1 00:00:10,119 --> 00:00:13,360 Speaker 1: Hello, and welcome to another episode of the All Thoughts podcast. 2 00:00:13,400 --> 00:00:16,480 Speaker 1: I'm Tracy Alloway and I'm Joe Wisenthal. Joe, we are 3 00:00:16,520 --> 00:00:20,200 Speaker 1: still here at Jackson Hole. We are coming to the 4 00:00:20,400 --> 00:00:24,080 Speaker 1: end of our sort of discussion series, however, and I 5 00:00:24,120 --> 00:00:26,960 Speaker 1: think one of the themes that has emerged from a 6 00:00:26,960 --> 00:00:29,360 Speaker 1: lot of the people that we've been talking to at 7 00:00:29,360 --> 00:00:33,519 Speaker 1: this event is this idea of living with high levels 8 00:00:33,560 --> 00:00:38,240 Speaker 1: of public debt and high inflation all while having basically 9 00:00:38,280 --> 00:00:42,080 Speaker 1: a global financial system that is built on bonds, things 10 00:00:42,120 --> 00:00:44,240 Speaker 1: that are supposed to be boring. They're not supposed to 11 00:00:44,240 --> 00:00:48,200 Speaker 1: see their yields kind of swing wildly, and yet that's 12 00:00:48,240 --> 00:00:49,200 Speaker 1: been what's happening. 13 00:00:49,520 --> 00:00:52,800 Speaker 2: Two things. One is to your point on yields, I mean, 14 00:00:52,840 --> 00:00:54,200 Speaker 2: it's the story of the last year, but it's really 15 00:00:54,200 --> 00:00:56,840 Speaker 2: also like the story of the last month, sure, which 16 00:00:56,880 --> 00:00:59,000 Speaker 2: is that you know, you think things have mellowed out 17 00:00:59,000 --> 00:01:01,760 Speaker 2: and suddenly you get a new spike mortgage rates at 18 00:01:01,760 --> 00:01:04,040 Speaker 2: the high since two thousand and ten year or thirty 19 00:01:04,080 --> 00:01:06,160 Speaker 2: year year old's highest lease since like two thousand and seven. 20 00:01:06,520 --> 00:01:09,200 Speaker 2: The other thing is, can I just say one fun 21 00:01:09,200 --> 00:01:12,520 Speaker 2: thing about Jackson The whole is running into possible odled 22 00:01:12,560 --> 00:01:15,000 Speaker 2: guests on a hiking trail, Yes, which is a really 23 00:01:15,000 --> 00:01:17,240 Speaker 2: fun aspect of here. You notice, like when we're back 24 00:01:17,240 --> 00:01:19,160 Speaker 2: in New York, we have to do all this work 25 00:01:19,440 --> 00:01:22,120 Speaker 2: to try to find guests. You know, here you just like, 26 00:01:22,400 --> 00:01:23,600 Speaker 2: oh hey, it's you. 27 00:01:23,600 --> 00:01:26,000 Speaker 1: You just pick them off in the wilderness. Yeah, like 28 00:01:26,120 --> 00:01:26,760 Speaker 1: creditors you. 29 00:01:26,800 --> 00:01:28,759 Speaker 2: Want to come on the show? Yeah, all right. 30 00:01:28,800 --> 00:01:31,959 Speaker 1: Well, one person we did actually run into while hiking 31 00:01:32,080 --> 00:01:34,040 Speaker 1: is one of our favorite all blots guests. We're going 32 00:01:34,080 --> 00:01:36,080 Speaker 1: to be speaking to Hyun Sung Shin. He is, of 33 00:01:36,120 --> 00:01:39,080 Speaker 1: course economic advisor and head of research at the Bank 34 00:01:39,120 --> 00:01:43,360 Speaker 1: for International Settlements, and we're going to try to synthesize 35 00:01:43,560 --> 00:01:46,560 Speaker 1: a lot of the discussion points we've been having for 36 00:01:46,600 --> 00:01:48,240 Speaker 1: the past day or so, right. 37 00:01:48,120 --> 00:01:50,000 Speaker 2: And to your point, you know, I do think that 38 00:01:50,240 --> 00:01:52,320 Speaker 2: and this was sort of part of the interesting thing 39 00:01:52,360 --> 00:01:55,120 Speaker 2: we talked about with Darryl Duffy, which is that we 40 00:01:55,200 --> 00:01:57,560 Speaker 2: came out of two thousand and eight very focused or 41 00:01:57,600 --> 00:01:58,960 Speaker 2: two thousand and eight two thousand and nine like very 42 00:01:59,000 --> 00:02:02,800 Speaker 2: focused on credit risk, like downside risk, etcetera. And I 43 00:02:02,840 --> 00:02:05,480 Speaker 2: think by and large policy makers, we probably did a 44 00:02:05,480 --> 00:02:08,720 Speaker 2: good job of de risking the system from the perspective 45 00:02:08,720 --> 00:02:11,920 Speaker 2: of credit. Right then we got Silicon, we got this 46 00:02:12,040 --> 00:02:15,160 Speaker 2: rate spike, we got the highest inflation in at least 47 00:02:15,320 --> 00:02:18,720 Speaker 2: four decades, we got Silicon Valley Bank, and suddenly like, oh, 48 00:02:18,720 --> 00:02:20,480 Speaker 2: there's other risks. It's not just credit risk. 49 00:02:20,560 --> 00:02:23,240 Speaker 1: Well, we reduced credit risk at the expense of interest 50 00:02:23,320 --> 00:02:25,919 Speaker 1: rate risk, it feels like, and we sort of buy 51 00:02:26,120 --> 00:02:30,400 Speaker 1: design made bonds really fundamental to the way that, again 52 00:02:30,440 --> 00:02:33,239 Speaker 1: the financial system works. So we need to dig into 53 00:02:33,600 --> 00:02:36,959 Speaker 1: these financial stability risks as they are now. So without 54 00:02:36,960 --> 00:02:39,440 Speaker 1: further ado, let's bring in Hun Hun. Thank you so 55 00:02:39,520 --> 00:02:41,800 Speaker 1: much for coming back on. I think this must be 56 00:02:41,840 --> 00:02:44,840 Speaker 1: your fourth or fifth opposite something like that, but. 57 00:02:44,919 --> 00:02:47,440 Speaker 3: Our first person, which yeah, absolutely, I mean I was 58 00:02:47,480 --> 00:02:49,080 Speaker 3: going to say, it's such a pleasure to do this 59 00:02:49,120 --> 00:02:52,560 Speaker 3: in person, Tracy, and it's a great topic, of course, 60 00:02:52,600 --> 00:02:55,480 Speaker 3: and I think you've had other people on during the 61 00:02:55,560 --> 00:02:58,040 Speaker 3: day that have explored bits of this. But maybe the 62 00:02:58,080 --> 00:03:00,560 Speaker 3: thing to the point to stop this is just to 63 00:03:00,600 --> 00:03:04,320 Speaker 3: take a step back and have an overview of the 64 00:03:04,360 --> 00:03:09,440 Speaker 3: way that the structure of intermediation has changed since the GFC. 65 00:03:09,760 --> 00:03:13,640 Speaker 3: As you say, Joe, the GFC very much was around 66 00:03:13,680 --> 00:03:16,519 Speaker 3: the banking sector and in particular credit risk. The idea 67 00:03:16,600 --> 00:03:21,440 Speaker 3: is that you need capital there to absorb losses on 68 00:03:21,520 --> 00:03:24,200 Speaker 3: the assets because they're risky assets, and that's the way 69 00:03:24,240 --> 00:03:27,919 Speaker 3: that you protect the depositives and other claimholders. I think 70 00:03:27,919 --> 00:03:31,280 Speaker 3: what we saw in March twenty twenty with the stress 71 00:03:31,280 --> 00:03:34,880 Speaker 3: episode in the treasury market is that even safe securities, 72 00:03:35,240 --> 00:03:39,120 Speaker 3: it can be at the center of a financial stress event. 73 00:03:39,760 --> 00:03:43,360 Speaker 3: I think the UK guilt episode last year. Again, these 74 00:03:43,360 --> 00:03:46,200 Speaker 3: are safe assets, but they were very much at the 75 00:03:46,200 --> 00:03:50,000 Speaker 3: center of financial stress. And I think what that does 76 00:03:50,040 --> 00:03:53,680 Speaker 3: point to is the shifting nature of risks, the different 77 00:03:53,680 --> 00:03:56,560 Speaker 3: propagation mechanisms, and you know, the different set of players 78 00:03:57,120 --> 00:04:00,920 Speaker 3: out there. So we're going from banks to non bank players. 79 00:04:00,960 --> 00:04:04,320 Speaker 3: In the jargon they're called MBFI, it's non bank financial intermediaries. 80 00:04:04,800 --> 00:04:07,240 Speaker 3: But it's not just the intermediaries. I mean, it's also 81 00:04:08,440 --> 00:04:12,800 Speaker 3: the way that infrastructures, you know, CCPs, exchanges, they've also 82 00:04:12,880 --> 00:04:15,200 Speaker 3: become very important as well. So this is I think 83 00:04:15,240 --> 00:04:17,440 Speaker 3: a very very important topic for us to touch on. 84 00:04:18,560 --> 00:04:19,240 Speaker 4: Well, talk to. 85 00:04:19,200 --> 00:04:23,000 Speaker 1: Us more about who those non bank financial intermediaries are, 86 00:04:23,120 --> 00:04:26,279 Speaker 1: because I think people often hear the term, the more 87 00:04:26,560 --> 00:04:30,480 Speaker 1: colloquial term shadow banking, and it sounds kind of nefarious. 88 00:04:30,520 --> 00:04:34,320 Speaker 1: But there are all these different flavors of non bank investors, 89 00:04:34,320 --> 00:04:36,839 Speaker 1: So talk to us about who they are and what's 90 00:04:36,960 --> 00:04:39,839 Speaker 1: happened to them in the years since two thousand and eight. 