Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane.
Speaker 1: Daily we bring you insight from the best in economics, finance, investment,
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Speaker 1: let us begin. It is about the next financial crisis
Speaker 1: that will not happen. Uh. As we began to put
Speaker 1: this panel together, uh, it just got better and better
Speaker 1: and weren't wonderful. Uh. And I'm not going to go
Speaker 1: through all their bios because that will take precious time.
Speaker 1: And Richards is with us. She has a wonderful concision
Speaker 1: in her analysis of finance and investment. I call her
Speaker 1: the mathematician. We enjoy so much having her with us
Speaker 1: on Bloomberg Surveillance. And I just I was just thrilled
Speaker 1: and Ann could find the time to be with us today.
Speaker 1: Jess Staley runs a bank. Uh. He said, the most
Speaker 1: intelligent thing I've heard up the valley so far, which
Speaker 1: just it feels like two thousand six. We get to
Speaker 1: that in a moment. Uh. We have another banker, whether
Speaker 1: it's Mr Corbett. Now I've got it out of the way.
Speaker 1: All I wanted to know from Mr Corbett, who's a
Speaker 1: real football But there's guys I played football. He was
Speaker 1: like the real deal. So all we talked about was
Speaker 1: Patriots Eagles, which I think has lost to translation at Davos,
Speaker 1: but we got that out of the way. We are
Speaker 1: honored to have find seeing High with us from China.
Speaker 1: Thank you so much for attending today with your work
Speaker 1: in Shanghai over the years, and now of course in Beijing. Uh,
Speaker 1: David rubensteins with us and Ken Rogoff who were with
Speaker 1: me last year, and thank you so much for again
Speaker 1: being with us. With different views. I always would start
Speaker 1: with Enriched, but because of his acclaim on financial crisis,
Speaker 1: may start with Dr Roga. First. Uh, your your book
Speaker 1: which was my book of the year last year, The
Speaker 1: Curse of Cash. I hear a new edition The Curse
Speaker 1: of Bitcoin. Well that well that move sales. Who it's
Speaker 1: the last quarter of the book. Actually, yeah it was.
Speaker 1: And this is an important note because it was my
Speaker 1: most courageous book ever and that can receives serious uh
Speaker 1: criticism and threat from his book. It's not just about
Speaker 1: the beginning of the book. It's about negative interest rates
Speaker 1: and it's about all the upward Mabel wells as if
Speaker 1: we have another financial crisis, there really isn't a plan,
Speaker 1: a even of what central banks would do. So I
Speaker 1: think it's something we need to talk about. Let's talk
Speaker 1: right now about the acclaim of your work with Karmen Ryner.
Speaker 1: This time is different? Do you feel that now that
Speaker 1: this time is different? I mean I don't. I feel
Speaker 1: we're still coming out of the last financial crisis at
Speaker 1: deep is Slamic. Financial crisis like we experience has a
Speaker 1: long afterlife, and taking eight to ten years to fully
Speaker 1: recover is not unusual. And I must say a lot
Speaker 1: of the talk about secular stagnation things will never be
Speaker 1: good again conflates genuine issues like demographics, productivity with UH
Speaker 1: the financial crisis, And so I'm actually I'm not going
Speaker 1: to tell you there's not going to be another financial crisis.
Speaker 1: Sales of my book would collapse. But I'm kind of
Speaker 1: optimistic going forward about you know, where the world economy
Speaker 1: is at the moment. We can talk about could there
Speaker 1: be a financial crisis, of course, could there be a recession, absolutely,
Speaker 1: But I actually think we're at the tail end of
Speaker 1: the last one. UH. In a typical pretty typic culture jectory.
Speaker 1: What was the number one lesson we learned coming out
Speaker 1: of this crisis? Oh boy, I'd leave it to I'm
Speaker 1: gonna ask them to I only got like three questions today.
Speaker 1: But but from where you sit, I mean, in the
Speaker 1: middle of your book, you go into this whole thing
Speaker 1: on Spanish Spinisher amount of the collapse, saying and it
Speaker 1: was longer than ten years. Yeah, I mean, certainly the
Speaker 1: theme this time, as different as people convinced themselves, is
Speaker 1: different that everything is going to go to the moon
Speaker 1: forever and it never does, And particularly when you see
Speaker 1: debt rising at an aggressive pace, you should look out
Speaker 1: for that. And in the current environment, interest rates are
Speaker 1: really low, and so you can say debt levels are
Speaker 1: high around the world, but not compared to the interest
Speaker 1: rates that we have. So I'd actually throw out that
Speaker 1: the biggest risk to the global economies that we're probably
Speaker 1: in an inflection point where the you know, tightening of
Speaker 1: labor market, statement of demand could get inflation, could get investment,
Speaker 1: which we haven't had, and then if something pushed up
Speaker 1: real interest rates. It's not my baseline case, sure, everyone,
Speaker 1: but we don't really know why they went down so much.
Speaker 1: They're phenomenals. And if they went up the places that
Speaker 1: weren't enjoying as much growth and had a lot of
Speaker 1: debt Italy, Japan, for example, some emerging markets, they could
Speaker 1: have a lot of problems. I certainly see China as
Speaker 1: a place where they're at an earlier stage of this.
Speaker 1: They didn't have the financial crisis. They did a great job,
Speaker 1: but they do have a lot of the characteristics of
Speaker 1: a typical financial crisis. Building up some of the themes
Speaker 1: to speak to our panels about. And I thought you
Speaker 1: had a very important perspective in the in the in
Speaker 1: the room about our collective memories, in the number of
Speaker 1: people in the financial business that really have not enjoyed
Speaker 1: how you get into a crisis. What would you say
Speaker 1: to the young crew who haven't enjoyed two thousand seven
Speaker 1: or some of the moments of two thousand eight and nine. Well,
Speaker 1: I think I think what kind of said is absolutely right,
Speaker 1: and it's not even a plan A. So we have
Speaker 1: we have far fewer tools to deal with any event
Speaker 1: that happens. And by the way, it will happen somewhere
Speaker 1: where none of us are looking. It never happens where
Speaker 1: you're looking at always happens somewhere else. And I think
Speaker 1: if you look at what's changed, what's shifted over the
Speaker 1: last ten years, we really have had ten years without
Speaker 1: any form of credit cycle. So we've now got a
Speaker 1: whole bunch of people who have never gone through a
Speaker 1: default cycle. And financial crisis are pretty simple. They always
Speaker 1: start with somebody borrowing, short lending, long been leverage in there,
Speaker 1: and a default, so you know, absolutely, so you know,
Speaker 1: we know that the elements will be there, we just
Speaker 1: don't know what the triggers are. And when you look
Speaker 1: at some of the new structures that haven't been through
Speaker 1: that tried and tested pro process around, for example, structured
Speaker 1: leverage dtfs or peer to peer lending, new things which
Speaker 1: are good developments in many senses, but they have not
Speaker 1: been through the rigor in the way a bank two
Speaker 1: or three d year old bank has it's kind of
Speaker 1: figured out how it manages a credit cycle through that period.
Speaker 1: We've got a lot of things that are now big
Speaker 1: operators in the market that we don't really know how
Speaker 1: we'll respond to the next one. So you know, I
Speaker 1: think you've got to look for where the kernels are
Speaker 1: for what will happen when eventually we go over the
Speaker 1: top and we start to go down the other side.
Speaker 1: It's in those sorts of things that would be the
Speaker 1: unexpected places that have not been through this stuff before.
Speaker 1: Did you figure out who do you go to the next?
Speaker 1: Among two major banks? And Mr Corbett and Mr Staley,
Speaker 1: I'm just gonna be polite and go b is before
Speaker 1: see is that just Daley? So many of the things
Speaker 1: as well. I'll go with the bank names today. When
Speaker 1: you look at the resurrection of Barclays that you're trying
Speaker 1: to manage right now, and if you look at how
Speaker 1: you're trying to steal the bank for the future, You've
Speaker 1: mentioned to me that you do see the asset size
Speaker 1: James McIntosh and the Journal today has a fabulous start
Speaker 1: chart on the non correlation of stocks and bonds as well.
Speaker 1: How do you look at the markets and tie that
Speaker 1: into where we are now? Is we get ready for
Speaker 1: whatever the crisis is down the road? But I do
Speaker 1: feel it's a little bit like two thousand and six
Speaker 1: when we're all talking about whether we've solved the riddle
Speaker 1: of economic crisises. It take some comfort in Kin saying
Speaker 1: he doesn't see it emminally on the edge. But you know,
Speaker 1: given given asset valuations, given that we've got four percent
Speaker 1: global economic growth, Uh, it seems like we're in a
Speaker 1: pretty good place right now economically. But we've got a
Speaker 1: monetary policy which is still seems like it's in the
Speaker 1: remnants of a depression era, and I think we have
Speaker 1: all very little capacity and the capital markets to do
Speaker 1: with the real move in in interest rates. What I
Speaker 1: would also say is, I do think that the banks
Speaker 1: are in such a different position than they were in
Speaker 1: two thousand and six, two thousand and seven. If there
Speaker 1: is going to be another financial crisis, my bet is,
Speaker 1: you know, most crisises are are where where we run
Speaker 1: into something that was totally obvious, but we all missed it.
