --> 00:18:42,439 Speaker 1: to surprise to the upside. There is this geopolitical cloud 360 00:18:42,520 --> 00:18:44,960 Speaker 1: between the United States and Europe and China. But I 361 00:18:45,000 --> 00:18:46,919 Speaker 1: will tell you that if you get beyond the cloud 362 00:18:46,960 --> 00:18:49,119 Speaker 1: and you look in the trenches, there is really strong 363 00:18:49,160 --> 00:18:51,920 Speaker 1: opportunity in China. And what we've done in China is 364 00:18:51,960 --> 00:18:54,679 Speaker 1: shift our focus from property and real estate over to 365 00:18:54,720 --> 00:18:57,879 Speaker 1: the industrial and infrastructure side. It was seventy thirty one 366 00:18:57,920 --> 00:19:01,879 Speaker 1: way now it's seventy percent I and I infrastructure and industrial. 367 00:19:01,920 --> 00:19:05,280 Speaker 1: So we see a positive opportunity in China. And then 368 00:19:05,280 --> 00:19:07,399 Speaker 1: we look by vertical. We just got a shift for 369 00:19:07,480 --> 00:19:11,320 Speaker 1: where there's more opportunities, so Data Center strong, the Chips 370 00:19:11,359 --> 00:19:15,200 Speaker 1: Act is bringing more investment into infrastructure and industrials. In 371 00:19:15,240 --> 00:19:20,080 Speaker 1: the United States, we look at low end certain parts 372 00:19:20,080 --> 00:19:22,959 Speaker 1: of real estate look very encouraging. So we have an 373 00:19:23,000 --> 00:19:25,760 Speaker 1: ability to shift some of our focus and we're landing 374 00:19:25,800 --> 00:19:28,720 Speaker 1: some very encouraging deals here in the United States. You 375 00:19:28,800 --> 00:19:32,359 Speaker 1: mentioned sustainability earlier. Tell us about the Inflation Reduction Acts 376 00:19:32,359 --> 00:19:36,000 Speaker 1: some of the other issues, such as the Bipartisan Infrastructure Bill. 377 00:19:36,240 --> 00:19:39,040 Speaker 1: What is that doing to your business? It's significant, you know, 378 00:19:39,080 --> 00:19:41,760 Speaker 1: you look at the Inflation Reduction Acts. Three hundred and 379 00:19:41,800 --> 00:19:43,960 Speaker 1: seventy billion is going to be spent on clean energy, 380 00:19:44,320 --> 00:19:46,399 Speaker 1: and we expect to be a big recipient, there's going 381 00:19:46,440 --> 00:19:49,040 Speaker 1: to be a two thousand dollars incentive to go to heatpumps. 382 00:19:49,440 --> 00:19:52,040 Speaker 1: Heatpumps is a very significant trend of the United States. 383 00:19:52,080 --> 00:19:54,639 Speaker 1: Thirty five percent of all of our split systems that 384 00:19:54,680 --> 00:19:57,359 Speaker 1: we sell for air conditioning for homes today are heatpumps. 385 00:19:57,400 --> 00:20:00,040 Speaker 1: So if you can use that two thousand dollars and 386 00:20:00,160 --> 00:20:02,560 Speaker 1: have to shift from not only cooling only to a 387 00:20:02,600 --> 00:20:05,439 Speaker 1: heat pump, but use it to shift to a variable speed, 388 00:20:05,640 --> 00:20:08,440 Speaker 1: more energy efficient heat pump, that will have a very 389 00:20:08,480 --> 00:20:10,840 Speaker 1: significant impact. Dave, thank you so much for being a 390 00:20:10,800 --> 00:20:12,400 Speaker 1: Wall Street We're really glad to have you here. As 391 00:20:12,480 --> 00:20:15,280 Speaker 1: Dave Gitlin, he is the chairman and CEO of Carrier 392 00:20:15,400 --> 00:20:20,000 Speaker 1: Global Corporation. Coming up, we wrap up a wild week 393 00:20:20,040 --> 00:20:23,560 Speaker 1: with our special contributor Larry Summers of Harvard. That's next 394 00:20:23,560 --> 00:20:34,040 Speaker 1: on Wall Street Week on Bloomberg. This