91 00:04:40,440 --> 00:04:42,600 Speaker 3: Well, you can draw a kind of flow chart here. 92 00:04:42,800 --> 00:04:45,120 Speaker 3: You've seen those in those New York Fed charts where 93 00:04:45,120 --> 00:04:48,640 Speaker 3: you have ultimate creditors on one side and ultimate borrowers 94 00:04:48,680 --> 00:04:51,320 Speaker 3: on the other side, and money flows from right to 95 00:04:51,400 --> 00:04:54,240 Speaker 3: left following the balance sheet direction. We can think of 96 00:04:54,680 --> 00:04:57,320 Speaker 3: something like that in this case as well. We have 97 00:04:57,480 --> 00:05:00,360 Speaker 3: fewer of these bank based intermediaries, although we of course 98 00:05:00,400 --> 00:05:03,400 Speaker 3: still have them, but they've shrunk in size and the 99 00:05:03,440 --> 00:05:06,760 Speaker 3: heft if you like, within the system. Instead, what we 100 00:05:06,839 --> 00:05:10,240 Speaker 3: have are many non leverage players in asset managers of 101 00:05:10,279 --> 00:05:14,240 Speaker 3: various stripes, life insurance companies, pension funds. But I think 102 00:05:14,240 --> 00:05:17,320 Speaker 3: a very very important class of players are the other 103 00:05:17,400 --> 00:05:21,440 Speaker 3: hedge funds as well. There are non regulated market intermediaries there, 104 00:05:22,000 --> 00:05:25,960 Speaker 3: and a very important part of the infrastructure here would 105 00:05:26,000 --> 00:05:31,880 Speaker 3: be the new sexual counterparties other exchanges where rather than 106 00:05:31,920 --> 00:05:37,360 Speaker 3: having intermediation go through a dealer balance sheet, you have clearing. 107 00:05:37,640 --> 00:05:41,680 Speaker 3: You have the central counterparties that actually act as creditors 108 00:05:41,680 --> 00:05:45,120 Speaker 3: and debtors to a wide range of participants. 109 00:05:45,480 --> 00:05:49,680 Speaker 2: So you mentioned March twenty twenty, you mentioned the guilt episode. 110 00:05:49,720 --> 00:05:53,040 Speaker 2: There's also, of course March twenty twenty three with Silicon 111 00:05:53,160 --> 00:05:55,880 Speaker 2: Valley Bank. I guess we have had this run up 112 00:05:55,920 --> 00:05:58,479 Speaker 2: in yields over the last month again, but I don't think, 113 00:05:58,560 --> 00:05:59,960 Speaker 2: you know, nothings. 114 00:05:59,600 --> 00:06:01,279 Speaker 3: Floated, nothing's broken yet. 115 00:06:01,320 --> 00:06:04,719 Speaker 2: Nothing's broken just yet. But it feels like we might 116 00:06:04,760 --> 00:06:08,839 Speaker 2: be in for multiple years of a very different direction. 117 00:06:08,880 --> 00:06:11,039 Speaker 2: Whereas the twenty tens were all about you think great 118 00:06:11,120 --> 00:06:11,680 Speaker 2: checking to go up. 119 00:06:11,640 --> 00:06:12,440 Speaker 5: And they go back down. 120 00:06:12,440 --> 00:06:14,360 Speaker 2: Do you think finally you're breaking out, they go back down. 121 00:06:14,480 --> 00:06:16,800 Speaker 2: It will be in the other direction where we think 122 00:06:16,960 --> 00:06:19,760 Speaker 2: rates and inflation are settling down, but it turns out 123 00:06:19,800 --> 00:06:21,800 Speaker 2: they gather steam. We don't know, but maybe that is 124 00:06:22,000 --> 00:06:23,760 Speaker 2: How do you think about that in terms of like 125 00:06:24,040 --> 00:06:27,599 Speaker 2: systemic risk, financial risk? How is it different than a 126 00:06:27,640 --> 00:06:29,600 Speaker 2: period of like credit risk and slow growth. 127 00:06:29,960 --> 00:06:32,920 Speaker 3: It's worth thinking about the journey that we've been on 128 00:06:33,000 --> 00:06:35,320 Speaker 3: for the last ten years or so, well maybe ten 129 00:06:35,360 --> 00:06:38,600 Speaker 3: twelve years. You know, we've had a very long period 130 00:06:38,880 --> 00:06:42,520 Speaker 3: of loaf of long interest rates and of course central 131 00:06:42,520 --> 00:06:46,359 Speaker 3: bank acid purchases that has really compressed the Yel curve, 132 00:06:46,960 --> 00:06:50,279 Speaker 3: and what that's meant is that borrowers have taken advantage 133 00:06:50,279 --> 00:06:53,239 Speaker 3: of that and they've turned out you know, their borrowing. 134 00:06:53,400 --> 00:06:56,120 Speaker 3: And we see it in the corporate sector. They've really 135 00:06:56,160 --> 00:06:59,760 Speaker 3: turned out the bondissuance. We see it in the household 136 00:06:59,760 --> 00:07:03,520 Speaker 3: sector as well. But I think especially important would be 137 00:07:03,600 --> 00:07:08,039 Speaker 3: the government bond market. There's been an increased duration of 138 00:07:08,080 --> 00:07:13,280 Speaker 3: the bond's outstanding. Not surprising really because government that managers 139 00:07:13,560 --> 00:07:16,600 Speaker 3: would also be taking advantage of the low long term rate. 140 00:07:16,760 --> 00:07:20,200 Speaker 3: So just to give you a number in the Biathaniel 141 00:07:20,240 --> 00:07:24,040 Speaker 3: Economic Report this summer, we had a small discussion on this. 142 00:07:24,240 --> 00:07:28,480 Speaker 3: If you look at the duration in aggregate of advanced 143 00:07:28,480 --> 00:07:31,920 Speaker 3: economic government bonds, it was around seven years at the 144 00:07:32,040 --> 00:07:36,160 Speaker 3: end of twenty ten. That's now nine plus years. So 145 00:07:36,160 --> 00:07:40,480 Speaker 3: we've had a tremendous lengthening of duration, and so as 146 00:07:41,160 --> 00:07:44,080 Speaker 3: central banks of race rates in response to inflation, what 147 00:07:44,120 --> 00:07:47,080 Speaker 3: that's meant is that the price impact has been that 148 00:07:47,160 --> 00:07:50,640 Speaker 3: much larger. So if you're not marking to market, if 149 00:07:50,680 --> 00:07:54,880 Speaker 3: you're using ultimaturity accounting, we call that interest rate risk 150 00:07:54,920 --> 00:07:57,520 Speaker 3: on the banking book, and this is what happened with SVB. 151 00:07:58,120 --> 00:08:01,200 Speaker 3: You don't mark the market until you have too. If 152 00:08:01,200 --> 00:08:04,280 Speaker 3: you're marking to market, then it's duration risk. So as 153 00:08:04,440 --> 00:08:07,240 Speaker 3: long term rates go up, the price of your assets 154 00:08:07,600 --> 00:08:10,840 Speaker 3: will go down accordingly. And the longer the duration, the 155 00:08:10,880 --> 00:08:13,840 Speaker 3: bigger the impact. And I think in that sense there 156 00:08:13,880 --> 00:08:18,560 Speaker 3: is a broad continuum here between what we saw in 157 00:08:18,720 --> 00:08:23,160 Speaker 3: SVB the UK guilt episode. But also I think just 158 00:08:23,200 --> 00:08:26,800 Speaker 3: in terms of emerging market bonds that I think we'll 159 00:08:26,880 --> 00:08:30,080 Speaker 3: also talk about during the course of this conference. So 160 00:08:30,120 --> 00:08:33,400 Speaker 3: I think that's if you like looking through the sector 161 00:08:34,240 --> 00:08:37,000 Speaker 3: to the underlying exposures, and if we do that, I mean, 162 00:08:37,040 --> 00:08:40,120 Speaker 3: that's what's out there. What's different, of course, is that 163 00:08:40,280 --> 00:08:44,480 Speaker 3: inflation is high and so monetary policy has to respond, 164 00:08:45,000 --> 00:08:47,080 Speaker 3: and after a very very long period of low for 165 00:08:47,160 --> 00:08:50,920 Speaker 3: long we are seeing, if you like, the consequences of 166 00:08:51,000 --> 00:08:54,200 Speaker 3: raising rates once the exposure has lengthened. 167 00:08:54,880 --> 00:08:57,200 Speaker 1: So I mentioned this in the intro, and you just 168 00:08:57,200 --> 00:09:01,000 Speaker 1: gave a very good outline of duration risk and this 169 00:09:01,120 --> 00:09:04,360 Speaker 1: idea of additional sensitivity to interest rate moves. But I 170 00:09:04,440 --> 00:09:06,680 Speaker 1: mentioned in the intro that a lot of this is 171 00:09:06,720 --> 00:09:10,560 Speaker 1: by design. We have actively encouraged a lot of investors 172 00:09:10,559 --> 00:09:14,280 Speaker 1: to buy more bonds, and maybe that wasn't an issue 173 00:09:14,320 --> 00:09:17,160 Speaker 1: in the lower for longer era, as you just pointed out, 174 00:09:17,640 --> 00:09:20,760 Speaker 1: but it seems to be problematic in an era of 175 00:09:20,840 --> 00:09:26,480 Speaker 1: high inflation. If not bonds, what do you use as 176 00:09:26,559 --> 00:09:30,040 Speaker 1: the sort of safety net for a lot of these entities. 177 00:09:30,679 --> 00:09:32,560 Speaker 3: Well, I think you know, before we go there, Tracy, 178 00:09:32,600 --> 00:09:36,199 Speaker 3: I think we have to point out that lengthening duration has. 179 00:09:36,040 --> 00:09:37,600 Speaker 2: Also a lot of advantages. 180 00:09:37,920 --> 00:09:42,280 Speaker 3: One thing that is very good with very long duration 181 00:09:42,679 --> 00:09:46,920 Speaker 3: exposures is that with very long duration liabilities is that 182 00:09:46,960 --> 00:09:50,120 Speaker 3: you're not facing the rollover risk that you used to 183 00:09:50,160 --> 00:09:52,880 Speaker 3: if you were borrowing short So you know, for example, 184 00:09:53,400 --> 00:09:56,800 Speaker 3: if you go back to the Asian financial crisis, there 185 00:09:57,080 --> 00:10:00,560 Speaker 3: you have the combination of currency mis as well as 186 00:10:00,559 --> 00:10:04,000 Speaker 3: in maturity mismatch, and if your liability is very short 187 00:10:04,080 --> 00:10:07,679 Speaker 3: term and your creditors want their money back, then that's 188 00:10:07,720 --> 00:10:11,440 Speaker 3: actually going to lead to a much sharper episode of stress. 