Speaker 1: So two thousand and eight was strip as securities or
Speaker 1: cash need no capital that I think that got wrong.
Speaker 1: Thousand nine was a Eurozone bar whereas the units are
Speaker 1: in credit. We sort of got that one wrong. Uh,
Speaker 1: there's something out there in the capital markets. Um, given
Speaker 1: where you know, equity markets are at a whole time
Speaker 1: high and and volatilities that at all time low, that's
Speaker 1: not a sustainable proposition. I don't think it's going to
Speaker 1: come from the banks uh. And I guess the final
Speaker 1: thing for me is, uh, we just got done with
Speaker 1: our stress test with the Bank of England, and you know, uh,
Speaker 1: Mike goes to the same process with process with the FED.
Speaker 1: When I look at the stress test, um and and
Speaker 1: what we clearly focused on is how does Barkley's do
Speaker 1: coming out of that? The really issue take the stress
Speaker 1: that our regulators are putting these banks through and apply
Speaker 1: that stress to the rest of the economy. And uh.
Speaker 1: And I think given where debt levels are, given our
Speaker 1: exposure to low interest rates, if we do have another
Speaker 1: economic cycle, which I would argue we will, I think
Speaker 1: the capital markets will be tested. Michael Spencer wrote an
Speaker 1: essay seven years ago, I think on type one and
Speaker 1: type two regulation and almost you can't see what you're
Speaker 1: supposed to see, but you can see things that you
Speaker 1: could that are a distraction. It was not that it
Speaker 1: was confusing, but Jess goes right to it. We have
Speaker 1: stress tests. Do you believe in stress tests? Distress tests
Speaker 1: keep you from a financial crisis? Really a gimmick. I
Speaker 1: think we've done a lot actually with the conventional banking system,
Speaker 1: but that pushes a lot of the problems into the
Speaker 1: shadow banking system, and you know that that that could
Speaker 1: be where we see the next problem come from stress us.
Speaker 1: We're a good idea, but that they're not perfect. And
Speaker 1: you know that, Michael Corbett. When you look at banks,
Speaker 1: there are a different kind of bank than they were
Speaker 1: at the beginning of the last UH financial crisis. You
Speaker 1: speak of resiliency, but you mentioned to me a word
Speaker 1: which I'm hearing. It's almost maybe my phrase for Davos
Speaker 1: this year. Maybe it's Davos scales up. We need scale.
Speaker 1: Michael Nathanson in media with Moffatt Nathanson the other day
Speaker 1: told me we are going to have scale and media
Speaker 1: like we have with Fox and Disney, and we can
Speaker 1: maybe address that later on. David Rubinstein tell us about
Speaker 1: scale in banking to try to avoid the agony of
Speaker 1: the next financial crisis. If you think about where are
Speaker 1: some of the lessons that came out of the last crisis,
Speaker 1: And one of the challenges was that we had a
Speaker 1: global banking business model where everyone or most big banks
Speaker 1: were seeking or trying to execute against similar plans be
Speaker 1: everything to everybody, the financial supermarket. You remember, oh six
Speaker 1: oh seven, that was the talk that was the rage
Speaker 1: I think what's different today is coming out of the crisis,
Speaker 1: what you've seen banks do in many ways is go
Speaker 1: back to their basics, or go back to the areas
Speaker 1: that they believe they've got a competitive advantage, and that
Speaker 1: competitive advantage is oftentimes steeped in scale. And we think
Speaker 1: of scale and whether scales in your markets business, or
Speaker 1: your banking business, or your lending business. In today's age
Speaker 1: of slower growth and more regulation, if you don't have scale,
Speaker 1: the odds are you can't buy it. Right. You're not
Speaker 1: seeing big banks get bigger through quisition. You've got to
Speaker 1: build it, and in slower growth, that's tougher to do.
Speaker 1: And so what we've seen is the industry in many
Speaker 1: ways pull back to areas of strength, areas of scale,
Speaker 1: and you've ended up with very different business models, which
Speaker 1: in itself is far more resilient. So we can use
Speaker 1: different examples of firms out there in terms of how
Speaker 1: they change. But when we look at City as an example,
Speaker 1: I can tell you the things that we're not today.
Speaker 1: We're not an insurance company, we're not an asset manager,
Speaker 1: we're not a hedge fund, were not any of those things.
Speaker 1: Were simply a bank and a bank that operates globally,
Speaker 1: and that's the scale that we've pulled back to. And
Speaker 1: as you can go around and look at Justice Bank
Speaker 1: and look at other banks, and you can see the
Speaker 1: divergence of business models. And I think that's that's quite
Speaker 1: powerful in terms of what it means for resiliency for
Speaker 1: the system. Do you day to day having better knowledge
Speaker 1: of your global bank? How do you keep track within
Speaker 1: the scale? How do you coordinate your global bank if
Speaker 1: you're bigger and bigger scale? I mean the aniless conference
Speaker 1: calls doesn't do it, endless travel doesn't do it. How
Speaker 1: are the communications going to exist within a given institution
Speaker 1: if we all decide to scale up. If you think
Speaker 1: in many ways of what's going on in the world,
Speaker 1: and in particular on the institutional side, and a business
Speaker 1: and others are great examples of it, is they're scaling
Speaker 1: as well. So it's not that we're necessarily covering more clients.
Speaker 1: We're not. We're actually covering less. It's not that we're
Speaker 1: entering more countries or doing more things. We're just doing
Speaker 1: more with what we have and using the benefits of
Speaker 1: scale against that. So we're not adding complexity. In fact,
Speaker 1: we've taken complexity out of the out of the bank
Speaker 1: and out of the system. I want to turn a
Speaker 1: little bit of politics here, and I think this is
Speaker 1: so important thing. You and I were talking and you
Speaker 1: brilliantly said that you would like to respond to what
Speaker 1: is clearly part of the Western zeitgeist in this January
Speaker 1: of two eighteen. And it's not that it's about China
Speaker 1: or it's China's fault, but that China is a number
Speaker 1: one risk we enjoyed with Bloomberg Surveillance working with Ian Bremer,
Speaker 1: and you raise your group early in the year and
Speaker 1: they did place China is the number one risk of
Speaker 1: the number that they had uh through their annual review.
Speaker 1: You take a real issue in that, why is China
Speaker 1: not a risk? Um? Well, before I answered your question,
Speaker 1: let me say, since I'm the only regulator here, I
Speaker 1: think as regulator you have to always stay alert on
Speaker 1: any financial risk that's coming up. And although the economy
Speaker 1: is doing quite well globally, but we cannot be complacent.
Speaker 1: And in terms of financial risk, I think every christ
Speaker 1: it is almost seemed to be associated with some kind
Speaker 1: of asset bubble, right, it could be that could be
Speaker 1: accurate it could be something else. And so this is
Speaker 1: the sign that we should look around. Are there any
Speaker 1: asset bubbles in any major economies? And if you find some,
Speaker 1: you know, the emerging asset bubble, then as a regulator,
Speaker 1: we've got to do something about it. So this is
Speaker 1: my opening statement. But to answer your question, um, since
Speaker 1: the Chinese economy is so large, right, so if something
Speaker 1: bad happens to the Chinese economy, the rest of the
Speaker 1: world will be affected. So it's you know, the concern
Speaker 1: about China in that sense, it's justified. We realize that
Speaker 1: we have some problems quite some years ago, and the
Speaker 1: problem is mainly with a lot of that and we
Speaker 1: have too much that in our system macro what we
Speaker 1: use you know, this macro UH in that in this
Speaker 1: ratio whatever uses a non financial sector that divided by
Speaker 1: GDP has been a rising all the time. It's now
Speaker 1: So we realized that, you know, some time ago, and
Speaker 1: we began to take actions two years ago. And the
Speaker 1: good news at this point is that that ratio for
Speaker 1: the first time platoid in the last quarter of last
Speaker 1: year UH, it did not rise. UH. And furthermore, M
Speaker 1: two divided by GDP is also not rising and M
Speaker 1: to The growth rate of M two in China last
Speaker 1: year was only eight two, which is almost two percentage
Speaker 1: lower than nominal GDP growth rate. So you can see
Speaker 1: the effect of taking these UH tightening actions. UH Now,
Speaker 1: since the macro that level is so high, So people
Speaker 1: will still be worried about the consequences of something happens
Speaker 1: to the to the financial system. And I can tell
Speaker 1: you know, in the Chinese system, if something bad happens
Speaker 1: to UH certain small financial institutions, right, what we will do,
Speaker 1: and this is the lesson we learned from the US
Speaker 1: financial crisis. What we will do is that we will
Speaker 1: move very swiftly to contain that risk, to make sure
Speaker 1: that whatever panics caused by this you know, small institution
Speaker 1: does not spread into the entire system quickly. And if
Speaker 1: you can contain that risk and make sure the planic
Speaker 1: does not spread, then the entire financial system will be okay.