is Wall Street Week. 395 00:20:34,040 --> 00:20:36,159 Speaker 1: I'm David Western. We're joined once again now by our 396 00:20:36,240 --> 00:20:38,240 Speaker 1: very special contributor here on Wall Street Week. He is 397 00:20:38,320 --> 00:20:40,479 Speaker 1: Larry Summers, of course of Harvard. So, Larry, there are 398 00:20:40,480 --> 00:20:42,280 Speaker 1: so many things to cover, it's hard to know where 399 00:20:42,280 --> 00:20:43,840 Speaker 1: to start, but let's go through a few of them 400 00:20:43,880 --> 00:20:45,919 Speaker 1: and how you would be looking at it if you 401 00:20:45,960 --> 00:20:49,159 Speaker 1: were sitting in one of those policymaking decisions positions that 402 00:20:49,200 --> 00:20:50,879 Speaker 1: you've had in the past. First of all, at the 403 00:20:51,000 --> 00:20:53,560 Speaker 1: very end of the week on Friday, we had SVB Financial, 404 00:20:53,600 --> 00:20:56,920 Speaker 1: as the parent company of Silicon Valley Bank, declare bankruptcy 405 00:20:57,000 --> 00:20:59,520 Speaker 1: here in New York City, and the bonds, as I understand, 406 00:20:59,520 --> 00:21:02,200 Speaker 1: initially went up. What do you make of that? Bankruptcy 407 00:21:02,320 --> 00:21:05,639 Speaker 1: seems like the right thing for a company that's insolvent 408 00:21:05,720 --> 00:21:10,000 Speaker 1: and the government is resolving. It. Worried me to see 409 00:21:10,000 --> 00:21:13,879 Speaker 1: those bonds go up. I don't understand why whatever money 410 00:21:14,000 --> 00:21:17,399 Speaker 1: is going to the bondholders that the bondholders are looking 411 00:21:17,440 --> 00:21:22,280 Speaker 1: at isn't instead being committed to defray the government's liability 412 00:21:22,480 --> 00:21:27,399 Speaker 1: for depositors. I hope somebody's looked carefully at all the 413 00:21:27,480 --> 00:21:33,560 Speaker 1: executive compensation arrangements and that any deferred compensation has been 414 00:21:33,600 --> 00:21:37,399 Speaker 1: wiped out for SVB executives, whether it's coming from the 415 00:21:37,440 --> 00:21:40,760 Speaker 1: bank or it's coming from the holding company wherever it's 416 00:21:40,880 --> 00:21:45,960 Speaker 1: coming out. That was the president's clear commitment, and I'd 417 00:21:46,000 --> 00:21:48,800 Speaker 1: be a little concerned based on what I'm seeing, But 418 00:21:48,920 --> 00:21:52,600 Speaker 1: obviously after respect the rule of law, and I don't 419 00:21:52,640 --> 00:21:56,480 Speaker 1: know all the legal details, Larry, You've been concerned about contagion. 420 00:21:56,520 --> 00:21:58,480 Speaker 1: A lot of people have. All week long, we had 421 00:21:58,480 --> 00:22:01,320 Speaker 1: the First Republic bank it situation, and then late Thursday, 422 00:22:01,320 --> 00:22:04,400 Speaker 1: over night Thursday night, we had Secretary of Yellen apparently 423 00:22:04,760 --> 00:22:07,879 Speaker 1: make an arrangement with Jamie Diamond of JP Morgan for 424 00:22:07,920 --> 00:22:11,240 Speaker 1: an effusion of thirty billion dollars in deposits in the bank. 425 00:22:11,440 --> 00:22:13,160 Speaker 1: What do you think about that? Well, it was JP 426 00:22:13,400 --> 00:22:18,760 Speaker 1: Morgan and a number of other banks who were apparently 427 00:22:19,240 --> 00:22:25,160 Speaker 1: corralled by the Secretary and by JP Morgan. I don't 428 00:22:25,160 --> 00:22:28,000 Speaker 1: know what to make of it. The government has committed 429 00:22:28,359 --> 00:22:32,119 Speaker 1: to put money in there at par above the market 430 00:22:32,200 --> 00:22:36,159 