189 00:10:11,520 --> 00:10:16,360 Speaker 3: So lengthening duration has also a lot of advantages for 190 00:10:16,840 --> 00:10:20,200 Speaker 3: financial stability, for mitigating financial stability risks. 191 00:10:20,280 --> 00:10:22,720 Speaker 1: This would be one reason why we perhaps haven't seen 192 00:10:22,760 --> 00:10:26,400 Speaker 1: as many bankruptcies as were expected as the FED raisers rates, 193 00:10:26,400 --> 00:10:29,360 Speaker 1: because everyone spent the past two years terming out their debt. 194 00:10:29,720 --> 00:10:34,040 Speaker 3: Absolutely, and that's especially true for those homeowners who actually 195 00:10:34,080 --> 00:10:36,840 Speaker 3: refinance their mortgage. I think that's a very very good example. 196 00:10:37,280 --> 00:10:39,560 Speaker 3: And what we also see is that in the household 197 00:10:39,559 --> 00:10:43,280 Speaker 3: sector mortgage duration has also lengthened as well, not just 198 00:10:43,320 --> 00:10:46,400 Speaker 3: in the US, and US is special because of its 199 00:10:46,800 --> 00:10:49,120 Speaker 3: of its institution of a thirty year fixed rate, but 200 00:10:49,160 --> 00:10:51,440 Speaker 3: it's also true in other economies that there's been this 201 00:10:51,600 --> 00:10:54,680 Speaker 3: shifting out. I think on balance, I would say that 202 00:10:54,960 --> 00:10:59,000 Speaker 3: the lengthening of the liabilities is a good thing on balance, 203 00:10:59,600 --> 00:11:03,120 Speaker 3: but every you know, silver lining as a cloud, and here, 204 00:11:03,200 --> 00:11:05,960 Speaker 3: you know, we have exactly this problem that it's not 205 00:11:06,000 --> 00:11:09,239 Speaker 3: a free lunch. You have to pay for the additional 206 00:11:09,400 --> 00:11:11,160 Speaker 3: risk that comes from greater duration. 207 00:11:12,320 --> 00:11:16,199 Speaker 1: And what about the if not bonds, what question? Because 208 00:11:16,240 --> 00:11:18,720 Speaker 1: this is what I struggle with, What is the next 209 00:11:18,760 --> 00:11:20,640 Speaker 1: safe asset? Basically, well, I. 210 00:11:20,640 --> 00:11:24,000 Speaker 3: Think the safest asset is just money, and I think 211 00:11:24,000 --> 00:11:26,600 Speaker 3: this is where the money, in the sense of the 212 00:11:26,679 --> 00:11:29,200 Speaker 3: high powered money that is issued by the central bank. 213 00:11:29,679 --> 00:11:33,400 Speaker 3: So when a central bank conducts QE, what happens is 214 00:11:33,920 --> 00:11:37,720 Speaker 3: the central bank takes out duration by purchasing the bonds, 215 00:11:38,120 --> 00:11:40,640 Speaker 3: but then pays for it by creating reserves that are 216 00:11:40,640 --> 00:11:44,080 Speaker 3: held by the sellers of those bonds, typically commercial banks, 217 00:11:44,240 --> 00:11:47,120 Speaker 3: who then would pass that on to the sellers, you know, 218 00:11:47,160 --> 00:11:51,319 Speaker 3: their customers. What that means, though, is that as interest 219 00:11:51,400 --> 00:11:55,800 Speaker 3: rates rise, the assets that the central banks hold will 220 00:11:55,840 --> 00:11:57,760 Speaker 3: also be subject to losses, and this is why we're 221 00:11:57,800 --> 00:12:01,000 Speaker 3: seeing the spate of losses on set bank balance sheet. 222 00:12:01,559 --> 00:12:04,680 Speaker 3: The important thing about central bank liabilities, though, is that 223 00:12:04,720 --> 00:12:07,880 Speaker 3: they're not subject to redemption. The central bank doesn't have 224 00:12:08,000 --> 00:12:11,680 Speaker 3: to repay the dollar with another dollar, because that is 225 00:12:11,720 --> 00:12:16,120 Speaker 3: the ultimate that is the ultimate liability, and as we 226 00:12:16,720 --> 00:12:20,320 Speaker 3: argue in a BIS bulletin recently, we should not be 227 00:12:20,360 --> 00:12:23,520 Speaker 3: so concerned about central bank losses in the same way 228 00:12:23,559 --> 00:12:26,480 Speaker 3: that we are concerned about losses suffered by a private 229 00:12:26,480 --> 00:12:29,960 Speaker 3: sector entity who are subject to those redemptions. But it 230 00:12:29,960 --> 00:12:32,240 Speaker 3: doesn't mean that there are no limits. I mean, clearly 231 00:12:32,320 --> 00:12:36,000 Speaker 3: there are limits, and we see those limits especially in 232 00:12:36,640 --> 00:12:40,680 Speaker 3: very fragile, emerging and developing economies that don't have the 233 00:12:40,720 --> 00:12:44,600 Speaker 3: same credibility in the value of money as with the 234 00:12:44,640 --> 00:12:48,080 Speaker 3: FED or with an advanced economy with other advant economy central. 235 00:12:47,880 --> 00:13:06,960 Speaker 2: Bank, this is a good time to ask you a question, 236 00:13:07,760 --> 00:13:09,920 Speaker 2: and I also pose this to very Eike and Green 237 00:13:09,960 --> 00:13:13,840 Speaker 2: and earlier conversation balance sheet policy. I mean, I think 238 00:13:13,880 --> 00:13:19,160 Speaker 2: we typically associate FED, QEY, Etceteram. Central banks are building 239 00:13:19,200 --> 00:13:21,880 Speaker 2: out that capacity, and it seems like in the post, 240 00:13:22,160 --> 00:13:25,320 Speaker 2: in the sort of COVID era, we are seeing more 241 00:13:25,440 --> 00:13:30,080 Speaker 2: central central banks having some credibility or capacity enough to 242 00:13:30,160 --> 00:13:32,760 Speaker 2: like be a buyer of last resort for their own 243 00:13:32,760 --> 00:13:34,440 Speaker 2: government bond markets in a way that we didn't have 244 00:13:34,480 --> 00:13:36,560 Speaker 2: in the past. Is that fair? Is that an accurate character? 245 00:13:36,679 --> 00:13:39,120 Speaker 3: I think, Joe, what I would say is, if we 246 00:13:39,160 --> 00:13:42,280 Speaker 3: look at the events of last year, if anything, it's 247 00:13:42,320 --> 00:13:45,000 Speaker 3: been the emerging markets that have done better in some 248 00:13:45,040 --> 00:13:47,920 Speaker 3: respects than the advanced economies. And let me explain what 249 00:13:47,960 --> 00:13:50,800 Speaker 3: I mean by that. So you know, good comparison is 250 00:13:50,880 --> 00:13:54,640 Speaker 3: between the events of last year with the earliest stress 251 00:13:54,679 --> 00:13:58,440 Speaker 3: episode for emerging markets in twenty fifteen twenty sixteen. So 252 00:13:58,559 --> 00:14:01,920 Speaker 3: back then, what we saw was a very strong dollar 253 00:14:02,040 --> 00:14:07,320 Speaker 3: coupled with very low commodity prices capital outflows for emerging markets. 254 00:14:07,440 --> 00:14:11,440 Speaker 3: We saw a sharp steepening of yeld curves. That combination 255 00:14:12,160 --> 00:14:15,560 Speaker 3: of stresses are very typical of emerging market stress episodes 256 00:14:15,600 --> 00:14:19,800 Speaker 3: that were familiar from the textbooks. What we saw last 257 00:14:19,880 --> 00:14:22,920 Speaker 3: year was actually quite different. What we saw was the 258 00:14:23,040 --> 00:14:25,200 Speaker 3: nature of the shocks were different. We had a war 259 00:14:25,440 --> 00:14:30,840 Speaker 3: and a pandemic, and what that meant was when commodity 260 00:14:30,840 --> 00:14:35,360 Speaker 3: prices rose, emerging markets that were commodity exporters actually did 261 00:14:35,880 --> 00:14:39,720 Speaker 3: very well relative to historical experience. If you look at 262 00:14:39,800 --> 00:14:43,160 Speaker 3: the Mexican peso or the Brazilian reality, it actually appreciated 263 00:14:43,640 --> 00:14:47,240 Speaker 3: last year, and that's very different from later the Euro, 264 00:14:47,480 --> 00:14:50,560 Speaker 3: the yen, even all the other advanced economy currencies. We 265 00:14:50,640 --> 00:14:55,040 Speaker 3: see quite a resilient picture and so they didn't even 266 00:14:55,120 --> 00:14:58,960 Speaker 3: need to enter the market like that. Now, Joe, your 267 00:14:59,080 --> 00:15:03,440 Speaker 3: question raises very important issue, which is when can a 268 00:15:03,480 --> 00:15:07,840 Speaker 3: central bank come into the market, intervene and play the 269 00:15:07,960 --> 00:15:12,000 Speaker 3: role of a buyer of last resort. I think this 270 00:15:12,080 --> 00:15:14,680 Speaker 3: is a very very important policy, Sue. Maybe we can 271 00:15:14,920 --> 00:15:17,080 Speaker 3: get back to some of the discussions that's happening in 272 00:15:17,120 --> 00:15:20,000 Speaker 3: the official world, But when we look at the emerging markets, 273 00:15:20,040 --> 00:15:23,760 Speaker 3: in particular emerging market central banks policy makers generally are 274 00:15:23,840 --> 00:15:29,200 Speaker 3: very reluctant to wade into markets in those stressed circumstances, 275 00:15:29,880 --> 00:15:33,880 Speaker 3: and for good reason, because when you go into the market, 276 00:15:34,200 --> 00:15:36,920 Speaker 3: you have to buy the bonds and you're creating reserves 277 00:15:37,120 --> 00:15:39,320 Speaker 