Speaker 1: And the way that we move swiftly in China is that,
Speaker 1: you know, I'm almost sure that if something like that happens,
Speaker 1: the Central Bank in China will coming immediately. Some of
Speaker 1: the larger healthy financial institutions will be brought in to
Speaker 1: take care of that small institution immediately so that the
Speaker 1: inter bank lending does not phreeze, right and the system
Speaker 1: can still function right now. This is something that the
Speaker 1: Chinese government always does value well, right because you know,
Speaker 1: our system can function really quickly. But of course, if
Speaker 1: you know the larger problem is so big, then even
Speaker 1: if you can move swiftly, you will not be able
Speaker 1: to deal with the impast system. You know, the bigger
Speaker 1: system in the rest is bigger risk in the system.
Speaker 1: So that is why moving earlier to contain the scale
Speaker 1: of the of the empire system, the risk of the
Speaker 1: empire system is so important. And as I said, you
Speaker 1: know we've made some progress in that as well. One
Speaker 1: thing I noticed her and I left David Rubinstein for
Speaker 1: left last, because I think he can provide us with
Speaker 1: a terrific perspective of not only finance and economics and investment,
Speaker 1: but bring it over to our geopolitics as well. I
Speaker 1: was thunderstruck by Richard Edelman's Trust Barometer released yesterday. Every
Speaker 1: year it's different. I think it's an incredibly important document
Speaker 1: and the fracture is the word of the moment here.
Speaker 1: We're fractured. Craig Gibbs article today in the Journal. We're
Speaker 1: fractured within our nations, and it really shows, as you
Speaker 1: mentioned to me earlier, the geo political mix that we're
Speaker 1: in as we speak to bankers and managers of money,
Speaker 1: and of course in a steamed academic that speaks to me,
Speaker 1: David Rubinstein, of exogenous shocks out there that get us
Speaker 1: to the next crisis. Well, um, the most exogenous shock
Speaker 1: I'm worried about the moment is these lights. They're very hot.
Speaker 1: So we do the surveillance, Dad, I hope they're getting
Speaker 1: you know, vitamin D into me at least something. I'll
Speaker 1: get something out of this. Stop. But if anybody thinks
Speaker 1: that's what it is, these lights are very very hot. Okay,
Speaker 1: So global warming is coming here? Um, he's say, such
Speaker 1: a TV story. Just get right to thank you so
Speaker 1: much for your program. Thank you very much for the plug.
Speaker 1: So right now, the biggest concern I have is that
Speaker 1: most people think there's no problem of a likely recession
Speaker 1: this year and maybe even early next year. Generally, when
Speaker 1: people are very happy and confident, something wrong happens, um,
Speaker 1: as you know from your own research. So I am
Speaker 1: nervous that the conventional wisdom is that we have no
Speaker 1: recession problems around the world. Everybody's doing quite well. As
Speaker 1: John Kenneth Galbraith, the former Harvard faculty member, famously said,
Speaker 1: the conventional wisdom is usually wrong, and it might be
Speaker 1: in this case. So what would produce a recession this year?
Speaker 1: I'm not saying what happened, but what is the thing
Speaker 1: that I most worry about? Well, I do worry that
Speaker 1: government's uh, maybe having a little bit too much debt,
Speaker 1: and maybe they have too much entitlement programs that they're
Speaker 1: not holdingly going to be able to honor. And at
Speaker 1: some point people will wake up and say, the US
Speaker 1: government has twenty trillion dollars of debt and funded liabilities
Speaker 1: that are hard to fathom about. They're being actually paid
Speaker 1: but leaving it out of side, and people don't worry
Speaker 1: about their while I worry about geopolitical things that we
Speaker 1: can't anticipate, the so called Black Swans so um an
Speaker 1: unanticipated nine eleven type events. Somewhere in the Western world.
Speaker 1: A dirty bomb goes off somewhere, Russia decides have invade someplace.
Speaker 1: The Middle East gets hot again in certain parts that
Speaker 1: are not yet hot. Maybe there's some more hot disputes
Speaker 1: between Saudi Arabia and Iran. We don't know, maybe something
Speaker 1: between China and Japan. So you never know what's going
Speaker 1: to happen, or it could be a pandemic. So I
Speaker 1: think when everybody's complacing, that's usually when you have to
Speaker 1: be nervous. Now that your earlier question, what was the
Speaker 1: lesson of the last recession by your own debt back
Speaker 1: at a discount? Um, Those people that bought their own
Speaker 1: debt back and the discount made great fortunes. And if
Speaker 1: you can't buy your own debt back and the discount,
Speaker 1: hold on, hold on, hold on, don't give back the
Speaker 1: keys to the banks, because eventually the economy will come back,
Speaker 1: and if you hold on, you'll make a lot of money.
Speaker 1: And the people that made the most money out of
Speaker 1: the last recession in private equit least. But people that
Speaker 1: bought their own debt back or managed to keep the
Speaker 1: banks away and hold held onto the assets until the
Speaker 1: economy came back. That's what happened. Great fortunes were made
Speaker 1: and great reputations were made by holding onto assets or
Speaker 1: buying your own debt back at a discount. So when
Speaker 1: the economy starts going this way, you know, don't run
Speaker 1: for the fences, be there, and you know, hang around
Speaker 1: the hoop because you're gonna buy some things a great
Speaker 1: discounts within this. And again we welcome all of you
Speaker 1: were streaming with the World Economic Forum website and the
Speaker 1: top link as well. And again I thank Bloomberg for
Speaker 1: their commitment to this event on Bloomberg Radio and television worldwide.
Speaker 1: So we've gone around UH once and I can go
Speaker 1: eight or any different ways. Jess, I want you to
Speaker 1: lead it off here with a more open discussion about
Speaker 1: things on your mind. I want to keep this open
Speaker 1: as we look at the crisis that Ken Rogo wrote about, Jess,
Speaker 1: expand further. Please look. And I think as we've also
Speaker 1: of talked about um UM, it all seemed so erosy
Speaker 1: at four percent global economic growth and UM, I think
Speaker 1: we saw the economic calamity when we missed the last
Speaker 1: financial crisis and the and the damage that was done globally.
Speaker 1: And I do think one thing that is different this
Speaker 1: time that we need to utilize UM is I think
Speaker 1: the the connectivity and the collaboration between regulators and academics
Speaker 1: and and and private ectory firms and investment firms. And
Speaker 1: banks is at a whole another level than than it
Speaker 1: was pre crisis. Uh. You go back to two thousand
Speaker 1: and five, thousand and six, a bank would meet with
Speaker 1: the Fed maybe once every quarter. UH. Today we have
Speaker 1: you know, the Bank of England in the p r
Speaker 1: A and the f c A. They're in the bank
Speaker 1: every day. Do the British do this better? Do they
Speaker 1: they have a more focus? I'm gonna call it simple.
Speaker 1: I think I think in both sides of the Atlantic,
Speaker 1: the degree of integration or or or work between the
Speaker 1: regulators and the banking community not only to fix what
Speaker 1: happened last time, but now I think as most of
Speaker 1: the corrections through bank regulation have occurred, it really is
Speaker 1: we need to work collaborately with our regulators to avoid
Speaker 1: the next crisis. You know, on one level, pre two
Speaker 1: thousand and UH and and and and two thousand and nine,
Speaker 1: the regulators were there just to bear witness and if
Speaker 1: something went wrong they would use their abilities to bring
Speaker 1: the big bank in or to do something in order
Speaker 1: to try to uh course correct the economy UH real time. Today,
Speaker 1: the the political body have told the regulators, I want
Speaker 1: you to regulate the systems through stress tests or whatnot,
Speaker 1: so you avoid the next financial crisis. You know, my
Speaker 1: some almost fourty years career in finance, we've never avoided
Speaker 1: the next financial crisis. And so and so what I
Speaker 1: think is incumbent upon banks and acidatial firms and academics
Speaker 1: is to work collaboratly with regulators in tour to try
Speaker 1: to avoid the next financial crisis. Because rightly so, the
Speaker 1: political costs that the banks have endured because of what
Speaker 1: happened uh ten ten years ago, it's been very high.
Speaker 1: And uh so I do think we all need to
Speaker 1: sit down in forums like this and even though it's
Speaker 1: all rosy and whatnot, and say, what what you know,
Speaker 1: what could we be missing? What could be happening in
Speaker 1: the non banking financial market, whether it's levels of debt,
Speaker 1: whether it's uh you know how you know how much
Speaker 1: short interest is there in uh in volatility? How much
Speaker 1: are we building structure notes around the world that are
Speaker 1: basically trying to enhance yield by selling volatility, which at
Speaker 1: this level is a very smart thing to do. If
Speaker 1: this thing turns hold on your are you worried about that?