Speaker 1: value of securities for a year. The fact that the 431 00:22:36,240 --> 00:22:39,760 Speaker 1: bank's made a commitment for one hundred and twenty days 432 00:22:40,200 --> 00:22:43,000 Speaker 1: so they can get out well ahead of the government 433 00:22:43,720 --> 00:22:47,240 Speaker 1: at a interest rate that we don't yet know what 434 00:22:47,280 --> 00:22:52,040 Speaker 1: it is with what the understandings in the agreement with 435 00:22:52,119 --> 00:22:58,680 Speaker 1: the Treasury are. I suppose the fact that everybody's acting 436 00:22:58,800 --> 00:23:02,440 Speaker 1: will make people a little more confident, but it made 437 00:23:02,440 --> 00:23:07,960 Speaker 1: me nervous. This was not an objective private sector assessment 438 00:23:08,040 --> 00:23:14,639 Speaker 1: to have confidence in First Republic, So I'm not sure 439 00:23:14,720 --> 00:23:18,800 Speaker 1: what to what to make of it. It seemed a 440 00:23:18,840 --> 00:23:25,680 Speaker 1: little corporatist and deal based between the government and big 441 00:23:25,720 --> 00:23:30,000 Speaker 1: banks to me. But we'll have to see how it unfolds, 442 00:23:30,080 --> 00:23:34,440 Speaker 1: and I hope there'll be total transparency on all the understandings. 443 00:23:34,720 --> 00:23:37,320 Speaker 1: What does all this mean for the central banks, particularly 444 00:23:37,359 --> 00:23:39,480 Speaker 1: the Federal Reserve as we look toward a decision next 445 00:23:39,520 --> 00:23:41,879 Speaker 1: week coming on the heels of the ECB. And when 446 00:23:41,920 --> 00:23:45,680 Speaker 1: you saw it Madame Legarde did this week, I think 447 00:23:45,720 --> 00:23:52,080 Speaker 1: Madame Legarde was terrific. She did three very important things. 448 00:23:52,840 --> 00:23:57,399 Speaker 1: She showed that you can carry through necessary anti inflation 449 00:23:57,560 --> 00:24:04,080 Speaker 1: monetary policy even when there are financial strains. She made 450 00:24:04,200 --> 00:24:11,280 Speaker 1: very clear that with two different problems, inflation and financial stability, 451 00:24:11,680 --> 00:24:16,840 Speaker 1: you can use two different instruments to respond to those 452 00:24:17,520 --> 00:24:23,840 Speaker 1: problems and not sacrifice on the inflation dimension. And she 453 00:24:24,119 --> 00:24:27,760 Speaker 1: ended forward guidance, and I hope in many ways that 454 00:24:27,800 --> 00:24:32,440 Speaker 1: will be a role model for the FED. Forward guidance 455 00:24:32,520 --> 00:24:36,840 Speaker 1: has mostly since rates got off the zero floor, been 456 00:24:36,880 --> 00:24:43,240 Speaker 1: an unfortunate model. I think we can use policy directed 457 00:24:43,320 --> 00:24:51,119 Speaker 1: at standing behind depositors separately from monetary policy, and I 458 00:24:51,160 --> 00:24:54,800 Speaker 1: think it's appropriate at least on current facts, and they're 459 00:24:54,880 --> 00:25:00,200 Speaker 1: changing very quickly these days, but on current facts to 460 00:25:00,280 --> 00:25:05,800 Speaker 1: raise rates by twenty five basis points. So that's where 461 00:25:05,880 --> 00:25:10,160 Speaker 1: I would be coming down. I do think that the 462 00:25:10,200 --> 00:25:15,200 Speaker 1: FED should not allow financial dominance, but does of course 463 00:25:15,320 --> 00:25:19,920 Speaker 1: need to recognize that slower credit is going to be 464 00:25:20,000 --> 00:25:24,800 Speaker 1: the result of that and assess it into its macroeconomic forecast. 