3: as the byproduct of that that's going to be held 278 00:15:39,320 --> 00:15:43,680 Speaker 3: by some of the domestic participants. You're creating money, so 279 00:15:43,880 --> 00:15:47,800 Speaker 3: liquidity injection. That has many, many good aspects, But what 280 00:15:47,840 --> 00:15:50,000 Speaker 3: it means is you're also going to put pressure on 281 00:15:50,080 --> 00:15:52,840 Speaker 3: exchange rate. So if you're pushing a lot of liquidity 282 00:15:52,880 --> 00:15:55,960 Speaker 3: into the system and you're a central bank that doesn't 283 00:15:55,960 --> 00:15:58,840 Speaker 3: have the credibility of a central bank like the FED, 284 00:15:59,560 --> 00:16:01,840 Speaker 3: then that's going to lead to a very sharp depreciation 285 00:16:01,960 --> 00:16:05,280 Speaker 3: of exchange rate that could in fact do more harm 286 00:16:05,360 --> 00:16:08,880 Speaker 3: than good. So I think the short answer to your question, Joe, 287 00:16:08,960 --> 00:16:11,240 Speaker 3: is that last year we saw a very different set 288 00:16:11,240 --> 00:16:15,360 Speaker 3: of circumstances. Emerging markets actually did pretty well. I would 289 00:16:15,400 --> 00:16:18,880 Speaker 3: say the major emerging markets did very very well. I mean, 290 00:16:18,880 --> 00:16:22,800 Speaker 3: they are clearly more stressed developing economies that still have 291 00:16:22,880 --> 00:16:25,560 Speaker 3: to borrow in dollars and so on, but emerging markets 292 00:16:25,600 --> 00:16:28,080 Speaker 3: did particularly well. But I think there is a very 293 00:16:28,080 --> 00:16:32,760 Speaker 3: important lesson here on what are the circumstances that mean 294 00:16:32,800 --> 00:16:36,360 Speaker 3: that you can enter the market with impunity and you know, 295 00:16:36,520 --> 00:16:38,680 Speaker 3: when can you enter the market and get away with it? 296 00:16:39,680 --> 00:16:42,200 Speaker 1: Well, why don't we go back to central banks that 297 00:16:42,320 --> 00:16:45,960 Speaker 1: can create reserves without putting necessarily downward pressure on their 298 00:16:46,000 --> 00:16:48,760 Speaker 1: own currencies. I wanted to talk to you about leverage 299 00:16:49,120 --> 00:16:52,440 Speaker 1: and bonds because I think we're used to talking about 300 00:16:52,480 --> 00:16:56,280 Speaker 1: leverage in the context of credit, and everyone remembers credit 301 00:16:56,320 --> 00:16:59,040 Speaker 1: derivatives from their starring role in the two thousand and 302 00:16:59,040 --> 00:17:03,560 Speaker 1: eight financial crisis. But I guess what's perhaps underappreciated, although 303 00:17:03,560 --> 00:17:06,080 Speaker 1: it feels like more people are becoming aware of it now, 304 00:17:06,160 --> 00:17:09,040 Speaker 1: is that there's also a lot of leverage attached to 305 00:17:09,160 --> 00:17:11,879 Speaker 1: the bond market, and we've seen sort of flashes of 306 00:17:11,920 --> 00:17:17,000 Speaker 1: it emerge, most notably in the March twenty twenty treasury event. 307 00:17:17,119 --> 00:17:20,040 Speaker 1: But how are you thinking about that issue and how 308 00:17:20,040 --> 00:17:23,080 Speaker 1: do you see leverage emerging in the world of bonds. 309 00:17:23,840 --> 00:17:26,639 Speaker 3: I think that's a very important question, Tracy, and I 310 00:17:26,640 --> 00:17:30,399 Speaker 3: think it goes to the point made at the outset, 311 00:17:30,880 --> 00:17:34,560 Speaker 3: how is it possible that a safe asset can still 312 00:17:34,560 --> 00:17:36,440 Speaker 3: be at the center of a stress event? And I 313 00:17:36,480 --> 00:17:38,840 Speaker 3: think I think here we have to think about the 314 00:17:38,880 --> 00:17:42,960 Speaker 3: possible reasons for perverse demand responses, and I will sort 315 00:17:42,960 --> 00:17:46,400 Speaker 3: of make it more concrete shortly. By a perverse demand response, 316 00:17:46,400 --> 00:17:49,800 Speaker 3: what I mean is when a price falls, we typically 317 00:17:50,080 --> 00:17:52,879 Speaker 3: would think, well, that means that it's more attractive to buy, 318 00:17:53,200 --> 00:17:56,000 Speaker 3: and so people would come into the market. So when 319 00:17:56,040 --> 00:17:58,000 Speaker 3: the price falls, you expect people to come in and 320 00:17:58,080 --> 00:18:03,600 Speaker 3: pick up the cheap assage. But in these stress episodes, 321 00:18:03,640 --> 00:18:07,679 Speaker 3: which you typically find is that a price decline actually 322 00:18:08,520 --> 00:18:12,280 Speaker 3: generates more sales and that actually, of course leads to 323 00:18:12,320 --> 00:18:14,520 Speaker 3: further price declines and you can have this loop. Now 324 00:18:14,560 --> 00:18:18,080 Speaker 3: why would you have this perverse demand response. Well, leverage 325 00:18:18,720 --> 00:18:20,639 Speaker 3: is one way that you can have that. So if 326 00:18:20,680 --> 00:18:23,359 Speaker 3: you're leveraged. If you're levered and the price of your 327 00:18:23,400 --> 00:18:26,359 Speaker 3: assets fall, well, your creditors want their money back, you 328 00:18:26,440 --> 00:18:29,800 Speaker 3: need to meet margin calls, and you have to sell, right. 329 00:18:29,880 --> 00:18:32,000 Speaker 1: This is something we spoke with Daryl Duffy about that 330 00:18:32,200 --> 00:18:35,440 Speaker 1: typically the thing you sell first is your safest, most 331 00:18:35,480 --> 00:18:38,480 Speaker 1: liquid asset, which would usually be a bond, probably a 332 00:18:38,600 --> 00:18:39,399 Speaker 1: US Treasury of so. 333 00:18:39,440 --> 00:18:42,119 Speaker 3: Absolutely, and so this is how a safe asset can 334 00:18:42,160 --> 00:18:44,480 Speaker 3: still be at the center of a stress event. But 335 00:18:44,520 --> 00:18:47,720 Speaker 3: it doesn't have to be leverage as such. It could 336 00:18:47,720 --> 00:18:50,080 Speaker 3: be leverage like behavior. And what I mean by that 337 00:18:50,200 --> 00:18:53,400 Speaker 3: is what other ways can you have where a price 338 00:18:53,480 --> 00:18:57,359 Speaker 3: decline would beget more sales. I think a typical and 339 00:18:57,400 --> 00:19:01,120 Speaker 3: a very very classical example, and it's in the mortgage market. Actually, 340 00:19:01,480 --> 00:19:04,200 Speaker 3: a well known historical episode is what happened in nineteen 341 00:19:04,280 --> 00:19:07,159 Speaker 3: ninety four when you have this rapid steepening of the 342 00:19:07,200 --> 00:19:10,000 Speaker 3: Yelk curve. The way that the embedded option in the 343 00:19:10,040 --> 00:19:13,560 Speaker 3: mortgage market, in mortgages means that you know when you hedge, 344 00:19:14,000 --> 00:19:17,320 Speaker 3: so when rates go up, the duration increases. Actually because 345 00:19:17,359 --> 00:19:18,600 Speaker 3: people stop refinancing. 346 00:19:18,920 --> 00:19:20,600 Speaker 1: This was the big convexity. 347 00:19:20,720 --> 00:19:25,639 Speaker 3: This was the convexity issue. Now there's something similar also 348 00:19:25,880 --> 00:19:29,560 Speaker 3: in I mean, something similar can happen even in very 349 00:19:29,600 --> 00:19:32,840 Speaker 3: boring sectors like you know, pension funds or life insurance. 350 00:19:33,000 --> 00:19:36,600 Speaker 3: So if you're trying to match duration, and you know 351 00:19:36,640 --> 00:19:39,600 Speaker 3: you have liabilities to your policy holders which are let's say, 352 00:19:39,640 --> 00:19:41,840 Speaker 3: you know, thirty years, but you have assets that are 353 00:19:41,880 --> 00:19:45,640 Speaker 3: ten years, liabilities are much longer duration than your assets. Now, 354 00:19:45,680 --> 00:19:49,879 Speaker 3: when rates rise, the duration comes in both on your 355 00:19:49,920 --> 00:19:53,080 Speaker 3: assets and your liabilities. But because your liabilities are much 356 00:19:53,160 --> 00:19:57,159 Speaker 3: longer duration than your assets, liability duration comes in much faster. 357 00:19:57,840 --> 00:19:59,720 Speaker 3: So what ends up happening is that you find that 358 00:19:59,760 --> 00:20:02,720 Speaker 3: you've got too much duration on the asset side, so 359 00:20:02,760 --> 00:20:05,480 Speaker 3: you have to sell. So what's just happened, you know, 360 00:20:05,560 --> 00:20:08,800 Speaker 3: race rows, but you're ending up selling. That's another example 361 00:20:09,280 --> 00:20:09,680 Speaker 3: of level. 362 00:20:09,760 --> 00:20:11,760 Speaker 2: This is this is the UK story, right, I mean, 363 00:20:11,760 --> 00:20:14,119 Speaker 2: this is similar. This is what happened. I think the UK. 364 00:20:14,359 --> 00:20:17,720 Speaker 3: It's a combination of both leverage and this story because 365 00:20:18,080 --> 00:20:22,240 Speaker 3: there was the LDI fund aspect, which actually gave it 366 00:20:22,280 --> 00:20:25,200 Speaker 3: a further amplification boost. But the underlying exposures I think, 367 00:20:25,240 --> 00:20:29,160 Speaker 3: are you know, really all the same. Depending on exactly 368 00:20:29,160 --> 00:20:31,119 Speaker 3: how it will play out depends on you know, who 369 00:20:31,280 --> 00:20:34,520 Speaker 3: are the main players, but the principles are very similar. 