Speaker 1: Are you not worried about the present? Absolutely, You're not
Speaker 1: worried about this right a bank. I mean when if
Speaker 1: you look at if you if you look at the
Speaker 1: damp and volatility that's out there and everybody's planning to play,
Speaker 1: is it is very easy looking. You have to pay
Speaker 1: attention to it again, you know, you think of where
Speaker 1: we are today. We went through a government shutdown over
Speaker 1: the weekend and the market shup, you know, So you
Speaker 1: go through these events, you've got to ask the question
Speaker 1: and the challenges I think from the asset management or
Speaker 1: from the the investing side is along the way, you
Speaker 1: sold Brexit, you brought it back high. If you sold
Speaker 1: President Trump's election, you bought it back higher. And so
Speaker 1: I think people stopped selling. And so there's a numbness
Speaker 1: out there. There's a uh an ambivalence out there. That's
Speaker 1: concerning because when the next turn comes, and it will come,
Speaker 1: it's likely to be more violent than it would otherwise
Speaker 1: be if we let some pressure off along the way.
Speaker 1: If you as you mentioned the new bank, if you
Speaker 1: will with the media, with all we do about FICK
Speaker 1: and worrying about trading and jobs, did you see a
Speaker 1: new trading process in banks as we go to the
Speaker 1: next financial crisis? Is FICK is uh fixed? Income, currency
Speaker 1: commands is going to be something different for the bank
Speaker 1: than is now or certainly different than what it was
Speaker 1: in two thousands. But one of the things time we've
Speaker 1: stopped talking about because the central banks have largely taken
Speaker 1: the role of being the significant liquidity provider. But bank
Speaker 1: balance sheets today around the globe are much smaller in
Speaker 1: terms of their dedicated capital UH and risk taking tolerance
Speaker 1: to pre crisis. So when the Great Science Fair project
Speaker 1: ends around Queue and we're talking potentially maybe can I
Speaker 1: steal that I've never used that. I love that the
Speaker 1: Science Fair and we see and we see maybe the
Speaker 1: Bank of England start to pull liquidity to titan maybe
Speaker 1: sometime early next year we see the Bank of Japan
Speaker 1: and things start to change. What's liquidity gonna look and
Speaker 1: feel like? We don't know because it hasn't really been tested?
Speaker 1: Postcript your of course this spring at Harvard is Science
Speaker 1: Fair four oh one something like that. How's all this
Speaker 1: gonna end? This? This wonderful banking experience? A Chairman Powell
Speaker 1: as a some challenges as this governor think the four
Speaker 1: thing it's Josh said of interest rates rise faster than
Speaker 1: the markets expecting because inflation could come on US suddenly.
Speaker 1: I think US inflation will exceed two percent this here,
Speaker 1: and we may start seeing it elsewhere. We may already
Speaker 1: be singing in China. I don't know. And if they
Speaker 1: start tightening faster than markets expect, how our capital market's
Speaker 1: going to take it. I want to mention something about
Speaker 1: what David said about geopolitical risk. I normally say, when
Speaker 1: we're reaching to try to think of what could go wrong,
Speaker 1: and we're pointing to geopolitical risk, things are pretty good.
Speaker 1: Because you're really racking your brains to try to think
Speaker 1: of what's wrong. I have to say, we haven't had
Speaker 1: President Trump before, and so you know that sort of uh,
Speaker 1: I think introduces a certain randomness that you have got.
Speaker 1: Thirty two minutes into the panel before we mentioned the tours.
Speaker 1: We don't we don't, we don't have to dwell on it.
Speaker 1: But I mean I I'd sort of torn between a
Speaker 1: crisis and China and an artificial crisis in the United States,
Speaker 1: as you know, being being the biggest US uh SO
Speaker 1: and and the stock market. By the way, I don't
Speaker 1: think an equity market collapse is nearly as bad as
Speaker 1: a dead crisis. It's not pleasant but it's not clearly
Speaker 1: as bad as a dead crisis. But I have to
Speaker 1: say it is not hard to imagine a stock price collapse.
Speaker 1: I think the stock prices are built on the high growth,
Speaker 1: but very much the low interest rates, and I don't
Speaker 1: know how everything from art and bitcoin to stock prices
Speaker 1: will react as interest rates go up. You've been listening
Speaker 1: to this discussion. I'm sorry if I've ignored you. And
Speaker 1: you're the one that has to sit and actually make
Speaker 1: investment decisions and choose around these mix of issues. How
Speaker 1: have you? How is your decision making changed MG as
Speaker 1: we've come out of this crisis. So I think the
Speaker 1: listening to all of that conversation the if we're talking
Speaker 1: really about a financial crisis rather than just an equity
Speaker 1: market correction, which could be quite a severe correction, then
Speaker 1: I think you have to look at what is systemic,
Speaker 1: what is actually a systemic problem, And I think listening
Speaker 1: to this conversation, there's one thing which is potential systemic risk,
Speaker 1: which hasn't been mentioned at all. I don't really buy
Speaker 1: the due political arguments because geopolitical stuff happens all the time.
Speaker 1: It has to be something which happens which fundamentally changes
Speaker 1: the way people react to events rather than the event itself.
Speaker 1: So it's got to change the animal spirit in some way,
Speaker 1: and the evidence points the fact that there's a relatively
Speaker 1: few to be seldom out the geopolitical stuff. We've not
Speaker 1: talked about technology. We've not talked about the systemic risk
Speaker 1: potentially from the cloud. We've not talked about the fact
Speaker 1: that we all have businesses which are absolutely reliant on
Speaker 1: a very small number of people who provide the pipes
Speaker 1: that effective what we all put our businesses through. So
Speaker 1: if you want to ask me what could happen it's
Speaker 1: systemic out there, I'd say there's a technology thing out
Speaker 1: there that we're all somewhat blind to, which will be
Speaker 1: kind of interesting to think how markets would respond to
Speaker 1: that if none of us could actually trade for one
Speaker 1: or two or three days or so. I think the
Speaker 1: other thing which has changed fundamentally this time around, the
Speaker 1: point about the banks being smaller and less systemically risky,
Speaker 1: I think, is it's absolutely right terms of the balance sheet.
Speaker 1: But the thing that has become more connected is, as
Speaker 1: you say, regulation, and there is a certain systemic risk
Speaker 1: from regulation. If all regulators are effectively looking at the
Speaker 1: same sorts of things in their stress tests. If all
Speaker 1: big insurance companies are sort of regulated by the same
Speaker 1: rules likewise banks, the one thing you can be sure
Speaker 1: of is that the scenario which tips up isn't one
Speaker 1: of the ones that featured on anybody's stress test, because
Speaker 1: it never happens like that. So I think there are
Speaker 1: systemic challenges out there that maybe none of us are
Speaker 1: looking at the right place for it. So what do
Speaker 1: you do when you try and make investment decisions against that?
Speaker 1: You try and look right through to the fundamentals, and
Speaker 1: you find stuff that behaves differently through the cycle. But
Speaker 1: even if at the more distress it might all behave
Speaker 1: in this thing I want to come back to, damn it.
Speaker 1: Have geoclitical events, they can't affect the economy. So when
Speaker 1: Saddam Hussein invaded Kuwait, it had a serious effect from
Speaker 1: the U s economy. When nine eleven occurred the United States,
Speaker 1: it has a serious effect the economy. So I think
Speaker 1: it's unfair to say if you have a major geopolitical
Speaker 1: event that's unanticipated, the economy will just move on as
Speaker 1: if nothing happened. So we can't anticipate these events I
Speaker 1: hope none of these things happen, but I think you
Speaker 1: can't and you can't prepare for it. But when they happen,
Speaker 1: you should expect that the economy will act differently because
Speaker 1: people won't spend as much. People will be nervous, and
Speaker 1: right now people are in the mood of saying, well,
Speaker 1: something is going to happen. I don't know what it
Speaker 1: is gonna happen, what is going to be And so
Speaker 1: if something bad were to happen in the geopolitical sense,
Speaker 1: I think it will frighten people a bit and they
Speaker 1: will pull back from the capital expenditures or other kinds
Speaker 1: of things. We just don't know what it will be.
Speaker 1: I do think that the it's harder, though, to figure
Speaker 1: out what's going to cause the recession than to figure
Speaker 1: out how to make money from it. And people who
Speaker 1: are good investors, and presently people are watching us, are
Speaker 1: trying to figure out how to take advantage of this.
Speaker 1: The best way to take advantage of this is wait
Speaker 1: for things to settle down a bit and then probably
Speaker 1: by not necessary to Trying to hit the bottom is
Speaker 1: never possible. But when you recognize that there are fundamental
Speaker 1: strength in an economy, and you do make investments along
Speaker 1: those lines, the geopolitical events will ultimately go away and
Speaker 1: the economy will come back. And economy has always come back.
Speaker 1: So again, the people that made the greatest fortunes in
Speaker 1: the last recession and other recessions were people who bought
Speaker 1: things near the bottom and rode them to the top.