465 00:25:25,400 --> 00:25:29,080 Speaker 1: But as I read the economic evidence, the slowing of 466 00:25:29,200 --> 00:25:34,280 Speaker 1: credit is not nearly as much as the amount that 467 00:25:34,400 --> 00:25:37,520 Speaker 1: the FED has that the market has taken out of 468 00:25:37,560 --> 00:25:41,439 Speaker 1: its expectations of how the FED is going to tighten. 469 00:25:41,920 --> 00:25:44,280 Speaker 1: So I hope the FED can move forward twenty five 470 00:25:44,320 --> 00:25:47,800 Speaker 1: basis points. So, Larry, I understand your point. I think 471 00:25:47,800 --> 00:25:50,040 Speaker 1: about marketing dominance. We don't want to have that. At 472 00:25:50,040 --> 00:25:53,880 Speaker 1: the same time, is it exactly right to believe, as 473 00:25:53,920 --> 00:25:56,600 Speaker 1: Madame Regard does, that in fact, using one of those 474 00:25:56,600 --> 00:25:59,480 Speaker 1: policy instruments does not affect the other. And what I'm 475 00:25:59,480 --> 00:26:02,680 Speaker 1: talking about is price stability and financial stability. It didn't 476 00:26:02,680 --> 00:26:05,240 Speaker 1: even not see this week perhaps some evidence that when 477 00:26:05,280 --> 00:26:08,879 Speaker 1: you go after price stability you actually can affect financial stability. 478 00:26:09,200 --> 00:26:15,080 Speaker 1: You can. The way to deal with that is to 479 00:26:16,160 --> 00:26:25,560 Speaker 1: adjust the other policy instrument by standing behind the affected institution. 480 00:26:26,160 --> 00:26:29,400 Speaker 1: If I lose weight. It affects how well my clothes fit. 481 00:26:29,880 --> 00:26:33,080 Speaker 1: But that's not an argument against losing weight. It's an 482 00:26:33,200 --> 00:26:37,560 Speaker 1: argument for going to the tailor. And that's the same 483 00:26:38,480 --> 00:26:46,440 Speaker 1: principle as using policy instruments to respond to financial concerns. 484 00:26:46,800 --> 00:26:49,320 Speaker 1: I think it will be very unfortunate if, out of 485 00:26:49,400 --> 00:26:55,600 Speaker 1: solicitude for the banking system, the FED were to slow 486 00:26:55,680 --> 00:27:00,119 Speaker 1: down its rate of interest rate increase beyond what is 487 00:27:00,119 --> 00:27:05,840 Speaker 1: appropriate given the credit contraction. It would raise inflation expectations 488 00:27:05,880 --> 00:27:09,000 Speaker 1: on the one hand, and I suspect many people would 489 00:27:09,040 --> 00:27:11,719 Speaker 1: feel that if the FED was scared, they should be 490 00:27:11,760 --> 00:27:15,520 Speaker 1: as well, and so ironically it could both raise inflation 491 00:27:15,640 --> 00:27:20,520 Speaker 1: expectations and contract the economy. Larry, what did this week 492 00:27:20,640 --> 00:27:23,359 Speaker 1: mean for financial regulation? And I really, I guess I'm 493 00:27:23,480 --> 00:27:26,000 Speaker 1: asking two questions, how well we're doing it, because there 494 00:27:26,000 --> 00:27:27,440 Speaker 1: are a lot of people are really questioning portunity to 495 00:27:27,440 --> 00:27:31,000 Speaker 1: San Francisco Fed in its regulation its oversight of Silicon 496 00:27:31,080 --> 00:27:34,560 Speaker 1: Valley Bank. But number two are confidence in the regulators. 