370 00:20:34,760 --> 00:20:39,159 Speaker 3: So even very conventional, very supposedly boring sectors can still 371 00:20:39,200 --> 00:20:41,720 Speaker 3: be the source of these kinds of you know, perverse. 372 00:20:41,880 --> 00:20:42,680 Speaker 1: That's a fun thought. 373 00:20:43,800 --> 00:20:45,879 Speaker 2: Forgive me if like this is like too big picture 374 00:20:46,000 --> 00:20:49,000 Speaker 2: or too meta of a question, but like for a 375 00:20:49,080 --> 00:20:52,480 Speaker 2: sort of market capitalist system, like someone's got to hold 376 00:20:52,480 --> 00:20:55,720 Speaker 2: the risk people need anycome, you know, it seems to me. 377 00:20:55,880 --> 00:20:57,440 Speaker 2: I don't know, maybe there's not even a question here, 378 00:20:57,440 --> 00:20:58,760 Speaker 2: but it seems to me it's like you know, two 379 00:20:58,800 --> 00:21:00,560 Speaker 2: thousand and eight, Okay, if there's too much credit risk 380 00:21:00,640 --> 00:21:04,080 Speaker 2: and too much bad lending to households and German banks 381 00:21:04,119 --> 00:21:07,200 Speaker 2: somehow financed construction in the sun Belt in some way. 382 00:21:07,200 --> 00:21:10,480 Speaker 2: And then now we're talking about like pretty boring in 383 00:21:10,760 --> 00:21:14,600 Speaker 2: boring bonds. Treasury is going up boring sort of simple 384 00:21:14,680 --> 00:21:19,199 Speaker 2: life insurance companies, pension companies not particularly exotic. Is this 385 00:21:19,240 --> 00:21:21,320 Speaker 2: our fate that for the rest of our careers is 386 00:21:21,400 --> 00:21:23,480 Speaker 2: just every ten years we just have to like pinpoint 387 00:21:23,520 --> 00:21:25,280 Speaker 2: a new area. I mean, because it's not like risk 388 00:21:25,320 --> 00:21:27,000 Speaker 2: can ever go away. Someone's got to hold the sse 389 00:21:27,040 --> 00:21:29,200 Speaker 2: that someone's got to make the income to pay the savers. 390 00:21:29,359 --> 00:21:31,520 Speaker 3: I think the key here is that we have a 391 00:21:31,600 --> 00:21:35,600 Speaker 3: diversity of investors. Okay, so whatever we do, we have 392 00:21:35,640 --> 00:21:38,320 Speaker 3: to make sure that when someone is selling, someone is 393 00:21:38,320 --> 00:21:41,480 Speaker 3: actually willing to come in and buy. And the diversity 394 00:21:41,680 --> 00:21:45,040 Speaker 3: of the market participants is absolutely key for this. And 395 00:21:45,160 --> 00:21:47,520 Speaker 3: this is all about finding the right price, and finding 396 00:21:47,520 --> 00:21:49,560 Speaker 3: the right price means that you know, we have buyers 397 00:21:49,920 --> 00:21:54,320 Speaker 3: as well as sellers. The reason why these financial stability 398 00:21:54,480 --> 00:21:59,240 Speaker 3: channels of propagation can be so corrosive is because sometimes 399 00:21:59,520 --> 00:22:02,480 Speaker 3: one part of the market just becomes too big. They 400 00:22:02,520 --> 00:22:06,120 Speaker 3: grew without our knowing it, without our really noticing it, 401 00:22:06,720 --> 00:22:09,159 Speaker 3: and then when something happens, this is when all these 402 00:22:09,240 --> 00:22:12,520 Speaker 3: dynamics take hold. I don't think we need to worry, 403 00:22:12,640 --> 00:22:16,720 Speaker 3: you know, in every ten years that something big will happen. 404 00:22:17,000 --> 00:22:19,760 Speaker 3: It's just a case of making sure that we have 405 00:22:19,800 --> 00:22:23,920 Speaker 3: a diversity of buyers and sellers, of participants in the market. 406 00:22:24,560 --> 00:22:26,679 Speaker 3: And there are some rules of thumb that we should 407 00:22:26,760 --> 00:22:31,040 Speaker 3: use both in the regulation but also for the private 408 00:22:31,040 --> 00:22:34,800 Speaker 3: sector institutions themselves in the risk management. So what are 409 00:22:34,920 --> 00:22:37,920 Speaker 3: some of the potential kind of decision rules that might 410 00:22:37,960 --> 00:22:41,360 Speaker 3: be baked in given the kinds of leverage and other 411 00:22:41,440 --> 00:22:44,760 Speaker 3: exposures out there. Relative value hedge funds I think were 412 00:22:44,880 --> 00:22:47,840 Speaker 3: very important in March twenty twenty that was very much 413 00:22:47,840 --> 00:22:53,200 Speaker 3: about leverage using futures and the cash bonds. Futures implied 414 00:22:53,240 --> 00:22:55,600 Speaker 3: yields a little bit lower because it doesn't take up 415 00:22:55,640 --> 00:22:59,119 Speaker 3: balance sheet, and so you're selling the futures and buying 416 00:22:59,119 --> 00:23:02,400 Speaker 3: the bonds. But then if margins go up, you know, 417 00:23:02,760 --> 00:23:06,560 Speaker 3: you have to either come up with additional equity from somewhere. 418 00:23:06,720 --> 00:23:10,320 Speaker 3: That's very difficult and stressed episode, so you typically end 419 00:23:10,400 --> 00:23:13,920 Speaker 3: up selling. And so this is another case where say 420 00:23:13,960 --> 00:23:16,720 Speaker 3: FACET can still be at the center of this kind 421 00:23:16,760 --> 00:23:21,560 Speaker 3: of episode. So as market observers, as observers from the 422 00:23:21,560 --> 00:23:24,560 Speaker 3: official sector. We just have to be very careful to 423 00:23:24,600 --> 00:23:29,840 Speaker 3: be on the lookout for where these stress episodes might arise. 424 00:23:30,200 --> 00:23:31,960 Speaker 3: I mean, there are some rules of thumb we can use, 425 00:23:32,080 --> 00:23:34,040 Speaker 3: and I think one of the interesting things is that 426 00:23:34,200 --> 00:23:37,119 Speaker 3: for the relative value hedge funds, we're seeing again the 427 00:23:37,280 --> 00:23:40,880 Speaker 3: short positions in futures growing, not in the thirty year 428 00:23:41,440 --> 00:23:43,360 Speaker 3: horizon that we saw into it to twenty, but more 429 00:23:43,400 --> 00:23:45,200 Speaker 3: in the five year horizon, more in the belly of 430 00:23:45,280 --> 00:23:48,600 Speaker 3: the curve this time. But it seems that that's something 431 00:23:48,640 --> 00:23:51,800 Speaker 3: that has come back. It's much smaller than it was 432 00:23:51,880 --> 00:23:54,639 Speaker 3: before the March twenty twenty episode. But these are the 433 00:23:54,680 --> 00:23:57,959 Speaker 3: things that you know, it's not a precise science, but 434 00:23:58,000 --> 00:24:05,159 Speaker 3: these are the things that we can look out for. 435 00:24:16,600 --> 00:24:19,520 Speaker 1: So maybe we could talk a little bit about potential 436 00:24:19,760 --> 00:24:23,240 Speaker 1: solutions to some of these issues. And again we touched 437 00:24:23,280 --> 00:24:26,840 Speaker 1: on this with Darryl Duffy, and he was advocating for 438 00:24:27,640 --> 00:24:30,919 Speaker 1: possibly all to all trading, where you would allow investors 439 00:24:30,920 --> 00:24:33,280 Speaker 1: to trade bonds with each other so that you would 440 00:24:33,280 --> 00:24:37,760 Speaker 1: have to your pointhand a more vibrant, diverse body of 441 00:24:37,840 --> 00:24:40,960 Speaker 1: participants in times of crisis. And the other thing he 442 00:24:41,000 --> 00:24:44,400 Speaker 1: was talking about is central clearing the idea being that 443 00:24:44,520 --> 00:24:47,840 Speaker 1: you create a central entity that can then net positions 444 00:24:47,920 --> 00:24:51,680 Speaker 1: and sort of offset the risk. But a classic critique 445 00:24:51,720 --> 00:24:54,880 Speaker 1: of central clearing is that you are in effect concentrating 446 00:24:54,960 --> 00:24:55,560 Speaker 1: the risk. 447 00:24:55,520 --> 00:24:57,040 Speaker 4: In one big entity. 448 00:24:57,160 --> 00:24:59,760 Speaker 1: And I'm curious you were in the room with all 449 00:24:59,800 --> 00:25:02,480 Speaker 1: the policymakers at Jackson Hall. What were some of the 450 00:25:02,520 --> 00:25:06,080 Speaker 1: debates around these proposals and what are your own views? 