Speaker 1: And I suspect that's what's gonna happen again. Last year
Speaker 1: we had President she's speaking here and I literally, I've
Speaker 1: said this many times on air. Literally, this valley came
Speaker 1: to us. Stop. Professor Rogof mentions our guests coming Thursday
Speaker 1: and Friday, the President of the United States, You serve,
Speaker 1: President Carter, what will you anticipate from President Trump within
Speaker 1: the new international relations that is upon this valley? And
Speaker 1: the idea here is the Washington Consensus? Where is it?
Speaker 1: For read Zakaria is post American world? Where is it?
Speaker 1: Do you see a regime that the president can address?
Speaker 1: In international relations that the president can address? And when
Speaker 1: it was announced the President Trump was coming, I think
Speaker 1: jaws dropped because this wasn't seen as his crowd um.
Speaker 1: This is the center of the globalization movement, and he
Speaker 1: hasn't been seen as the biggest supporter of globalization. So
Speaker 1: he's coming here, I think, either to do one of
Speaker 1: two things. Either to say he was right and globalization
Speaker 1: isn't such a great thing and we have to accommodate
Speaker 1: his views and change our views. Or he's going to
Speaker 1: say he's been misinterpreted a bit, and he actually believes
Speaker 1: in some of the things that people here believe in,
Speaker 1: and that he may have not communicated adequately, But actually
Speaker 1: he believes in many of the things here. I don't
Speaker 1: know which message he's going to have, but I suspect
Speaker 1: it's a massive message has been carefully thought through, and
Speaker 1: he wouldn't have come without some message that he wants
Speaker 1: to give that presumably makes a fair amount of sense.
Speaker 1: What is the mess message of China? One year on
Speaker 1: from the historic moment with President z last year? It
Speaker 1: is so interesting to see the different themes you know,
Speaker 1: in my in my world that we see every day
Speaker 1: at Bloomberg. But but what is this? What not the
Speaker 1: simple message, but what is the theme you see day
Speaker 1: to day from your home in Shanghai and working now
Speaker 1: in Beijing? Um, you know, I mean, China obviously needs
Speaker 1: a global trading system for its only economy, and China
Speaker 1: also realizes that realizes that as its economy grows bigger
Speaker 1: and a bigger China needs to open up more to
Speaker 1: the international competition. And that's what President she said last
Speaker 1: year here that China would do, and that's something China
Speaker 1: is doing. So, for example, in the financial service sector,
Speaker 1: when President Trump visited China last November, we announced that
Speaker 1: definancial sector would be opened up in a very big
Speaker 1: way and the details are coming out very soon. Uh
Speaker 1: So we continue to see globalization uh and worldwide trading.
Speaker 1: The investment system is good for China, and it's a
Speaker 1: system that China wants to help strengthens from America. If
Speaker 1: we have an administration and a president so distrustful of China,
Speaker 1: we talked about and we see this with Mr mccrawl
Speaker 1: the most, without question, the most quoted dame I've seen
Speaker 1: in the first two days of Davos has been Mr
Speaker 1: mccawn and as many travels of recently. But what does
Speaker 1: China need from the United States? From where you sit
Speaker 1: as part of the government, we want, we just want
Speaker 1: a normal relation with the United States. Um, good luck.
Speaker 1: We think the professor said that, not me in that regard.
Speaker 1: Let me say, I think that President Trump and not
Speaker 1: part of his administration. I'm not speaking really, but I
Speaker 1: suspect that he saw when she g Ping came here
Speaker 1: last year, he was widely seen as having made a
Speaker 1: very impressive speech talking of out imports of globalization, and
Speaker 1: for a communist leader to come and kind of capture
Speaker 1: the World Economic Forum was quite impressive. I think Trump
Speaker 1: recognizes that if he comes here and makes an articulate speech,
Speaker 1: he can reassert the US presidency is being perhaps the
Speaker 1: most important position in the world. Right now, you have
Speaker 1: two people who are vuying to be the most important
Speaker 1: persons in the world. President China, President United States. I
Speaker 1: think the President States would like to regain some of
Speaker 1: the luster that maybe he lost a bit in the
Speaker 1: first year in in the perception of the people around
Speaker 1: the world, and by speaking here, I think he feels
Speaker 1: he can probably regain that luster. How did politics plain
Speaker 1: to your research within within the many papers, the steamed
Speaker 1: papers that you and Carmen Reyner did, did did this
Speaker 1: discussion fold into it or you removed from the geopolitics
Speaker 1: that David speaks of. Well, I mean a lot of
Speaker 1: it's in human nature, not so much geopolitics, and it
Speaker 1: doesn't necessarily matter the left or the right. You can
Speaker 1: have financial crisis either way. But after a financial crisis,
Speaker 1: this fracturing is very typical the polarization. Their papers on
Speaker 1: that economists and political scientists. Maybe it will ameliorate get
Speaker 1: less after a while if growth continues. There are other factors.
Speaker 1: So I mean that's something. I think that's partly because
Speaker 1: of the financial process. Two are two bankers, and I
Speaker 1: say this is a great cheer. I believe we had legislation,
Speaker 1: UH tax cut legislation, and the I m F clearly
Speaker 1: says it is a cyclical plus plus and may it'll
Speaker 1: be longer. How will you adapt and adjust micro corpetted
Speaker 1: an American bank to this legislation. Is it a one
Speaker 1: off it benefits off with growth to keep us away
Speaker 1: from a financial crisis, or can it really have a
Speaker 1: long term structural benefit that truly changes banking and changes
Speaker 1: your business. I think it has the ability. We don't
Speaker 1: know yet. We don't know yet. We don't know yet.
Speaker 1: And when you think about the the U. S economy
Speaker 1: and the demographics of the economy, seventeen eighteen trillion dollar economy,
Speaker 1: two thirds consumer, and we can look at the consumer
Speaker 1: in the US. We can look at the consumer most places,
Speaker 1: but the consumer in US is very important. And when
Speaker 1: we look in employment, when we look at housing, when
Speaker 1: we look at savings, all those in pretty good shape.
Speaker 1: Yet we had an economy that was growing to point one,
Speaker 1: So what's the catalyst? And I would say not just
Speaker 1: as you travel in the U. S. But you travel
Speaker 1: around the world and you have conversation with business. You said,
Speaker 1: tell me about your business, what's your business feel like?
Speaker 1: And time and time again, we're kind of eking it
Speaker 1: out on top line, managing the heck out of expenses,
Speaker 1: were being tough on capex and hiring and investment. And
Speaker 1: maybe this is the catalyst. It's what we call maybe
Speaker 1: it's a catalyst that takes us from optimism to confidence.
Speaker 1: That's just daily number one. Well, please God, you have
Speaker 1: an observation. So Barkley's is a British bank whose strategy
Speaker 1: is to be a translantic consumer and wholesale bank, basically
Speaker 1: anchored in New York and London. And I think this
Speaker 1: tax cut aligned with another of other measures taken by
Speaker 1: the U. S. Treasury into a certain extent by the
Speaker 1: Fed as a as a global Bank. We want to
Speaker 1: have a regulatory and environment and a tax environment that
Speaker 1: is as equalized as we can. I think certainly one
Speaker 1: of the one of the good things that the G
Speaker 1: twenty did post financial crisis is as they reregulated the
Speaker 1: financial industry, they basically kept it the regulatory environment equivalent
Speaker 1: whether you were in Brussels or London, or New York
Speaker 1: or or Beijing, um, recognizing that a functioning global capital
Speaker 1: markets without barriers to flows the capital is the best
Speaker 1: for well. I think we have preserved the the regulatory
Speaker 1: equivalency broadly speaking around the world. I think there's a
Speaker 1: question of whether that covenant, if you will, between countries
Speaker 1: is holding right now. Um um uh. And there are
Speaker 1: positive and minds to us. You know, the United States
Speaker 1: has made a very bold move of dramatically decreasing its
Speaker 1: quote the taxes. That has a real economic impact of
Speaker 1: the benefit of Barkley shareholders and the cities UH shareholders.
Speaker 1: What does it mean competitively with other countries and UH
Speaker 1: and how all other Jurisdicans respond to a dramatic drop
Speaker 1: in corporate texts. I think what you're likely to see
Speaker 1: is other companies saying countries saying well, if the US
Speaker 1: can have this big tax cut, maybe we'll have one
Speaker 1: as well, and kind of a race to the bottom. Now,
Speaker 1: one of the things people may not realize is when
Speaker 1: we have these tax cuts United States, they're based on
Speaker 1: ten year projections of what revenues are going to be
Speaker 1: or or costs are going to be, and we really
Speaker 1: don't know. So what you often do is you say,
Speaker 1: this is going to give you a very good benefit
Speaker 1: in years one, two, and three, and we'll make up
Speaker 1: for it in years seven eight nine. But year seven
Speaker 1: eight nine don't really come along anytime soon, So we
Speaker 1: really don't know what the impact is going to be.