497 00:27:34,560 --> 00:27:38,600 Speaker 1: And you saw the report that reportedly at least Chair 498 00:27:38,680 --> 00:27:41,600 Speaker 1: Powell delayed the announcement about what was being done with 499 00:27:41,640 --> 00:27:43,960 Speaker 1: Silicon Valley Bank because he wanted to take out any 500 00:27:44,040 --> 00:27:49,919 Speaker 1: reference to problems with regulatory authorities. Look, it's a mistake 501 00:27:50,040 --> 00:27:54,960 Speaker 1: to rush rush to judgment when you don't know all 502 00:27:55,000 --> 00:27:58,680 Speaker 1: the facts, but it sure looks like this was an 503 00:27:58,680 --> 00:28:06,080 Speaker 1: egregious failure supervision. We had hugely rapid growth in deposits, 504 00:28:06,800 --> 00:28:14,880 Speaker 1: we had a obvious mismatch in duration, and it sure 505 00:28:14,960 --> 00:28:18,639 Speaker 1: doesn't look like the supervisors at the San Francisco FED 506 00:28:19,240 --> 00:28:22,719 Speaker 1: were on top of the situation. Again, we don't know 507 00:28:22,840 --> 00:28:28,280 Speaker 1: everything yet, but clearly this needs to be a cause 508 00:28:28,440 --> 00:28:33,480 Speaker 1: for some soul searching within the federal reserve system. We 509 00:28:33,600 --> 00:28:38,840 Speaker 1: have to be careful, David. The central irony of financial 510 00:28:38,880 --> 00:28:43,880 Speaker 1: crisis is that it's caused by excessive lending, and it's 511 00:28:43,960 --> 00:28:48,320 Speaker 1: resolved by more lending. And so we need to be 512 00:28:48,520 --> 00:28:52,560 Speaker 1: careful at in the very short run, throwing the book 513 00:28:52,560 --> 00:28:56,480 Speaker 1: at all the regional banks, because that may exacerbate a 514 00:28:56,560 --> 00:29:00,680 Speaker 1: credit crunch that we don't want to have. For the 515 00:29:00,800 --> 00:29:03,960 Speaker 1: longer term, I think we need to think very carefully 516 00:29:04,160 --> 00:29:08,880 Speaker 1: about whether we want to have this idea of market 517 00:29:08,960 --> 00:29:14,800 Speaker 1: discipline from depositors. Should a five million dollars startup be 518 00:29:14,920 --> 00:29:18,760 Speaker 1: in the position of trying to evaluate the credit worthiness 519 00:29:18,800 --> 00:29:21,760 Speaker 1: of a bank where it just wants to hold cash 520 00:29:22,200 --> 00:29:24,800 Speaker 1: so that it can meet its payroll. I think the 521 00:29:24,840 --> 00:29:27,920 Speaker 1: answer to that question is no, and so I hope 522 00:29:27,960 --> 00:29:32,520 Speaker 1: we move to over time a financial system in which 523 00:29:32,680 --> 00:29:38,640 Speaker 1: basic cash deposits sit in treasury bills or sit in 524 00:29:38,640 --> 00:29:43,960 Speaker 1: institutions that intermediate them into treasury bills, and we separate 525 00:29:44,160 --> 00:29:48,480 Speaker 1: the risk taking function more securely than we do right 526 00:29:48,520 --> 00:29:52,680 Speaker 1: now from the liquidity provision function. But that's for the 527 00:29:52,800 --> 00:29:57,800 Speaker 1: long run. It's going to take a huge amount of thought. 528 00:29:58,160 --> 00:30:03,320 Speaker 1: But they're very profound con sceptual questions raised here. But 529 00:30:03,520 --> 00:30:06,880 Speaker 1: right now it's looking to me like the idea of 530 00:30:07,080 --> 00:30:12,440 Speaker 1: market discipline from depositors just isn't a very strong idea. Larry, 531 00:30:12,440 --> 00:30:14,560 Speaker 1: thank you so much. Quite an important week to have 532 00:30:14,640 --> 00:30:16,880 Speaker 1: you here on Walshret Week. Thank you. It's Larry Summers 533 00:30:16,920 --> 00:30:21,520 Speaker 1: of Harvard coming up. It was a week that cried 534 00:30:21,600 --> 00:30:24,959 Speaker 1: out for leadership and we get a lesson on transformative 535 00:30:25,040 --> 00:30:28,960 Speaker 1: leadership from former Bridgewater CEO Dave McCormick, who's seen it 536 00:30:29,080 --> 00:30:32,600 Speaker 1: from the best. That's next on Wall Street Week on Bloomberg. 