451 00:25:06,480 --> 00:25:08,719 Speaker 3: Well, actually I was sitting next to darryl oh Okay, 452 00:25:08,840 --> 00:25:10,640 Speaker 3: and so we had a great discussion on this. I mean, 453 00:25:10,680 --> 00:25:13,400 Speaker 3: and we've had some very good discussions on this over 454 00:25:13,440 --> 00:25:16,320 Speaker 3: the years. I think the plumbing is important. I think 455 00:25:16,359 --> 00:25:20,560 Speaker 3: whenever the plumbing can be improved to improve if you 456 00:25:20,640 --> 00:25:23,760 Speaker 3: like the day to day functioning of markets, that's something 457 00:25:23,760 --> 00:25:26,280 Speaker 3: that we should see. And in fact, the analysis in 458 00:25:26,359 --> 00:25:29,480 Speaker 3: Daryl's paper is really excellent, I think on the policy 459 00:25:29,920 --> 00:25:31,840 Speaker 3: prescription that comes from that, I think that can be 460 00:25:31,880 --> 00:25:35,120 Speaker 3: some diversity views should we say. I mean, you mentioned 461 00:25:35,400 --> 00:25:39,560 Speaker 3: the diversity of the market participants, but that's a necessary condition, 462 00:25:39,640 --> 00:25:42,320 Speaker 3: if you like, for the ol to old trading or 463 00:25:42,320 --> 00:25:47,920 Speaker 3: for central clearing itself to bring to channel that diversity 464 00:25:48,000 --> 00:25:51,639 Speaker 3: into the market. But that is a necessary condition. We 465 00:25:51,720 --> 00:25:54,000 Speaker 3: have to be quite sure that there will be a 466 00:25:54,119 --> 00:25:57,160 Speaker 3: large enough body of buyers out there who will actually 467 00:25:57,200 --> 00:26:00,400 Speaker 3: come into the market. Now, if we don't have that 468 00:26:00,720 --> 00:26:04,080 Speaker 3: diversity sufficiently, and we still have this, you know, one 469 00:26:04,119 --> 00:26:08,240 Speaker 3: way type of market, then simply changing the infrastructure is 470 00:26:08,280 --> 00:26:10,160 Speaker 3: not going to do that. I think the way that 471 00:26:10,240 --> 00:26:14,879 Speaker 3: the policy debate, the policy discussion has gone is to 472 00:26:15,040 --> 00:26:17,240 Speaker 3: look for, if you like a happy mean, some kind 473 00:26:17,240 --> 00:26:22,400 Speaker 3: of balance between how much should we make sure that 474 00:26:22,400 --> 00:26:25,680 Speaker 3: the leverage and other perverse type of demand behavior that 475 00:26:25,760 --> 00:26:30,040 Speaker 3: could arise can be mitigated from the outset? How much 476 00:26:30,119 --> 00:26:33,399 Speaker 3: do we need the Central Bank or other authorities to 477 00:26:33,560 --> 00:26:36,960 Speaker 3: play a kind of backstop role, And in this connection, 478 00:26:37,240 --> 00:26:39,399 Speaker 3: you know, I would just point to your listeners to 479 00:26:39,960 --> 00:26:43,560 Speaker 3: a very important BIS Market's Committee report that we put 480 00:26:43,600 --> 00:26:46,440 Speaker 3: out earlier this year. It was actually from a working 481 00:26:46,440 --> 00:26:48,399 Speaker 3: group that was chaired by Laurie Logan when she was 482 00:26:48,400 --> 00:26:50,680 Speaker 3: at the New York Fed and Andrew Houser at the 483 00:26:50,680 --> 00:26:54,439 Speaker 3: Bank of England. It was very much motivated by the 484 00:26:54,440 --> 00:26:57,480 Speaker 3: March twenty twenty episode, and it turned out that it 485 00:26:57,520 --> 00:27:00,439 Speaker 3: was also know very well timed for the guilt stress 486 00:27:00,560 --> 00:27:03,520 Speaker 3: as well. To kind of long story short, the story 487 00:27:03,560 --> 00:27:06,200 Speaker 3: there is we have to strike a strike a balance. 488 00:27:08,760 --> 00:27:13,080 Speaker 3: In the end, the central bank has to be a backstop. 489 00:27:13,640 --> 00:27:16,640 Speaker 3: So if no one else is there to really pick 490 00:27:16,720 --> 00:27:18,560 Speaker 3: up the pieces, the central bank has to be there 491 00:27:18,560 --> 00:27:22,240 Speaker 3: to cushion that shot, because otherwise the consequences of not 492 00:27:22,320 --> 00:27:25,800 Speaker 3: doing so would be very, very large. But it should 493 00:27:25,880 --> 00:27:28,879 Speaker 3: not be a first resort to the extent possible, So 494 00:27:28,920 --> 00:27:32,000 Speaker 3: whenever possible, it should be a market determined outcome. The 495 00:27:32,080 --> 00:27:34,240 Speaker 3: central bank shouldn't weighed in that the drop of a hat, 496 00:27:34,960 --> 00:27:37,760 Speaker 3: and if you like, influence market outcomes that way. The 497 00:27:37,800 --> 00:27:41,040 Speaker 3: other important point is that there's a very important issue 498 00:27:41,080 --> 00:27:45,000 Speaker 3: here of incentives. If it becomes generally known that the 499 00:27:45,040 --> 00:27:48,479 Speaker 3: central bank's threshold for pain is here and therefore they 500 00:27:48,520 --> 00:27:51,760 Speaker 3: will enter, what that could do is to shift the 501 00:27:51,960 --> 00:27:54,440 Speaker 3: if you like, the incentives in the portfolio decision of 502 00:27:54,480 --> 00:27:58,320 Speaker 3: the private sector market participants. What you're doing by doing that, 503 00:27:58,359 --> 00:28:00,639 Speaker 3: by having a kind of you know, a rule to 504 00:28:00,760 --> 00:28:03,760 Speaker 3: enter the market, would be to lop off the left 505 00:28:03,760 --> 00:28:08,040 Speaker 3: tail of the outcome distribution. Means that it becomes less 506 00:28:08,119 --> 00:28:11,280 Speaker 3: risky to one layer of leverage. And so I think 507 00:28:11,320 --> 00:28:13,800 Speaker 3: it's so if you're looking for a simple answer, there 508 00:28:13,880 --> 00:28:16,000 Speaker 3: isn't one okay, and I think this is where we are. 509 00:28:16,720 --> 00:28:19,119 Speaker 3: The central bank has a very important role to play 510 00:28:19,640 --> 00:28:23,040 Speaker 3: as a backstop, but it should be a backstop rather 511 00:28:23,119 --> 00:28:25,520 Speaker 3: than a intervener of the first result. 512 00:28:26,400 --> 00:28:29,000 Speaker 2: Let me ask this question, but from a very non 513 00:28:29,080 --> 00:28:33,800 Speaker 2: plumbing standpoint, how much would it be beneficial for financial 514 00:28:33,800 --> 00:28:38,920 Speaker 2: stability if fiscal authorities were to play You know, right 515 00:28:38,960 --> 00:28:41,360 Speaker 2: now we've sort of tasked the central banks with fighting 516 00:28:41,400 --> 00:28:44,400 Speaker 2: and there's a lot of spending, and there's a lot 517 00:28:44,400 --> 00:28:47,680 Speaker 2: of stimulus, particularly in the US, and it's sort of 518 00:28:47,680 --> 00:28:50,000 Speaker 2: the central bank's job maybe to counteract that and figure 519 00:28:50,040 --> 00:28:51,760 Speaker 2: out a way to get back to two percent inflation. 520 00:28:52,400 --> 00:28:55,960 Speaker 2: Would it be good for financial stability if the central 521 00:28:55,960 --> 00:28:59,280 Speaker 2: bank didn't have to work row cross purposes with fiscal 522 00:28:59,280 --> 00:29:03,040 Speaker 2: authorities as much and didn't weren't facing so much pressure. 523 00:29:02,760 --> 00:29:05,480 Speaker 3: From that, Actually, Joe, in our Annual Economic Report this year, 524 00:29:05,680 --> 00:29:09,160 Speaker 3: our chapter two, it's great that you asked this question. 525 00:29:09,560 --> 00:29:11,680 Speaker 3: You know, we have a whole chapter on this point. 526 00:29:11,800 --> 00:29:14,640 Speaker 3: What we argue is fiscal policy has to row in 527 00:29:14,680 --> 00:29:19,160 Speaker 3: the same direction as monetary policy, not only for Phillip's 528 00:29:19,160 --> 00:29:22,760 Speaker 3: curve reasoning or aggregate demand, but the for the kinds 529 00:29:22,760 --> 00:29:26,280 Speaker 3: of arguments that we raised earlier about if the central 530 00:29:26,280 --> 00:29:29,160 Speaker 3: bank has to enter the market, intervene in the way, 531 00:29:30,000 --> 00:29:32,720 Speaker 3: and you're going to inject liquid it in a situation 532 00:29:32,760 --> 00:29:36,800 Speaker 3: that might actually undermine financial stability through a very sharp 533 00:29:36,840 --> 00:29:39,560 Speaker 3: depreciation of the exchange rate, you could actually end up 534 00:29:39,560 --> 00:29:41,680 Speaker 3: doing more harm than good. What we call is we 535 00:29:41,800 --> 00:29:44,360 Speaker 3: need to be at the region of stability. So we 536 00:29:44,400 --> 00:29:47,520 Speaker 3: need to make sure that monetary policy and fiscal policy 537 00:29:47,600 --> 00:29:50,760 Speaker 3: are working in concert rather than at cross purposes. 538 00:29:51,280 --> 00:29:54,680 Speaker 1: So how do you actually do that? Because you know, 539 00:29:54,720 --> 00:29:57,360 Speaker 1: we were speaking with Adam Posen earlier and he was 540 00:29:57,360 --> 00:30:01,440 Speaker 1: talking about how there's a lot of uncertain around how 541 00:30:01,520 --> 00:30:04,640 Speaker 1: central bankers should react to fiscal A lot of them 542 00:30:05,040 --> 00:30:10,480 Speaker 1: are completely separated from fiscal for very obvious reasons, and 543 00:30:10,520 --> 00:30:13,560 Speaker 1: it can be awkward for them to even start to 544 00:30:13,680 --> 00:30:17,040 Speaker 1: talk or consider this issue, at least publicly. So how 545 00:30:17,040 --> 00:30:18,080 Speaker 1: do you actually get there? 