Speaker 1: But I think and right now, that companies are going
Speaker 1: to um I think provide bigger dividends, they're gonna do
Speaker 1: stock buybacks, they're gonna make more m and A acquisitions,
Speaker 1: and I think the amount of cash United States will
Speaker 1: probably inflate the economy of bit. David Herbinstein, do you
Speaker 1: believe in trickle down economics? That's all great for the halves?
Speaker 1: Do you believe in trickle down economics? Needing interction like
Speaker 1: that You hit your no, no, but you come on,
Speaker 1: you grew up, You grew up in Baltimore, the son
Speaker 1: of a postal worker. You grew up basic. Do you
Speaker 1: believe in trickle down economic I want to say I believe.
Speaker 1: I do not want to say believe in trickle down economics.
Speaker 1: I do believe that UM, when you have a tax
Speaker 1: cut of this amount, and many of it much of
Speaker 1: a ghost in the middle class as well, it will
Speaker 1: have some beneficial effect. I don't think it's only a
Speaker 1: trickle down effect. Jess, you mentioned you're a British bank.
Speaker 1: My number one observation for a week in London is wow,
Speaker 1: continue change and continued enthusiasm in London, and the message
Speaker 1: I heard interview after interview, including Jim O'Neill, was just
Speaker 1: beginning to really diffuse across the United Kingdom. Do you
Speaker 1: see that at Barclay's coming out of the unique financial
Speaker 1: crisis of the United Kingdom, Northern Rock and the rest
Speaker 1: of it, and how all of you had to adapt,
Speaker 1: Is it a better United Kingdom even with the soap
Speaker 1: opera known as Brexit going on? Well again, I I
Speaker 1: do think that the Bank of England UM has done
Speaker 1: quite a good job managing the transformation of the financial
Speaker 1: industry posts the financial crisis and UH and uh, we've
Speaker 1: seen reasonably strong economic growth, somewhat weaker recently, but I
Speaker 1: you know, like all these countries a little bit. Going
Speaker 1: back to what and I'm talking about visa the technology.
Speaker 1: One of the things that I think is playing well
Speaker 1: to the United Kingdom right now is technology. I've said
Speaker 1: this in a in a couple of forms. Perhaps the
Speaker 1: biggest economic event immediately post Brexit was a decision of
Speaker 1: Google to make London the their second largest center for
Speaker 1: technology development. But seven thousand engineers in the middle of
Speaker 1: of London and the UK has gotta as an outstanding,
Speaker 1: uh academic base. Um, I think it's in the forefront
Speaker 1: of a lot of what's happening in technology. And there's
Speaker 1: not a business or an industry in the world now
Speaker 1: that's not deeply impacted by technology. And so if we
Speaker 1: can keep the borders open to the best and the
Speaker 1: brightest and use that academic footprint to allow a Barkleys
Speaker 1: to be in the forefront of mobile banking and digital
Speaker 1: safety and whatnot, that's a good thing for the UK.
Speaker 1: Is the biggest story of two thousand and seventeen in
Speaker 1: terms of the economy Europe, many people thought was dead
Speaker 1: and gone. Years ago, and was going to be really
Speaker 1: a weak sister compared to the United States. And when
Speaker 1: you had Brexit that made people think even more so
Speaker 1: that would be the case. And despite Brexit, the problems
Speaker 1: in Spain, the problem is in the week in German
Speaker 1: weaker in German government, a new French government. Europe is
Speaker 1: not quite well. Economic prices a little bit lower, and
Speaker 1: so it's a very attractive place to invest. Just get
Speaker 1: a third runway. He's wrong. I just want to echo second,
Speaker 1: what ants? How about technology? Let's face it, we don't
Speaker 1: understand it, and it's grown and importance. That's you know,
Speaker 1: in few off all our lives, and the idea that
Speaker 1: something could happen that had a systemic effect of first
Speaker 1: systemic technology crisis not you know, not that far. And
Speaker 1: what's interesting here is Professor Rogoff told that to me
Speaker 1: in a radio boost. I remember this conversation pushing fifteen
Speaker 1: years ago, fourteen years ago. And yet and as you mentioned,
Speaker 1: technology has become so many different things and so embedded
Speaker 1: in our life. I remember at Davos, at these meetings,
Speaker 1: the uproar over cell phones. Well wait, we can't have
Speaker 1: these in the building. We can't And then of course
Speaker 1: the next year every executive was had had them going
Speaker 1: in and three assistance to tell them what to do
Speaker 1: with it. By when we say technology in two thousand,
Speaker 1: in two thousand twenty, what do you mean? But it's
Speaker 1: all about it's the interconnectivity. So the amount of stuff
Speaker 1: that we all put, the amount of data, the amount
Speaker 1: of transactions and processing, the amount of stuff that we
Speaker 1: put into a shared space, for example, in the cloud.
Speaker 1: It's just kind of interesting and all of our businesses
Speaker 1: would stop if for some reason that most of us
Speaker 1: don't understand, because we don't really understand what the cloud is.
Speaker 1: You're not talking here about one or two days, or
Speaker 1: five days or six days. You're talking about something more systemic.
Speaker 1: I'm just posing the question, right what could potentially cause
Speaker 1: a systemic risk? The answer is if for whatever reason,
Speaker 1: we had the inability to access Wi Fi based systems,
Speaker 1: cloud based systems, just really simple stuff like that, hypothecating
Speaker 1: And the answer is nobody really knows the answer to
Speaker 1: that question. How would our businesses all work in a
Speaker 1: world where suddenly the cell phones went down simultaneously? How
Speaker 1: would your disaster recovery procedures work? If you'll wait your
Speaker 1: satellite phones tucked back at your hotel room. Maybe you do,
Speaker 1: but it's an interesting hypothesis. No. I I think every
Speaker 1: year there seems to be a change at these meetings.
Speaker 1: I want to again and say welcome to all of
Speaker 1: the top link at the World Economic Forum. And of
Speaker 1: course we're streaming across the World Economic Form site. We're
Speaker 1: thrilled of that. And thanks to Bloomberg for their commitment
Speaker 1: on Bloomberg Radio and television today to this panel. I'm
Speaker 1: gonna go for five more minutes and go to find
Speaker 1: there if I could. Uh. And then we'll open the
Speaker 1: questions and I will say Dr Frankel, you get the
Speaker 1: first question, so you better be ready as we'll take
Speaker 1: a francl with us, and we'll leave with this question
Speaker 1: here in a moment house Bitcoin. You're in the heart
Speaker 1: of it, aren't you? In China? China? And if we
Speaker 1: look at China, if we look at Korea, and we
Speaker 1: look at nineteen can Ken told me Tom go along
Speaker 1: at nine. Uh. But when you look at bitcoin, you
Speaker 1: have had to live it as a regulator in China. Well,
Speaker 1: in China, it's the central bank that has the deal
Speaker 1: with bitcoin. It's not the security give us some experiences.
Speaker 1: Our attitude is that this is something that uh that
Speaker 1: is uh, you know, whose little value to the economy
Speaker 1: still has to be proven. So in that sense, we
Speaker 1: do not want them to get to kind of big
Speaker 1: you know, too widely traded in China, and that is
Speaker 1: why the central Bank has actually ordered the closure of
Speaker 1: trading a big coin in China, which I support. Who
Speaker 1: had today, Uh, let me just add one thing. Mr.
Speaker 1: Movements then talked about how to make money in the
Speaker 1: financial crisis. I want to say something, you know, to
Speaker 1: the clouds, maybe here over the internet, you know, who
Speaker 1: had that to shoot on China? If they bet that
Speaker 1: China would somehow have a financial collapse and doing the
Speaker 1: class it's going to happen. People have been predicting it
Speaker 1: for ten years, and every year they've been wrong. And
Speaker 1: that's some part because the Chinese government can move much
Speaker 1: more quickly. The US government is so diffused it can't
Speaker 1: really get it back together. I don't really think that's
Speaker 1: uh something to worry about. The biggest thing I worry
Speaker 1: about increasingly is something that we haven't talked about, and
Speaker 1: it's not global warming. It's a phenomenon that I've noticed recently,
Speaker 1: it's the increase in gravity. As I've gotten older, I've
Speaker 1: noticed that things sag more, and I noticed that my
Speaker 1: ability to jump for basketball is less. I think the
Speaker 1: gravity and the Earth is getting much stronger, and that's
Speaker 1: something we should worry about. Parting people my age, you
Speaker 1: should worry much more about gravity than anything else. This
Speaker 1: would you like to speak about gravity? And three years
Speaker 1: working on gravitational waves and she's found them around you, David.