537 00:30:41,320 --> 00:30:44,640 Speaker 1: Our one more thought this week comes from Dave McCormick, 538 00:30:44,840 --> 00:30:48,280 Speaker 1: a man who's run for the Senate in Pennsylvania run Bridgewater, 539 00:30:48,520 --> 00:30:51,680 Speaker 1: served with Treasury Secretary Hank Paulson during the Great Financial Crisis, 540 00:30:51,800 --> 00:30:56,120 Speaker 1: and commanded troops in Operation Desert Storm. This week, Dave 541 00:30:56,120 --> 00:30:59,240 Speaker 1: published his book on what he has learned and about 542 00:30:59,280 --> 00:31:02,600 Speaker 1: the course direction he believes we need to make. The 543 00:31:02,680 --> 00:31:06,280 Speaker 1: book is Superpower in Peril, a battle plan to renew 544 00:31:06,400 --> 00:31:09,040 Speaker 1: America and in the end, it comes down to what 545 00:31:09,120 --> 00:31:14,640 Speaker 1: Dave calls transformational leadership. One of the main themes of 546 00:31:14,640 --> 00:31:18,280 Speaker 1: the book is transformational leadership, the need for transformational leadership. 547 00:31:18,720 --> 00:31:21,400 Speaker 1: You've gotten the opportunity to lead as well as observe 548 00:31:21,600 --> 00:31:24,680 Speaker 1: leaders or your career at West Point, in Desert Storm, 549 00:31:24,800 --> 00:31:27,960 Speaker 1: in the Treasure Department at Bridgewater, draw from that and 550 00:31:28,040 --> 00:31:30,160 Speaker 1: give us an example or two of people who you 551 00:31:30,200 --> 00:31:35,120 Speaker 1: thought were exceptional leaders or moments of exceptional leadership. Yeah. Well, 552 00:31:35,120 --> 00:31:38,560 Speaker 1: you know, you talk about the transforming the country, and 553 00:31:38,560 --> 00:31:40,480 Speaker 1: the motivation for the book was, you know, taking the 554 00:31:40,480 --> 00:31:42,200 Speaker 1: country in the right direction. And you could have all 555 00:31:42,240 --> 00:31:44,320 Speaker 1: the great ideas in the world, but if you don't 556 00:31:44,320 --> 00:31:47,520 Speaker 1: have leaders that first of all, can win elections. So 557 00:31:47,520 --> 00:31:50,080 Speaker 1: if new leaders who can win elections and then take 558 00:31:50,080 --> 00:31:53,600 Speaker 1: those ideas in our republic and make them reality. Then 559 00:31:53,840 --> 00:31:55,360 Speaker 1: then you're not going to go anywhere. And so I 560 00:31:55,400 --> 00:31:58,640 Speaker 1: talk about the kind of leadership we need. And you know, 561 00:31:58,640 --> 00:32:02,280 Speaker 1: there's so many definitions of leadership, and despite having grown 562 00:32:02,360 --> 00:32:04,400 Speaker 1: up in all these places and study leadership, it's an 563 00:32:04,440 --> 00:32:07,640 Speaker 1: amorphous concept. And so I tried to outline four things 564 00:32:08,120 --> 00:32:11,160 Speaker 1: that I think are so critical to leadership. One's vision. 565 00:32:11,760 --> 00:32:13,160 Speaker 1: You have to you have to have a sense of 566 00:32:13,560 --> 00:32:16,520 Speaker 1: where your headed. Ronald Reagan was the best example of that. 567 00:32:16,600 --> 00:32:19,520 Speaker 1: This simplicity, the clarity. And when we talk about courage, 568 00:32:19,880 --> 00:32:22,640 Speaker 1: we talk about the courage to, you know, run up, 569 00:32:23,360 --> 00:32:26,160 Speaker 1: run up the hill we're going to combat. We have 570 00:32:26,160 --> 00:32:28,280 Speaker 1: so many courageous molitive but there's courage that goes well 571 00:32:28,280 --> 00:32:31,800 Speaker 1: beyond that. It's the courage to stand alone in pursuit 572 00:32:31,800 --> 00:32:35,520 Speaker 1: of your your convictions. It's the courage to make tough decisions. 