546 00:30:18,720 --> 00:30:21,520 Speaker 3: I think this is why talking about fiscal policy is 547 00:30:21,560 --> 00:30:24,480 Speaker 3: actually a very important function of the central bank. And 548 00:30:24,960 --> 00:30:28,520 Speaker 3: it's true that when central banks talk about fiscal policy 549 00:30:28,680 --> 00:30:32,360 Speaker 3: it can sort of raise eyebrows, But I think we 550 00:30:32,440 --> 00:30:35,239 Speaker 3: have to make it very clear that monetary policy and 551 00:30:35,280 --> 00:30:39,000 Speaker 3: fiscal policy are not separate policy functions. They're actually very 552 00:30:39,000 --> 00:30:43,440 Speaker 3: closely interrelated, and so in order to perform monetary policy well, 553 00:30:43,840 --> 00:30:47,720 Speaker 3: fiscal policy also has to play its part. Now there 554 00:30:47,760 --> 00:30:50,200 Speaker 3: is the whole issue of the Filipsko of reasoning, what 555 00:30:50,280 --> 00:30:54,360 Speaker 3: is aggregate demand? When mandatary policy is tightening, should fiscal 556 00:30:54,400 --> 00:30:57,280 Speaker 3: policy play more of a role. If the economy is 557 00:30:57,280 --> 00:31:00,200 Speaker 3: depressed even with very low rates, should fiscal policy take 558 00:31:00,280 --> 00:31:02,720 Speaker 3: up the slack and stimulate the economy more? Those are 559 00:31:02,800 --> 00:31:05,880 Speaker 3: very very important debates, and you know, I think that's 560 00:31:05,880 --> 00:31:09,720 Speaker 3: something that is more more conducive to these formal economic modeling. 561 00:31:10,560 --> 00:31:15,560 Speaker 3: But when muntary policy physical policy are joined up because 562 00:31:15,600 --> 00:31:18,320 Speaker 3: of the balance sheet interconnections, then I think it's much 563 00:31:18,320 --> 00:31:20,920 Speaker 3: more difficult. And I think, you know, these kinds of 564 00:31:20,960 --> 00:31:25,280 Speaker 3: issues are more or less second nature in emerging markets, 565 00:31:25,360 --> 00:31:28,480 Speaker 3: because in emerging markets and developing economies that have really 566 00:31:28,520 --> 00:31:33,360 Speaker 3: a painful history of a financial crises, the debate is 567 00:31:33,520 --> 00:31:36,280 Speaker 3: on much firmer footing. There's a lot more consensus. I 568 00:31:36,280 --> 00:31:39,800 Speaker 3: would say. The difficulty, I think is more when that 569 00:31:39,840 --> 00:31:43,720 Speaker 3: recognition is not so strong. It's a bit of an 570 00:31:43,800 --> 00:31:46,760 Speaker 3: uphill struggle to put that on the agenda. But I 571 00:31:46,800 --> 00:31:49,680 Speaker 3: think that's really why we at the BIS are here. 572 00:31:49,680 --> 00:31:52,080 Speaker 3: I mean, this is one of our jobs to actually, 573 00:31:52,080 --> 00:31:53,920 Speaker 3: you know, put these things on the table. 574 00:31:54,360 --> 00:31:56,160 Speaker 2: Just to take it back to I think maybe the 575 00:31:56,200 --> 00:32:00,440 Speaker 2: first part of this conversation. How much has the turning 576 00:32:00,480 --> 00:32:03,360 Speaker 2: out or the fixed nature of debt in the US 577 00:32:03,400 --> 00:32:07,400 Speaker 2: and maybe elsewhere contributed to the fact that we've had 578 00:32:07,440 --> 00:32:11,560 Speaker 2: this extraordinary rapid rate of nominal rate hikes, particularly the 579 00:32:11,560 --> 00:32:14,760 Speaker 2: short end, without a ton of evidence that it's done 580 00:32:14,800 --> 00:32:16,479 Speaker 2: a whole lot. I mean, inflation is down, but there 581 00:32:16,520 --> 00:32:19,080 Speaker 2: is some question about why, and there hasn't been much 582 00:32:19,200 --> 00:32:21,640 Speaker 2: economic slowing. How much would you attribute it to that 583 00:32:21,760 --> 00:32:23,959 Speaker 2: simple fact that there is not a lot of floating 584 00:32:24,040 --> 00:32:24,640 Speaker 2: rate debt here? 585 00:32:25,040 --> 00:32:27,560 Speaker 3: This is actually a very important part of the debate 586 00:32:27,640 --> 00:32:31,400 Speaker 3: right now, discussion and the research at central banks, and 587 00:32:31,440 --> 00:32:34,120 Speaker 3: it goes to the channel of monetary policy. So when 588 00:32:34,600 --> 00:32:38,000 Speaker 3: the central bank raises rates, what are the levers that 589 00:32:38,440 --> 00:32:41,360 Speaker 3: it's pulling to actually slow the economy down? You know, 590 00:32:41,440 --> 00:32:44,720 Speaker 3: one channel is the classic credit channel, where you know, 591 00:32:44,760 --> 00:32:47,720 Speaker 3: when you raise rates, and there's plenty of evidence both 592 00:32:47,760 --> 00:32:50,600 Speaker 3: from Yeah, so let me just finish the sentence and explain. 593 00:32:50,840 --> 00:32:54,320 Speaker 3: So when you raise rates, banks tend to lend less 594 00:32:54,360 --> 00:32:58,200 Speaker 3: and the lending standards tend to become higher, and that 595 00:32:58,320 --> 00:33:02,440 Speaker 3: channel I think is very well established. It is less 596 00:33:02,440 --> 00:33:04,760 Speaker 3: strong in the data this time around. I think there 597 00:33:04,800 --> 00:33:06,800 Speaker 3: is an interesting set of questions as to why not. 598 00:33:08,480 --> 00:33:11,680 Speaker 3: You're pointing to another interesting channel, which is if the 599 00:33:12,160 --> 00:33:15,840 Speaker 3: debt has been termed out, how much does raising the 600 00:33:15,840 --> 00:33:21,080 Speaker 3: short rate due to slow spending when liabilities are so 601 00:33:21,160 --> 00:33:24,520 Speaker 3: long term. If homeowners have refinanced their mortgage at very 602 00:33:24,560 --> 00:33:28,640 Speaker 3: low rates, then they're sitting on very big gains and 603 00:33:29,080 --> 00:33:32,840 Speaker 3: raising short rates will have limited impact. I think empirically 604 00:33:33,040 --> 00:33:36,880 Speaker 3: these things still need to be worked out. I mentioned 605 00:33:36,880 --> 00:33:40,000 Speaker 3: earlier that this turning out is not just the US phenomenon. 606 00:33:40,040 --> 00:33:40,840 Speaker 2: It's pretty global. 607 00:33:40,840 --> 00:33:44,440 Speaker 3: I would say countries like the UK used to be 608 00:33:44,760 --> 00:33:49,160 Speaker 3: more or less completely floating rate. Now we have mortgages 609 00:33:49,200 --> 00:33:52,480 Speaker 3: that are actually between two and five years. That's quite typical, 610 00:33:53,640 --> 00:33:56,560 Speaker 3: and I think debate is what has been the impact 611 00:33:56,600 --> 00:33:59,120 Speaker 3: of that turning out. But I think there is a 612 00:33:59,120 --> 00:34:03,240 Speaker 3: bigger puzzle that we're all wrestling with, which is why 613 00:34:03,280 --> 00:34:06,480 Speaker 3: did we have the inflation in the first place, and 614 00:34:06,560 --> 00:34:09,960 Speaker 3: how have we managed to get the disinflation without triggering 615 00:34:10,000 --> 00:34:12,839 Speaker 3: a recession. And I think that's a good puzzle to have. 616 00:34:13,000 --> 00:34:16,640 Speaker 5: What's the answer here, you're here to tell us it's 617 00:34:17,400 --> 00:34:19,560 Speaker 5: I mean, if you look at the standard textbook models 618 00:34:19,600 --> 00:34:21,360 Speaker 5: for how the Phillips go would work, I mean, we 619 00:34:21,400 --> 00:34:25,200 Speaker 5: should not have had that inflation outbreak, at least not 620 00:34:25,360 --> 00:34:26,640 Speaker 5: the persistent inflation. 621 00:34:27,040 --> 00:34:30,279 Speaker 3: Or clearly there were supply chains the flare up with 622 00:34:30,719 --> 00:34:33,320 Speaker 3: the used cast prices and so on that you've covered 623 00:34:33,480 --> 00:34:37,600 Speaker 3: extremely extensively on this podcast, but we should not have 624 00:34:37,719 --> 00:34:40,799 Speaker 3: had the persistent inflation cropping up because I think the 625 00:34:40,880 --> 00:34:44,080 Speaker 3: excess demand, if you like, was I mean, it was 626 00:34:44,120 --> 00:34:46,880 Speaker 3: clearly there. It had a very important role to play, 627 00:34:46,880 --> 00:34:50,279 Speaker 3: but it wasn't way off the charts, and yet we 628 00:34:50,360 --> 00:34:54,319 Speaker 3: still had this very persistent inflation taking hold. And by 629 00:34:54,360 --> 00:34:58,719 Speaker 3: the same score, we are very happy to see the disinflation, 630 00:34:59,480 --> 00:35:03,759 Speaker 3: and the disinflation has come and it's confounded. Some of 631 00:35:03,800 --> 00:35:06,520 Speaker 3: the pessimists have said that, look, we have to have 632 00:35:07,200 --> 00:35:10,400 Speaker 3: a very deep recession in order to bring the inflation down, 633 00:35:11,320 --> 00:35:14,120 Speaker 3: and that logic is completely watertight if you look at 634 00:35:14,120 --> 00:35:16,000 Speaker 3: the Philips curve. If you look at the Phillips curve, 635 00:35:16,960 --> 00:35:20,480 Speaker 3: you do need activity to slow very substantially to bring 636 00:35:20,520 --> 00:35:24,000 Speaker 3: inflation down. But we are very happy to see that 637 00:35:24,000 --> 00:35:26,920 Speaker 3: inflation has come down. So there are still many things 638 00:35:26,920 --> 00:35:31,080 Speaker 3: that we don't understand fully. I think having gone through 639 00:35:31,880 --> 00:35:36,080 Speaker 3: the pandemic and the shocks, especially the Russian invasion of Ukraine, 640 00:35:36,760 --> 00:35:40,560 Speaker 3: shocks the commodity prices, food and energy, these were very 641 00:35:40,640 --> 00:35:45,400 Speaker 3: unusual shocks that subjected the global economy to really unprecedented 642 00:35:45,480 --> 00:35:49,359 Speaker 3: a really unprecedented combination of sharks, and so I think 643 00:35:49,360 --> 00:35:51,879 Speaker 3: we have to be modest here. But I think one 644 00:35:51,880 --> 00:35:54,680 Speaker 3: thing is for sure, which is that if we knew 645 00:35:55,440 --> 00:35:59,640 Speaker 3: exactly what the channels of monetary policy transmission were, then 646 00:36:00,400 --> 00:36:02,200 Speaker 3: we were a little bit too over confident. We were 647 00:36:02,200 --> 00:36:05,040 Speaker 3: over confident there, and in that respect, I think one 648 00:36:05,080 --> 00:36:07,040 Speaker 3: of the candidates that we have to look at is 649 00:36:07,080 --> 00:36:11,560 Speaker 3: to what extent has determined out of debt meant that 650 00:36:11,800 --> 00:36:17,160 Speaker 3: short term rates are having less purchase on the real economy. 651 00:36:17,520 --> 00:36:20,800 Speaker 1: So to sum it all up, the risks are safe 652 00:36:20,840 --> 00:36:25,680 Speaker 1: assets can be the locusts for instability. There's still hidden 653 00:36:25,800 --> 00:36:30,440 Speaker 1: leverage in the system. Monetary policy might not be as 654 00:36:30,440 --> 00:36:33,800 Speaker 1: effective as we think because of the shift from banks 655 00:36:33,800 --> 00:36:36,800 Speaker 1: to bonds and the terming out of debt. And finally, 656 00:36:37,560 --> 00:36:41,359 Speaker 1: we're not clear how any of this works. These are 657 00:36:41,360 --> 00:36:42,360 Speaker 1: sobering thoughts. 658 00:36:42,920 --> 00:36:44,920 Speaker 3: You know, I wouldn't put it in those terms, sure, 659 00:36:45,560 --> 00:36:49,359 Speaker 3: and I think you probably overplayed at somebody's points, but 660 00:36:49,400 --> 00:36:52,480 Speaker 3: it's definitely. I mean, it's it's true of economics pore 661 00:36:52,560 --> 00:36:56,440 Speaker 3: generally and policymating especially. We just have to be very humble. 662 00:36:56,719 --> 00:37:00,520 Speaker 3: We're always learning, and I think what the last three 663 00:37:00,600 --> 00:37:03,640 Speaker 3: years has taught us is that we need to be 664 00:37:03,800 --> 00:37:09,120 Speaker 3: extremely open minded on what the channels are. And it's 665 00:37:09,440 --> 00:37:12,920 Speaker 3: very very fortunate that it seems that we're now we've 666 00:37:13,080 --> 00:37:15,880 Speaker 3: opened the door to a soft landing, it seems where 667 00:37:15,920 --> 00:37:19,279 Speaker 3: we haven't had the very deep recession to bring inflation down. 668 00:37:20,520 --> 00:37:22,560 Speaker 1: All right, Well, I think that's a great place to 669 00:37:22,719 --> 00:37:26,360 Speaker 1: leave our Jackson Hale series of Odd Loots discussions with 670 00:37:26,640 --> 00:37:30,600 Speaker 1: the note of very reasonable humility that you just described 671 00:37:30,600 --> 00:37:32,680 Speaker 1: to you. And thank you so much for coming back 672 00:37:32,719 --> 00:37:35,160 Speaker 1: on Odd Lots and walking through these issues with us. 673 00:37:35,239 --> 00:37:37,080 Speaker 2: Yeah, that was great, Thank you so much, and so great. 674 00:37:36,880 --> 00:37:39,239 Speaker 1: To Yeah, finally finally. 675 00:37:38,920 --> 00:37:40,399 Speaker 3: Do this in person. This great. 676 00:37:40,400 --> 00:37:42,480 Speaker 2: Thanks for the invitation, Thank you so much. 677 00:37:55,080 --> 00:37:57,360 Speaker 1: So Joe, always a treat to catch up with you, 678 00:37:57,400 --> 00:37:59,880 Speaker 1: and I'm so glad that we caught him while he 679 00:38:00,200 --> 00:38:03,200 Speaker 1: was how hiking and managed to drag him back for 680 00:38:03,239 --> 00:38:04,280 Speaker 1: a podcast recording. 681 00:38:04,640 --> 00:38:08,439 Speaker 2: I feel like it's a good thing. Humility is sort 682 00:38:08,440 --> 00:38:09,759 Speaker 2: of like maybe the latch. 683 00:38:09,480 --> 00:38:11,920 Speaker 1: Word humility should be the theme of the content. 684 00:38:11,920 --> 00:38:13,960 Speaker 2: I feel like humility has been the theme and it's 685 00:38:14,000 --> 00:38:16,439 Speaker 2: come up over and over again. And I don't think 686 00:38:16,520 --> 00:38:20,759 Speaker 2: anybody could look at the last three years and come 687 00:38:20,800 --> 00:38:23,800 Speaker 2: away with anything but some people, you know, maybe a 688 00:38:23,840 --> 00:38:26,360 Speaker 2: better intuition than others or whatever, but with it like 689 00:38:26,440 --> 00:38:27,680 Speaker 2: everyone needs a dose. 690 00:38:27,520 --> 00:38:31,280 Speaker 1: Of humility, absolutely, And I did think his point about 691 00:38:31,560 --> 00:38:34,080 Speaker 1: how you want to avoid the central Bank becoming the 692 00:38:34,280 --> 00:38:38,240 Speaker 1: first lender of last resort or the lender of first 693 00:38:38,280 --> 00:38:40,880 Speaker 1: resort makes a lot of sense. I remember after the 694 00:38:40,920 --> 00:38:44,520 Speaker 1: FED announced the corporate bond buying program, there were some 695 00:38:44,640 --> 00:38:47,080 Speaker 1: analysts that came out with notes and basically said, the 696 00:38:47,120 --> 00:38:50,520 Speaker 1: FED has changed the corporate bond market forever because now 697 00:38:50,560 --> 00:38:54,080 Speaker 1: we know that this backstop will come out if things 698 00:38:54,160 --> 00:38:57,160 Speaker 1: get bad enough. So you did see that moral hazard 699 00:38:57,239 --> 00:38:58,959 Speaker 1: sort of creeping into the market. 700 00:38:59,000 --> 00:39:01,280 Speaker 2: You know, and made the point you just talk about 701 00:39:01,520 --> 00:39:04,279 Speaker 2: in the ideal world, which never happens. You know, the 702 00:39:04,280 --> 00:39:07,359 Speaker 2: Central Bank and the fiscal authorities work together on some level, 703 00:39:07,400 --> 00:39:09,120 Speaker 2: and we saw it. We saw the breakdown in the 704 00:39:09,160 --> 00:39:11,120 Speaker 2: twenty tens. I'm always going back to this idea of 705 00:39:11,160 --> 00:39:14,239 Speaker 2: like how twenty twenties like the Bizarro twenty tens. In 706 00:39:14,320 --> 00:39:17,880 Speaker 2: the twenty tens, fiscal was probably too tight and we 707 00:39:17,960 --> 00:39:20,680 Speaker 2: expected central banks to do everything to get the economy 708 00:39:20,680 --> 00:39:23,000 Speaker 2: back going, and it was a long slow process and 709 00:39:23,040 --> 00:39:25,799 Speaker 2: many people were disappointed by the pace of the recovery. 710 00:39:26,040 --> 00:39:29,640 Speaker 2: It feels like in the twenty twenties, we're once again 711 00:39:29,719 --> 00:39:33,640 Speaker 2: the entire burden of the inflation adjustment, this time is 712 00:39:33,640 --> 00:39:36,399 Speaker 2: being put on the central banks. Actual they do seem 713 00:39:36,400 --> 00:39:38,880 Speaker 2: to be working cross purposes with fiscal authorities, and b 714 00:39:39,800 --> 00:39:43,360 Speaker 2: it does seem like that contributes to financial stability risks 715 00:39:43,600 --> 00:39:46,839 Speaker 2: when the only move really is higher and higher rates. 716 00:39:46,880 --> 00:39:49,799 Speaker 2: And then you get SVB like its situations very well. 717 00:39:49,800 --> 00:39:52,720 Speaker 1: Put, Joe, you basically just summed up what five hours 718 00:39:52,760 --> 00:39:53,760 Speaker 1: of All Blots episode. 719 00:39:53,800 --> 00:39:54,200 Speaker 2: There we go? 720 00:39:54,360 --> 00:39:55,600 Speaker 1: All right, shall we leave it there? 721 00:39:55,719 --> 00:39:56,359 Speaker 2: Let's leave it there? 722 00:39:56,440 --> 00:39:59,560 Speaker 1: Okay, this has been another episode of the All Bloughts podcast. 723 00:40:00,239 --> 00:40:00,600 Speaker 4: Away. 724 00:40:00,680 --> 00:40:02,480 Speaker 1: You can follow me at Tracy Alloway. 725 00:40:02,640 --> 00:40:05,280 Speaker 2: I'm Joe Wisenthal. You can follow me at the Stalwart. 726 00:40:05,360 --> 00:40:08,359 Speaker 2: You can follow our guest Hunan Sungtion at Hun Sung Shin. 727 00:40:08,719 --> 00:40:12,600 Speaker 2: Follow our producers Carmen Rodriguez at Carman Arman, dash Ol 728 00:40:12,600 --> 00:40:16,440 Speaker 2: Bennett at dashbod, and our special Jackson Hole producer, Sebastian 729 00:40:16,600 --> 00:40:21,040 Speaker 2: Escobar under dicibass. Follow all of the Bloomberg podcasts under 730 00:40:21,040 --> 00:40:24,000 Speaker 2: the handle at podcasts, and for more Oddlots content, go 731 00:40:24,080 --> 00:40:26,560 Speaker 2: to Bloomberg dot com slash odd Lots, where we have 732 00:40:26,560 --> 00:40:30,120 Speaker 2: a blog transcript. Tracy and I write a newsletter and 733 00:40:30,680 --> 00:40:33,360 Speaker 2: hang out with other fellow listeners in our discord really 734 00:40:33,360 --> 00:40:36,320 Speaker 2: fun place discord dot gg slashd loots. 735 00:40:36,360 --> 00:40:39,239 Speaker 1: And if you enjoy odd Lots, if you liked the 736 00:40:39,320 --> 00:40:42,480 Speaker 1: episodes that we did from the Jackson Hole Economic Symposium, 737 00:40:42,520 --> 00:40:45,560 Speaker 1: then please leave us a positive review on your favorite 738 00:40:45,560 --> 00:40:46,719 Speaker 1: podcast platform. 739 00:40:46,840 --> 00:41:13,640 Speaker 4: Thanks for listening in in