Speaker 1: But this is this brings up on a point we're
Speaker 1: going to, Professor. If we go back to Newtonian mechanics,
Speaker 1: F equals g MM over are squared? Does the math
Speaker 1: work or did you learn as Olivier Blanchard study that
Speaker 1: the I M F that the models didn't work? Richard Claire,
Speaker 1: does D S G E. Are you still a believer
Speaker 1: in in ops Felt Rogoff for Krugman Rogoff or is
Speaker 1: there a new math involved as we go to the
Speaker 1: next crisis? Well, I think the models failed miserably, not
Speaker 1: just in predicting the crisis, which we don't really think
Speaker 1: we'd be good at anyway, but they failed in predicting
Speaker 1: what would happen afterwards. It was much more fruitful to
Speaker 1: look at historical example. You know, going back to the
Speaker 1: high level of the stock market, interest rates are really low.
Speaker 1: I think it's easily half the story of why stock
Speaker 1: right there, Maybe so maybe three quarters of it. You know,
Speaker 1: if interr strates go up even modestly halfway towards their
Speaker 1: normal level, you will see a collapse in the stock market.
Speaker 1: I mean real interest rates inflation adjusted. And I don't
Speaker 1: know what will take the thing because they're worried. I
Speaker 1: would have for the stock market is that the technology
Speaker 1: unicorns when they try to go public, if they go
Speaker 1: public at a lower valuation than their last private round,
Speaker 1: that's going to begin to make people very nervous. And
Speaker 1: we've already seen that that we're already seeing that now.
Speaker 1: Well yeah, I agree, we're begin to see it now.
Speaker 1: Would you say that will be a theme for the
Speaker 1: next twenty four months. Were ever seeing it, they can
Speaker 1: see more of that. Interest rate is one risk to
Speaker 1: the U s Acuto market. Another risk is regulation. And
Speaker 1: when you see the President teats about every high of
Speaker 1: the stock market and takes pride in that, unavoidably, it
Speaker 1: will have an impact on the regulators. The regulators may
Speaker 1: not move as quick as you know, adamant as they
Speaker 1: should and that can cause that's a very good point
Speaker 1: that even though the financial regulation has changed and it's better,
Speaker 1: it's enforced by people, and we've systematically seen the regulators
Speaker 1: changed and that's changed the implementation so independent. I thought,
Speaker 1: oh well, I mean that's a theory. It's I want
Speaker 1: to go back to gravity. I stayed in a hotel
Speaker 1: in London that was the height of early maybe pseudo
Speaker 1: Edwardian banking. It was the Middle and Bank Building of
Speaker 1: nineteen twenty four, down by mansion house and down by
Speaker 1: our glorious new office, and it was built. Is a
Speaker 1: is a monument just to what was before them? What's
Speaker 1: the monument we're doing now that we did in two
Speaker 1: thousand six, is you brilliantly stated earlier or for that matter,
Speaker 1: inn before the substantial crisis of what's the monument in
Speaker 1: financial system architecture now that you think is most monument
Speaker 1: like and we need to avoid I was gonna take
Speaker 1: it from Antice and I again, uh uh, what I
Speaker 1: think we can't forget is that, uh the beginnings of finance. Um,
Speaker 1: what finance really did going back a couple of centuries
Speaker 1: ago and very much in the UK was really to
Speaker 1: democratize economic growth. UH. Finance was the means by which
Speaker 1: wealth could be transferred from a diverse population, not to
Speaker 1: just a family member who inherited a big farm, but
Speaker 1: rather to an innovator or an entrepreneur that had a
Speaker 1: new idea. And so finance allowed for the funding of
Speaker 1: someone who bought an idea of building a car or
Speaker 1: building a railroad. Um. Uh. And we obviously went through
Speaker 1: a dramatic period in two thousand and eight and nine
Speaker 1: in the aftermath of the financial crisis. UM. But I
Speaker 1: think I know you know City Bank does an extraordinary
Speaker 1: job at it um. UM people like Carlisle and investments
Speaker 1: that they make. UM. We shouldn't lose sight of the
Speaker 1: value of finance and from item for global economic growth. Uh.
Speaker 1: And that it does provide a very central function UH
Speaker 1: that benefits everybody. One of the things I think we
Speaker 1: haven't talked about is that with samuelh Anything you used
Speaker 1: to talk about the clash of civilization. Now it's a
Speaker 1: class of technologies. The Chinese large technology companies, are they
Speaker 1: going to be able to take their technologies outside of
Speaker 1: China and and really dominate the world or the American
Speaker 1: company is going to take their technologies Facebook, Google, and
Speaker 1: so forth and dominate the World's gonna be a big
Speaker 1: fight between the Chinese technology companies the American technology companies
Speaker 1: for global supremacy outside of their core countries, and that's
Speaker 1: where you're gonna see a big fight. What I would say,
Speaker 1: when we think of your question, what's the monument to
Speaker 1: financial services today? What I love about the monument is
Speaker 1: it's not physical, it's digital. It's not a building, it's
Speaker 1: not the infrastructure of that. But the fact that finance
Speaker 1: today is about inclusion and getting to more people in
Speaker 1: the world and making that easier. And clearly technology digital
Speaker 1: is pushing that the pain points that are coming out
Speaker 1: of people's lives. So we talk about people's proclivity to
Speaker 1: use technology, but when you think a lot of it there,
Speaker 1: there's some that's disruptive. Most has actually been um life
Speaker 1: enhancing where you can get your balance online, you can
Speaker 1: you can spend online, you can borrow online, you can
Speaker 1: do those things that we're putting more time back in
Speaker 1: your life. And so when you think of that monument,
Speaker 1: I think it's the push towards digital. Okay, we're gonna
Speaker 1: go to questions. I want to make clear run television
Speaker 1: worldwide and radio, and as you get up, please try
Speaker 1: to avoid diving in front of the cameras or you know, uh,
Speaker 1: making faces and hand movements. And that I am honored
Speaker 1: to have as a first question today. Jacob Frankel, who
Speaker 1: is ken rogof knows did original research in Chicago years
Speaker 1: ago and foreign exchange and economics. He served as Governor
Speaker 1: of the Bank of Israel and course holds court with
Speaker 1: James Diamond over at JP Morgan now Dr Franklin. Observation
Speaker 1: plays in a question for a good panel, Thank you
Speaker 1: very much. Where we are celebrating quite a few anniversaries
Speaker 1: this season, the tenth anniversary of the crisis that you've
Speaker 1: been talking about, the twentieth anniversary of the Asian financial crisis,
Speaker 1: the Russian default, the thirtieth anniversary or so of the
Speaker 1: death crisis of Latin America, and the thirtieth anniversary of
Speaker 1: my own presence here in Davos. Invariably, in all of
Speaker 1: these events, the conclusion that you started with, namely that
Speaker 1: the depth problem is a much more serious than an
Speaker 1: equity problem, is common. But are always two questions which
Speaker 1: you always tom have asked, number one, where is the
Speaker 1: risk today? And number two is it being priced properly?
Speaker 1: Because if we know the risk and it is being
Speaker 1: priced properly, it has a very different dimension now in
Speaker 1: order to price it properly, that's where transparency comes in.
Speaker 1: That's where regular asians come in, etcetera. So you've been
Speaker 1: asking about the future, where is the risk and if
Speaker 1: we know the risk, isn't being priced probably, and that's
Speaker 1: when we would know if we need to fasten. Are
Speaker 1: we pricing particularly in the short term paper market or
Speaker 1: do we have confidence we're pricing risk properly? Now I
Speaker 1: was addicted to libelary O I s for years and
Speaker 1: other games of measurement. Do we price risk in the
Speaker 1: short term paper market better? Are we smarter? It has
Speaker 1: to be at risk. I mean, we're in this unprecedented
Speaker 1: monetary experiment. Science fair, it's going to turn around. It's
Speaker 1: not the QWI, the low levels of interest rates as
Speaker 1: they reflight and who knows what's gonna happen. And on transparency,
Speaker 1: I mean, China's done a phenomenal job. But when I
Speaker 1: hear you know this time is different. China is different,
Speaker 1: even though it looks the same you have to you know,
Speaker 1: wonder I've asked you this before, and I'll get to
Speaker 1: Mr Corbett. The the the idea of how much of
Speaker 1: our dead is still at a negative nominal rate and
Speaker 1: with the oddities of real rates. Do you have confidence
Speaker 1: we can unwind from a negative interest rate to something
Speaker 1: more normal nominally and real confidence. No, I'm but I'm
Speaker 1: actually more worried, not about the unwinding, but if we
Speaker 1: did have a significant recession, it could happen. David gave reasons, uh,
Speaker 1: and gave reasons um, Jazz gave reasons. And if it
Speaker 1: did happen, there isn't a plan A. I mean they've
Speaker 1: done so much already. I mean there'd be a big
Speaker 1: fistical stimulus, there'd be more quantitative eating. I don't think
Speaker 1: either would work as well as it did last time.
Speaker 1: Jacob Frankos, Should Mario draggy X sooner? Should he do
Speaker 1: something on Thursday at the ECB meeting? Do we have
Speaker 1: a microphone? Does he need to act quicker to begin
Speaker 1: to unwind? Is doing a great job? That was a
Speaker 1: banker's answer for this. European should take out key Man
Speaker 1: insurance on him because when he goes uh, you know
Speaker 1: a real giant will have gone because he's an incredible job.