573 00:32:35,680 --> 00:32:38,200 Speaker 1: The third is humility. And Benjamin Franklin wrote a lot 574 00:32:38,240 --> 00:32:41,840 Speaker 1: about leadership, but humility was the area that he he 575 00:32:41,920 --> 00:32:43,400 Speaker 1: spent a lot of time one and I think that 576 00:32:43,440 --> 00:32:48,240 Speaker 1: one's critical because humility allows you to recognize you're often 577 00:32:48,280 --> 00:32:51,080 Speaker 1: going to be wrong. It allows you to draw in others, 578 00:32:51,520 --> 00:32:55,160 Speaker 1: it allows you to learn from and get better because 579 00:32:55,160 --> 00:32:57,760 Speaker 1: of your mistakes. And uh, and we see this too 580 00:32:58,440 --> 00:33:01,320 Speaker 1: rarely among leaders, because you know, you start to be 581 00:33:01,360 --> 00:33:02,800 Speaker 1: the leader and all of a sudden, people keep telling 582 00:33:02,840 --> 00:33:04,480 Speaker 1: you how smart you are and they're laugh at your jokes. 583 00:33:04,760 --> 00:33:08,040 Speaker 1: And keeping that humility through the course of your leadership 584 00:33:08,200 --> 00:33:10,840 Speaker 1: journey is really critical. And then the final one, I 585 00:33:10,880 --> 00:33:14,000 Speaker 1: talked about caring and uh, you know, I don't think 586 00:33:14,000 --> 00:33:17,120 Speaker 1: we see enough of this today, but people sense when 587 00:33:17,240 --> 00:33:20,560 Speaker 1: you're in it for something bigger than yourself and in 588 00:33:20,600 --> 00:33:23,600 Speaker 1: it for them and to bring them along. And those 589 00:33:23,640 --> 00:33:26,400 Speaker 1: are the things in my career in terms of the humility. 590 00:33:26,400 --> 00:33:29,360 Speaker 1: Hank Paulson sticks out in my mind because Hank I 591 00:33:29,440 --> 00:33:32,520 Speaker 1: worked for him during the financial crisis and and he 592 00:33:32,760 --> 00:33:35,040 Speaker 1: you know, we got a lot wrong. And you know, 593 00:33:35,040 --> 00:33:36,640 Speaker 1: when you're in a crisis, you're going to try to 594 00:33:36,680 --> 00:33:40,080 Speaker 1: do things and you learn from the feedback you get 595 00:33:40,120 --> 00:33:42,880 Speaker 1: and you make mistakes, and your the ability to evolve 596 00:33:43,520 --> 00:33:46,920 Speaker 1: quickly in the middle of a crisis, get feedback, respond 597 00:33:46,960 --> 00:33:48,800 Speaker 1: and not have your ego tied up into all. We 598 00:33:48,840 --> 00:33:50,480 Speaker 1: decided to do this, therefore we're going to stick to it. 599 00:33:51,000 --> 00:33:53,400 Speaker 1: I think really in many ways, save the country because 600 00:33:53,440 --> 00:33:56,880 Speaker 1: he was adaptable and here. He is a you know, 601 00:33:56,920 --> 00:33:59,640 Speaker 1: a bigger than life figure, the CEO of Goldman Sachs, 602 00:33:59,720 --> 00:34:03,520 Speaker 1: the Asury Secretary, you know, a remarkable leader, but one 603 00:34:03,560 --> 00:34:06,960 Speaker 1: who constantly asked himself whether he was wrong, and constantly 604 00:34:07,000 --> 00:34:09,279 Speaker 1: made changes when he thought he was And he's one 605 00:34:09,320 --> 00:34:10,920 Speaker 1: of the people that jumps out of my mind as 606 00:34:10,920 --> 00:34:16,240 Speaker 1: a gracious and successful leader. That was Dave McCormick, author 607 00:34:16,320 --> 00:34:19,720 Speaker 1: of Superpower in Peril. That does it for this episode 608 00:34:19,719 --> 00:34:22,719 Speaker 1: of Wall Street Week. I'm David Weston. This is Bloomberg. 609 00:34:23,000 --> 00:34:23,839 Speaker 1: See you next week.