Speaker 1: And you mentioned the European expansion that's there. Let's go
Speaker 1: back to something Ken, they's barely touched on March fourth.
Speaker 1: I believe it is the Italian election as well. Ken,
Speaker 1: I've noticed per capita growth in Italy actually finally perfectly up.
Speaker 1: Is it all boats rising? Is the boom of of
Speaker 1: my cross France or miracles? Maybe challenge Germany? Is that
Speaker 1: lifting all boats? So it's supposed to work again. Like
Speaker 1: David Rubinstein said, Europe has been a phenomenal story this year.
Speaker 1: It's the most surprising thing of why global growth is
Speaker 1: so so good, and it's benefited Italy. But it's also
Speaker 1: true that even in the salad days of European growth,
Speaker 1: Italy didn't grow so well. When I look at their
Speaker 1: political system, which I want to claim to begin to understand,
Speaker 1: it doesn't look like it's sorting itself out. I don't
Speaker 1: even know if we'll see Berlsconi again. And you have
Speaker 1: to worry about the arm from and they have. They
Speaker 1: do have a lot of debt. And if the rest
Speaker 1: of the world in flight its interest rates, Italy could
Speaker 1: not keep up. Did damn g. Did you capture the
Speaker 1: booming Europe and you look back with all of your
Speaker 1: strategies and analysts, did you feel like you saw Europe
Speaker 1: as a value and we're able to capture that? And
Speaker 1: then how do you recapitulate that as we are in
Speaker 1: these good times? Look, I mean, we Europe, we were
Speaker 1: we were fortunate to be on that that trend early
Speaker 1: and and it was unexpectedly partly because the political noise
Speaker 1: dominated the headlines and neglected the fact that if you're
Speaker 1: coming off such a low base, you don't need that
Speaker 1: much of a of a percentage changed to have a
Speaker 1: meaningful difference to what's going on, because anything is better
Speaker 1: than than nothing in in a peculiar sense. So you know,
Speaker 1: I think Europe continues to model through on the political side.
Speaker 1: So I think, but going into today and looking at
Speaker 1: annualizing the games we've made so far this year and
Speaker 1: thinking can you really believe that? And that's more generally,
Speaker 1: that's not that's not Europe particularly, Can that really carry
Speaker 1: on through all of this? Here? Clearly not? So the
Speaker 1: smart money is taking some risk off the table. It's
Speaker 1: not taking all the risk off the table. It's taking
Speaker 1: some risk off the table. If going back to what
Speaker 1: Ken said, differ inter strates go up meaningfully over the
Speaker 1: next twelve months, there will be a bunch of people
Speaker 1: who have borrowed money from potentially people around this table
Speaker 1: or in the room, who will not be able to
Speaker 1: pay it back. There are those people are out there,
Speaker 1: and the markets are not inaggregate pricing that. So that's
Speaker 1: a very simplicity. That doesn't mean that every company that's
Speaker 1: ever borrowed money is not going to be able to
Speaker 1: pay back, of course, not if there are some very
Speaker 1: little marketing that's four to six trillion dollars emerging market
Speaker 1: corporate debt that's dollar denominated, and if a dollar were
Speaker 1: to rise above where it is now it's actually a
Speaker 1: fairly low point, that could cause big problems for a
Speaker 1: lot of those companies paying that back because they're not
Speaker 1: going to be at earn it in their local currency.
Speaker 1: We haven't mentioned three countries that have really surprising economies
Speaker 1: of late. One is Brazil, which has been in a
Speaker 1: five year recession, but it's coming back from the dead.
Speaker 1: And I think that you can buy very very inexpensive
Speaker 1: things now. Uh And I think it's a pretty good
Speaker 1: commy we haven't mentioned India. India has been booming at
Speaker 1: a higher rate actually growth rate than China the last
Speaker 1: couple of years. And Modi has really done an enormous
Speaker 1: job of getting foreign capital into that country and really
Speaker 1: back from the dead as well as Russia. Russia because
Speaker 1: whale prices are coming back and gas prices are coming back.
Speaker 1: I do think that Russian economy should not be written
Speaker 1: off as much as it was. And then to circle
Speaker 1: back here in our final minutes, and David, I'll go
Speaker 1: to you again on this and please open it up
Speaker 1: to the panel. We have a partid of the United
Speaker 1: States coming here who looks at India, I would suggest,
Speaker 1: is distant and removed from his discourse and analysis, and
Speaker 1: is focused on Russia in a completely different way than
Speaker 1: conventional world economic form manners. What do you want to
Speaker 1: hear from him? As you look at Brazil, India and
Speaker 1: Russia doing better. He doesn't want to talk about those countries,
Speaker 1: doesn't I think what he wanted to Again, again, I
Speaker 1: don't speak for him, but what I think he wants
Speaker 1: to convey is that he's not this overre that he's
Speaker 1: been portrayed. He does want to work with other countries
Speaker 1: he wants to do check the rules a little bit
Speaker 1: different than I have been. But I don't think he's
Speaker 1: coming here to uh um, you know, canstigate people. I
Speaker 1: don't think that's his mission. I think his mission is
Speaker 1: to come here and say I can work with you,
Speaker 1: but you've got to work somewhere. Terms. Most likely who
Speaker 1: will come here to castigate people because he's a politician. Remember,
Speaker 1: I mean he comes here to play politics, not to
Speaker 1: can you know they uh some kind of new economic
Speaker 1: agenda of his administration to the rest of the world,
Speaker 1: because there's no economic agenda there no at least no
Speaker 1: internationalist economic agenda. But I just want to I don't
Speaker 1: think that people working on his response where working on
Speaker 1: a canstigation. This is just that bad. I just want
Speaker 1: to respond to the Professor Lagos point that is China
Speaker 1: different at this time? Actually in China don't view China
Speaker 1: is different because we openly admit that we have too
Speaker 1: much debt, right, and that is why we have a
Speaker 1: new phrasing. China is called the gray Rhino. I mean,
Speaker 1: we all know about black Swan, right, and then China
Speaker 1: have a new phrase called Great Rhino, referring to the
Speaker 1: risk that everybody sees it, but you don't tackle it.
Speaker 1: You don't you know, you can get used to it
Speaker 1: and then the risk finally explode. So these things we
Speaker 1: have a problem. What I was trying to say is
Speaker 1: that the resolution of the problem, the manner of the
Speaker 1: resolution of the problem in China will be different from
Speaker 1: a lot of other countries. That from your academics at
Speaker 1: Stanford and going back to high how do we clear markets?
Speaker 1: And do we clear them the same and just day
Speaker 1: least London or Michael Corbett's New York, how do you
Speaker 1: clear those markets in China? I mean it's the combination
Speaker 1: of female market clearness but itself as well as government intervention.
Speaker 1: And that's always the case in China. You cannot use
Speaker 1: the will of this government different than the recent pus.
Speaker 1: If anything, I think the will of this government is
Speaker 1: even younger to help clear the market sooner than later.
Speaker 1: I want to follow up on something President Trump might say,
Speaker 1: as I think he's addressed this group and say, well,
Speaker 1: I understand a lot of you may not like me,
Speaker 1: but if you look at your wallets, you should love me.
Speaker 1: And the danger, I think is what Tang said is
Speaker 1: that if the stock market starts going down, Willie pressure
Speaker 1: the Federal Reserve to keep interest right slow even if
Speaker 1: inflation is rising. Willie pressure regulators to do things to
Speaker 1: reduce the economy and turn what should be an equity
Speaker 1: market correction. If one comes into something much deeper. You
Speaker 1: might try to take some credit for the economy doing
Speaker 1: well around the world. He would say, look what I've
Speaker 1: done the United States, and what I've done has been
Speaker 1: used as my other economies and governments, and I suspect
Speaker 1: you'll try to take some, rightly or wrongly, for what's
Speaker 1: going on with I think I would say, I do
Speaker 1: hope that the World Economic Forum this week stays focus
Speaker 1: on an issue that's been uh it focused the last
Speaker 1: couple of years, which is income inequality, and that all
Speaker 1: that's going on doesn't take our eye off of that
Speaker 1: challenge because it still exists. Let's leave it there. It
Speaker 1: has been an interesting More again to our audience here,
Speaker 1: I want to say thank you so much across the
Speaker 1: World Economic Form, and thank you again to Bloomberg and
Speaker 1: Bloomberg Radio, Bloomberg Television for their coverage of this event.
Speaker 1: But I really want to thank and I've never done
Speaker 1: this in fourteen years, this audience for fighting through the snow.
Speaker 1: It is just extraordinary, the snow and we're all out
Speaker 1: there today. It's some of you in some real heartship.
Speaker 1: Thank you so much for coming today. Thank you to
Speaker 1: Marjo on the World Economic Thanks for listening to the
Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keane before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio