Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and unfortunately Tracy Ellaway is out this week.
Speaker 1: But the good news is we have one of our
Speaker 1: favorite recurring guests on the podcast. Today we're going to
Speaker 1: be speaking with screenavs to Vedanta. He's the director of
Speaker 1: research at the Jerome Levy Forecasting Center. Uh. Great voice
Speaker 1: and great insights on markets and economics, and today we're
Speaker 1: going to be talking a little bit about the Fed
Speaker 1: monetary policy, bubbles, economic volatility and things like that. There's
Speaker 1: a lot of um, there's a lot of belief out
Speaker 1: there that the FED contributes to instability bubbles, but a
Speaker 1: lot of the thinking is kind of muddled, sort of
Speaker 1: overly simplistic. Idea is about a low rate just lead
Speaker 1: to surgeon speculation. Uh. Screen of Oz has some more insightful,
Speaker 1: complex ideas about the nature of central banking over the
Speaker 1: last several decades and how it's contributed to less than
Speaker 1: ideal outcomes in the economy. And I'm gonna talk to
Speaker 1: him now, so sure. You thank you very much for
Speaker 1: joining us. Thank you, thank you, Joe. I'm good to
Speaker 1: be back. You know what's interesting before we get into
Speaker 1: you wrote this paper recently on inflation targeting, But before
Speaker 1: we get into that, it's funny. I was looking at
Speaker 1: a chart recently of just inflation. You can measure it
Speaker 1: obviously several different ways, and strip out of things over
Speaker 1: the last fifteen years, and probably further if you strip
Speaker 1: out oil prices, it's almost impossible to find any meaningful
Speaker 1: up or down trend at all, even the economic collapse,
Speaker 1: the boom or whatever. It's like, there's it's it kind
Speaker 1: of just stays the same. It's a dead flat Yeah,
Speaker 1: over read like this always strikes me. They get really excited.
Speaker 1: The three months annualized rate of change in core CPI
Speaker 1: excluding healthcare services is at its fastest level in three years,
Speaker 1: and they get really excited. But then you zoom out.
Speaker 1: It's like inflation hasn't changed dynamics in years. Yeah, and
Speaker 1: we have got used to that. You know that that stability,
Speaker 1: I mean that that even a small take up in
Speaker 1: the three months gets people excited. You know how much
Speaker 1: of they can be attributed to Fed policy in your view?
Speaker 1: The fact that inflation trends are so stable, I mean,
Speaker 1: what happens when inflation trends are stable? How much can
Speaker 1: it be attributed to FED? I think certainly FED has
Speaker 1: contributed to it. I mean, if you look at the
Speaker 1: FED policy in the last twenty thirty years, what it
Speaker 1: has done is implicitly they're not trying to I mean
Speaker 1: a lot of people attribute a lot of motives to FED.
Speaker 1: I just want to be careful. They're not trying to
Speaker 1: do anything. They are trying to do within their mandate. Now,
Speaker 1: it may be that the framework is wrong, which is
Speaker 1: what I believe, um, but what they have tried to
Speaker 1: do is they take two things very seriously low and stable.
Speaker 1: The stable part of it is is a lot more
Speaker 1: problematic than just the low part. In my opinion, it's
Speaker 1: if you have low with a little bit of volatility
Speaker 1: around it, that would be okay. Probably okay, maybe you
Speaker 1: need to cheat it up a little bit, but but
Speaker 1: you keep the stability. That you're pointing out is that
Speaker 1: this is partly the FEDS doing. So let's start. You
Speaker 1: wrote this paper and you took aim at a particular
Speaker 1: particular approach to monetary policy or framework. I guess maybe
Speaker 1: we want to be called called called inflation targeting. What
Speaker 1: is inflation targeting? When did it start? When did the
Speaker 1: FED adopt this current framework in your few The FED
Speaker 1: actually officially started inflation targeting only in two thousand twelve UM,
Speaker 1: but implicitly, if you look back, they probably have been
Speaker 1: doing it since the early nineties or maybe mid nineties
Speaker 1: at least, they have been doing that, and even before that,
Speaker 1: you know, if you look at the seventies when people
Speaker 1: really got, of course upset about inflation. So the original
Speaker 1: Humphrey Orkins Act actually called for low unstable inflation inflation
Speaker 1: to be like zero percent or you know, usually they
Speaker 1: said that to zero is not possible to percent over
Speaker 1: a long period of time. So it's been there. Implicitly,
Speaker 1: we have been doing inflation targeting in one form or
Speaker 1: the other at least since the mid nineties. What well,
Speaker 1: what is it? What is so it's just this idea
Speaker 1: that it's not enough to just have low inflation, but
Speaker 1: that they should really worry about any sort of volatility.
Speaker 1: And that is that, right? What is there? What's the
Speaker 1: main approach to achieving that goal? So the main approach
Speaker 1: to achieving those goals and this is the tricky part
Speaker 1: because the mechanism is never really clarified, you know, when
Speaker 1: you ask monitorists or when you ask the economists they
Speaker 1: would tell you, oh, it's all through expectations. But these
Speaker 1: expectations channels, I mean, if you really look at expecting
Speaker 1: inflation expectations, they have really not changed much or they
Speaker 1: don't seem to have any relation to reality sometimes. So
Speaker 1: you know, I don't know how the expectation channel works
Speaker 1: except in textbooks. But the basic idea between in the
Speaker 1: expectations channel is through some magic. I know it's they
Speaker 1: would never say magic. That we all expect inflation to
Speaker 1: be low and maybe around two. And if everyone sort
Speaker 1: of accepts that, and if we all accept that the
Speaker 1: FED will do whatever it takes to keep it there,
Speaker 1: then that has the effect of actually keeping it there.
Speaker 1: And probably the main way sort of mechanically that the
Speaker 1: FED keeps it there is by being very vigilant raising
Speaker 1: rates at any sort of hint that inflation might be
Speaker 1: picking up to reinforce this notion among consumers among businesses
Speaker 1: that they will do what it takes. That's right, and
Speaker 1: and that is that is that is clear, that signaling
Speaker 1: aspect of it, apart from raising rates. All the talk
Speaker 1: that goes along with it is one aspect of it.
Speaker 1: To be sure, you know, I mean, of course people
Speaker 1: to some extent. You know, if there is a set
Speaker 1: expectations that you know, prices go up by two persons,
Speaker 1: so people get hikes about two pers and people are happy,
Speaker 1: and you know, that's what gets set in the by
Speaker 1: seeing mechanism. But it doesn't work through the expectations way
Speaker 1: way that a lot of people think it works. But
Speaker 1: that is that's how they sort of explain it, or
Speaker 1: that isn't theory. Now you say inflation targeting officially only
Speaker 1: has existed since de facto, it's existed since the mid nineties. Okay,
Speaker 1: so then what was the pre the earlier approach. How
Speaker 1: does that substantively differ from what the Fed did in
Speaker 1: the sixties or the Seven Dayes or right in the
Speaker 1: sixties and seventies. They were not particularly seventies, it's a
Speaker 1: little bit different. But in the fifties and sixties, when
Speaker 1: they would see the economy heating up and inflation starting
Speaker 1: to pick up, they would just slam the brakes. But
Speaker 1: they didn't particularly have an specific target in mind. They
Speaker 1: were not trying to target inflation. But it was also
Speaker 1: much more from the industrial side, much more, you know,
Speaker 1: like a German type economy. There were large unions and
Speaker 1: there would be large union type bargaining. So the price
Speaker 1: mechanism was a little bit different. Agent plies mechanism. We
Speaker 1: don't have that kind of a thing, so you know,
Speaker 1: I mean prices were a lot more closely aligned with
Speaker 1: wages and productivity. Okay, so they they still fought inflation.
Speaker 1: They still wanted low inflation, and as you say, the
Speaker 1: Humphrey Hawkins mandate required them to have that. But it
Speaker 1: wasn't like we have this number, it's about two percent,
Speaker 1: and we're going to do what it takes. We just
Speaker 1: don't want inflation to go up. And if it looks
Speaker 1: like it's going up, we're starting to go up, we're
Speaker 1: gonna find it. That's correct. I think the difference in
Speaker 1: in the post is especially post let's say, let's put
Speaker 1: that as a cut off, is the mandate on stable
Speaker 1: inflation and what they think contributes to the inflationary pressures.
Speaker 1: You know, see in the past, they used to have
Speaker 1: some kind of even if you try to recast it
Speaker 1: into a model and try to backfit the data, they
Speaker 1: did some tailor rule kind of a thing all through
Speaker 1: up to They have been doing that ever since as well,
Speaker 1: But they also have an extra emphasis or not just
Speaker 1: the output gap, but on how fast you're reaching the
Speaker 1: output gap. I mean, so you let's say you have
Speaker 1: a huge output gap. Let's say not for for simplicity sake,
Speaker 1: NIRO is five percent or unemployment is ten percent. The
Speaker 1: gap is huge, right, and that NIRO made self overstate
Speaker 1: and unemployment. I mean then the natural rate. But that's
Speaker 1: a huge gap. But let's say you're accelerating. Should the
Speaker 1: feed BI worried? Right? Should? Should the economy is accedent?
Speaker 1: Should the FEBIBI worried because the gap is so big?
Speaker 1: But they seem to data, I mean, the empirical work
Speaker 1: shows that they seem to be really concerned if you're
Speaker 1: accelerating very fast, even if the gap is huge. So
Speaker 1: even if there's it's clear that al right, everyone thinks
Speaker 1: that ten percent is a very long way from full employment.
Speaker 1: Like what we saw obviously in the immediate during the
Speaker 1: natural crisis, there's almost no level if if if we
Speaker 1: suddenly got hot growth, right, it doesn't matter how big
Speaker 1: that gap is. That makes FED officials nervous at that,
Speaker 1: that's right, and you who you saw that early in
Speaker 1: the in the expansion, right, they will not. People keep
Speaker 1: saying now, in hindsight, oh, the Fed should have been
Speaker 1: more accommodative. They should have said this, said that. But
Speaker 1: you know, like four two thirty six years ago when
Speaker 1: they did the pay per tantum thing. I mean, you know,
Speaker 1: when things heat up a little bit, they react to
Speaker 1: the heating up, and I think that's kind of new.
Speaker 1: So you did not see that in the sixties and seventies.
Speaker 1: If there was a big output gap, if it was
Speaker 1: clear that there was a lot of people who are
Speaker 1: left to come back in the workforce, they would be
Speaker 1: they would welcome fast growth because that would get them
Speaker 1: to the goal fast. So was that green Span who
Speaker 1: sort of was the first I mean in a way,
Speaker 1: I mean sometimes it's interesting because green SPAN's legacy I
Speaker 1: think over the years is I think people deteriorated a
Speaker 1: little bit, but you could make me you know, sometimes
Speaker 1: I think that he made some interesting choices and would
Speaker 1: certainly seemed to tolerate the boom a little bit in
Speaker 1: a way that maybe modern central bankers will be more uncomfortable. Left. Yeah,
Speaker 1: the longer you stay, the greater it sounds that your
Speaker 1: emits get stublished because something will go wrong, you know, Um, yeah,
Speaker 1: I mean he did in the nine nineties to do
Speaker 1: some extent for sure. He let the boom boom run.
Speaker 1: And and that is right. I mean, see, there are
Speaker 1: two aspects to it letting the boom run is it's
Speaker 1: not necessarily bad. But the problem with letting the boom
Speaker 1: run in the backdrop of an inflation topeting frameworok, with
Speaker 1: the Fed states it's going to keep inflation control leads
Speaker 1: to build up a leverage and the financial exercise that's
Speaker 1: the issue, right, And so this gets to kind of
Speaker 1: one of your key points, but also sort of what
Speaker 1: seems like the unspoken or increasingly vocalized problem with all
Speaker 1: of this, which is that so far we've just been
Speaker 1: talking about this sort of push pole relationship between unemployment
Speaker 1: and inflation. But then there's this added dimension of financial
Speaker 1: leverage and speculation. Right, So we had a very good
Speaker 1: economy throughout much of the nineties, but when things are
Speaker 1: good for a long time, people get reckless with speculation,
Speaker 1: and we've a right, that's right in the beginning, as
Speaker 1: I mentioned as like, you know, it's kind of amazing,
Speaker 1: like inflation doesn't do anything. So on one level of
Speaker 1: the economy has been incredibly stable, and that's some prices.
Speaker 1: But this pursuit of stability on the inflation front, in
Speaker 1: your view, creates instability elsewhere, right, because when you have
Speaker 1: such stable inflation, the fact is making two kinds of
Speaker 1: promises effectively. Right when you're saying that inflation is going
Speaker 1: to be stable. Look, if you are an investor in credit,
Speaker 1: it's telling you that you don't need to worry about
Speaker 1: inflation e wroting your real returns the value of payments. Yeah,
Speaker 1: and you also, Dean, don't need to worry about deflation,
Speaker 1: which would be really bad because the defaults would pick
Speaker 1: if they're making you a very narrow coutodel promise. And
Speaker 1: if you're that, what does it encourage you? To encourage
Speaker 1: you so that Fred is going to do whatever it
Speaker 1: takes to do that right to hit that mandate. Yeah,
Speaker 1: so you should go ahead and make make loans. And
Speaker 1: that's why you see if you look at this era,
Speaker 1: that's when you've had these junk bonds. There was no
Speaker 1: susting called junk bond. Before there used to be investment
Speaker 1: grade bonds that would become junk, but there was no
Speaker 1: market called junk bonds the whole junk bond market has
Speaker 1: been explosive in this. You know, I think this is
Speaker 1: just an incredibly important point, and I think one that
Speaker 1: we should just slow down for a second for people
Speaker 1: to understand this idea that if I make a loan
Speaker 1: to you, there's two ways I can lose. Right, So,
Speaker 1: if inflation shoots up, and you know, you have to
Speaker 1: pay me back a hundred dollars every month, and inflation surges,
Speaker 1: the value of that hundred dollars a month is less.
Speaker 1: So that was an unfortunate choice by me. On the
Speaker 1: other hand, if there's a recession, you might lose your
Speaker 1: job and not be able to pay me back at all.
Speaker 1: And so what you're describing with this inflation targeting and
Speaker 1: by keeping it very stable, and you say they're essentially
Speaker 1: making two bads, is the FED is taking both sort
Speaker 1: of normal risks for lenders off the table, right, And
Speaker 1: that's just a fantastic for lenders. That is fantastic for lenders.
Speaker 1: But what it does in a secular census built up
Speaker 1: leverage in the system, which is to be very different
Speaker 1: from which I want to distinguish this. You know, there's
Speaker 1: a lot of model play in economic debates, policy debates
Speaker 1: that how we need to purge the excesses from building up,
Speaker 1: you know, like you know Andrew Mellon saying that stuff,
Speaker 1: and that's doing that kind of thing is incredibly painful
Speaker 1: for the most disadvantaged people in society. So I just
Speaker 1: want to be careful. It's not that the FED should
Speaker 1: be hiking rates, you know, perfectly when things are really bad.
Speaker 1: That's not what they should be doing. I think it
Speaker 1: is the mandate per se that creates. So the issue
Speaker 1: is when inflation is low, and so let's say the
Speaker 1: three month moving I've just went about two percent, but
Speaker 1: we have like five percent away from anywhere near closing
Speaker 1: the slack. It's early in the cycle where the FED
Speaker 1: is this slamming down. That really is the problem, which
Speaker 1: also has been shown in a recent paper. What the
Speaker 1: guy I mentioned in the beginning is that they're everyone
Speaker 1: criticizes the FED, and there's all different kinds of criticisms,
Speaker 1: and there is this view that, uh, you know, the
Speaker 1: Feed prints a bunch of money that people go out
Speaker 1: and make speculative um speculative investments. And you're describing a
Speaker 1: very different mechanism than what I think is sort of
Speaker 1: the typical I don't know, the sort of gold bug
Speaker 1: kind of Austrian crankish, you know, I think there is
Speaker 1: I think a lot of people have this like that
Speaker 1: is the mechanism they would agree, They're like, yeah, the
Speaker 1: fet is causing bubble? Is this because they print all
Speaker 1: this money and they keep interest rates really low and
Speaker 1: then people rushed to buy a speculative assets And you're
Speaker 1: what you're saying kind of is that there is a
Speaker 1: connection between FED policy and speculation and too much leverage.
Speaker 1: It's just different than a common mechanism this previous And
Speaker 1: I don't criticize the FED for doing what their mandate says,
Speaker 1: which is trying to pursue full employment. You know that
Speaker 1: if you're slamming the brakes, I mean, so slam the
Speaker 1: break in two thous eight and we did that. What happened, right?
Speaker 1: I mean you you are the human cost of doing
Speaker 1: these kind of things is incredible, which somehow people seem
Speaker 1: to I mean paper over when they talk about I
Speaker 1: think the issue, My issue is if we want to
Speaker 1: address these issues of cleaning up everything and have a
Speaker 1: stable economy and stable growth, we need to think rethink policy.
Speaker 1: But not there's no point in criticizing the FED because
Speaker 1: they've been given the mandate of trying to manage the
Speaker 1: globe macro economy, and these are the tools that they have.
Speaker 1: What are they supposed to do with it? So what
Speaker 1: what should they do? I mean? So is the is
Speaker 1: the issue that the FED in any mandate doesn't have
Speaker 1: the tools to do this, and that we need more
Speaker 1: more aggressive fiscal policy in some way, and that essentially,
Speaker 1: no matter what happened, if we lean entirely on monetary
Speaker 1: policy for macroeconomic stabilization, that will never pably lead to
Speaker 1: these kind of risky dead build ups. Yes, you need
Speaker 1: fiscal policy because fiscal policy, apart from being stabilizing, you know,
Speaker 1: in a in a macro sense, they flow of financial flows,
Speaker 1: you know, profits and everything. It also in a balance
Speaker 1: sheets sense, what you're doing with fiscal policy, you're adding
Speaker 1: more safe assets to balance sheets. Therefore you're making them
Speaker 1: more resilient, right right, I mean you're adding more treasury
Speaker 1: bonds to portfolios. You're making it more safe. You know.
Speaker 1: What's weird to me is going back to the mechanism
Speaker 1: view which inflation targeting leads to build ups. Is I
Speaker 1: think that you know the FED, as you put it,
Speaker 1: has created nirvana for lenders. So they're a banker, if
Speaker 1: you're a lender, if you have capital, this is the
Speaker 1: absolute sweet spot. Shouldn't this be like what all the
Speaker 1: conspiracy theorists adopt, because this actually kind of seems like
Speaker 1: you know, the real tinfoil had types who think the
Speaker 1: FED is like secretly with the elites and all that.
Speaker 1: Shouldn't they adopt the view that what the FED is
Speaker 1: doing is, say, day up an economic Goldilocks. That's just
Speaker 1: absolutely beautiful. If you're the if you're the entities that
Speaker 1: have money and the ability to land. That is that
Speaker 1: is actually true in some sense. I mean they're not
Speaker 1: doing it there. I mean there's no grand constitucy, not
Speaker 1: intentional we're going to do this to enriched creditors, but
Speaker 1: the facto they've created a great scenario if you're a lender,
Speaker 1: that is correct. That's absolutely true, and that's why it
Speaker 1: has been associated with the rice of finance right in
Speaker 1: the rice of the financial sector in the last thirty years,
Speaker 1: you know, overall, in gross value added, in profits and
Speaker 1: in everything. You know, it's clearly been associated with this.
Speaker 1: You know, I don't want to pin it all on
Speaker 1: the FED policy. Lots of each complicated issues going on,
Speaker 1: but certainly there is contribution from FED policy. Why did uh,
Speaker 1: there's actually a real diversion. But can you mentioned inflation?
Speaker 1: They would like slam the brakes to two thousand eight.
Speaker 1: I think in Europe they got really unnerved by oil
Speaker 1: and eleven. Why did it? Like like the modern era,
Speaker 1: did central markers still get so freaked out by oil prices?
Speaker 1: Because nineteen seventies and if you look at most of them,
Speaker 1: of the people who are in central banks, these are
Speaker 1: people whose formative views were in the seventies, all of them, right,
Speaker 1: So that's why inflation when when people get I mean,
Speaker 1: David Graeber just wrote something and all economies got really
Speaker 1: upset about, right, But they don't do some soul searching.
Speaker 1: Why has inflation gotten so much preponderance in the economic literature?
Speaker 1: Inflation inflation, inflation, inflation targeting, inflation, that costs of interestion
Speaker 1: And actually if you look at the data, this is
Speaker 1: very much from the mainstream. The very major paper written
Speaker 1: by Nakamura who used to be at Columbia but she's
Speaker 1: now at Berkeley. I think fantastic paper. She just did
Speaker 1: amazing work with this, she and her authors elusive costs
Speaker 1: of inflation. So she went back and looked at the
Speaker 1: nineteen seventies data. She did all this micro fish work
Speaker 1: to get that data, and and she found that the
Speaker 1: costs of inflation that people talk about on the textbook
Speaker 1: or in the models new Kcane models, but simply not
Speaker 1: there in the seventies. Whatever the costs that people talk about,
Speaker 1: this is in terms of real costs in the economy,
Speaker 1: in terms of well, what is the theoretical idea behind
Speaker 1: the idea that inflation is bad? So the inflation what
Speaker 1: what what they're saying is it distorts relative prices. If
Speaker 1: there's high inflation and therefore high variability and inflation high
Speaker 1: volatility information, it creates the distortion in the relative prices,
Speaker 1: and thereby it creates wrong signals for allocation of capital,
Speaker 1: allocation of output, allocation of resources. That's so the essential
Speaker 1: belief that inflation should be both low and stable is
Speaker 1: this idea that if we just like get prices fairly
Speaker 1: predictable and stable, then all the other decisions that are
Speaker 1: actually important for the economy. Company is making investments and
Speaker 1: so forth, they do a better job at that that
Speaker 1: the economy, and then theoretically all these other things are
Speaker 1: like downstream from inflation. They do a better job of that.
Speaker 1: And so we've been talking about the speculative access that
Speaker 1: emerged to inflation targeting. But go on, what is what
Speaker 1: are the costs in terms of other aspects of the
Speaker 1: real economy, Because again, if you look over the last
Speaker 1: fifteen years, they've obviously achieved inflation is very low and stable,
Speaker 1: but I mean for most of that time employment has
Speaker 1: been far away from anything that anyone call full employment.
Speaker 1: So they're also failing on that front. Yeah, I mean,
Speaker 1: if you look at the standard Nucincan model, this is
Speaker 1: how absurd it is. And people, this is when the
Speaker 1: economists are going to give me a lot of blowback
Speaker 1: on it. How absurd it is. The cost of having
Speaker 1: a little bit volatile inflation that distarts relative prices. Apparently, okay,
Speaker 1: do the data doesn't show that at all. It's more
Speaker 1: than cost of recessions, much more than the cost of recessions.
Speaker 1: In their their view, recessions are preferable to having inflation
Speaker 1: be a little more volatile. That is how it is.
Speaker 1: But in the last thirty years since seventy nine, not
Speaker 1: thirty years, forty years now unemployment rate has been above NIDO.
Speaker 1: I don't believe even I do. But let's take that
Speaker 1: is the non what's it for, the non accelerating inflation
Speaker 1: rate of unemployment? And so we don't even I know,
Speaker 1: you don't even believe that this number actually exists. But
Speaker 1: the premise of that is that of this idea that
Speaker 1: NIRA exists, is that there is a level of unemployment
Speaker 1: below which suddenly inflation really takes. But the vast majority
Speaker 1: of time we've been above that, we have been more
Speaker 1: than two thirds of the time since in the last
Speaker 1: four years, seventy the time we have been above NIDOL,
Speaker 1: So seventy percent of the time we had about running
Speaker 1: the economy on slack. Just imagine. So that why and
Speaker 1: why why does it this get more attention in the
Speaker 1: academic literature the fact that I don't know, I mean,
Speaker 1: why why the same thing that is what I'm trying
Speaker 1: to save. Because I tweeted the other day this the
Speaker 1: chart of like inflation being stable and someone's like, oh,
Speaker 1: so you're what you're saying is the FED is doing
Speaker 1: its job, and well no, because they have two mandates,
Speaker 1: so they're like they're one of them is doing one mandate,
Speaker 1: the Low and Stable Inflation mandate. Yeah, I guess you
Speaker 1: could say they're doing their job, but it's clearly they're
Speaker 1: failing on the second one. It's an exorbitant cost of
Speaker 1: achieving a mandate for whose benefits are very nebulous. That's
Speaker 1: what it is. The FAN is a dual mandate of
Speaker 1: low and stable inflation as well as UH maximum employment.
Speaker 1: It's to all central bankers more or less. I think
Speaker 1: those are not that the second one, the employment part
Speaker 1: of the mandate, is the lesser among equals. I do
Speaker 1: think they do. And in the other case, they don't
Speaker 1: even have that mandate, like you c doesn't have their mandate.
Speaker 1: You see these mandates, So they don't even have the mandate.
Speaker 1: So well, they don't care about it. So let's go
Speaker 1: back to policies that could ameliorate this. And I think
Speaker 1: the key thing is, you know, you're not talking about liquidation.
Speaker 1: You're not saying, oh, yeah, we gotta like raise rates
Speaker 1: and squeeze out the bad debts and cause a recession.
Speaker 1: But this what you're saying is that from a much
Speaker 1: bigger secular standpoint, it's not about twenty nineteen, stocks are
Speaker 1: high and debt actually nervous. It's that for decades we've
Speaker 1: run a regime in both ups and downs. Correct that
Speaker 1: contribute to a build up of uh risky debt. And
Speaker 1: we had your colleague on the podcast and David Leaving
Speaker 1: a few weeks ago, he talked about that risky debt.
Speaker 1: But this is not a cyclical thing. It's just it's
Speaker 1: a it's a fixture of the economy. That's right, it's
Speaker 1: a fixure. It's a fixture of the economy. And so
Speaker 1: how do we that that contributes to instability? Like it
Speaker 1: leads to the kind of thing that we had in
Speaker 1: two thousand and eight and then before that in the
Speaker 1: banking problems. So how do you deal with that? I
Speaker 1: think you certainly your fiscal policy has to play a
Speaker 1: much more active role number one. Number two. You know,
Speaker 1: Minsky said this also that regulation will always the innovation
Speaker 1: will always be ahead of regulation, but you do need
Speaker 1: to put to keep on improving on regulation. So the
Speaker 1: faiths approach generally has been Okay, we're able to do
Speaker 1: monetary policy with interest rates or something like that, but
Speaker 1: we're not really going to do much regulate ree one
Speaker 1: form or the other like in the green span, resisted
Speaker 1: doing anything but with margin that people people are talking about.
Speaker 1: I don't know whether that's the right approach, but one
Speaker 1: has to think about a variety of regulatory tools. Like
Speaker 1: in the in the in the in the housing bubble
Speaker 1: and it was going, you could have kept interest rate slow,
Speaker 1: but try to come down on the on the risky
Speaker 1: landing puts more guidances. They did come up with the guidance,
Speaker 1: But what's like in two thousand and six with the guidance. Powell,
Speaker 1: the current Frenhair seems cognizant of this tension. Uh. He
Speaker 1: does not seem like he has any appetite too um
Speaker 1: slow the economy via interest rates. He doesn't seem particularly
Speaker 1: concerned about inflation. Maybe less concerned probably than even some
Speaker 1: of his predecessors. He does seem concerned. I think it
Speaker 1: was um. I think it was Jackson Holt summer twenty eighteen,
Speaker 1: and he talked about how imbalances don't really show up
Speaker 1: in inflation, but they show up in financial excess, so
Speaker 1: they find So do you have some hope that the
Speaker 1: Fed in its current direction is maybe thinking about at
Speaker 1: least identifying the problem a little bit more, if not
Speaker 1: necessarily coming up with the tools to curb speculation other
Speaker 1: than through the rage channel, at least identifying that the
Speaker 1: current setup is kind of insufficient for all the real
Speaker 1: concerns that are out there. I think so. I think
Speaker 1: if you see even the academically treature, a lot of
Speaker 1: work is being done on on the macroprudential staff and
Speaker 1: on and even you know, the dog trunk. Whether the
Speaker 1: legislation is perfect or not, I do not know legislation
Speaker 1: is ever perfect, but you know it's a working progress.
Speaker 1: But you can see that it certainly has contributed to
Speaker 1: frictions and you know, complete easy lending and easy policies.
Speaker 1: So if we don't get the same crazy things happening,
Speaker 1: do you think that economists who are doing their work
Speaker 1: now and then over the coming years um and maybe
Speaker 1: entering academia or central banking will carry the scars of
Speaker 1: mass unemployment with them and put an emphasis more on
Speaker 1: the employment side fifteen years from now, twenty years from now,
Speaker 1: in the same way that central bankers in the nineties
Speaker 1: had their formative years the inflation of the seventies. Probably,
Speaker 1: but I don't see that much of it. I mean,
Speaker 1: I I do read quite a bit of I don't
Speaker 1: see that much of, but what I do see a
Speaker 1: lot as much more of the macro prudential stuff, you know,
Speaker 1: or the financial crisis and the financial friction modeling. I
Speaker 1: think that advices are still probably people who are still
Speaker 1: very much focused on inflation. It's funny like I, I mean,
Speaker 1: I know what you're saying, and I you know, I
Speaker 1: don't read much academic literature, but I am surprised at
Speaker 1: the number of you know, smart people that I follow
Speaker 1: out there who are like still like pretty kind of
Speaker 1: dead enders on the sort of new Kanzian models that
Speaker 1: you describe. Despite I mean, to me, it's just a
Speaker 1: sort of lay observer of this who's not steeped in
Speaker 1: the literature. It looks like they've mostly failed. It looks
Speaker 1: like a they haven't delivered much stability and be that
Speaker 1: the models they have, for say, even anticipated when inflation
Speaker 1: is going to take it off. Everyone seems to have
Speaker 1: embarrassed themselves on this and yet playing large. There's a
Speaker 1: lot of people who don't strike me as having done
Speaker 1: a particular amount of soul searching or you know, how
Speaker 1: long it takes to learn the apparatus learned the math
Speaker 1: behind it, recording behind it, how much investment in human
Speaker 1: capital it takes to do that, and are you going
Speaker 1: to throw it away? Think about it if you had
Speaker 1: put it that cost, I know, you know, that's that's
Speaker 1: really what it is. I mean before we go so,
Speaker 1: you know, the the sort of extreme other end of
Speaker 1: the sort of new Canadian idea is the sort of
Speaker 1: modern monetary theory school, which essentially says the FEDS should
Speaker 1: just set interest right to zero and they should all
Speaker 1: just go on vacation and that all of the sort
Speaker 1: of task of fighting inflation and uh, maintaining macroeconomic stability
Speaker 1: should be left to fiscal policymakers or policymakers in general,
Speaker 1: are including non fiscal tools, regulatory tools, price controls, whatever
Speaker 1: it is to fight inflation, maybe other supply side things
Speaker 1: in terms of busting up busting up rent seekers and cartels.
Speaker 1: Is that too far? Like, what is the proper role
Speaker 1: for in your view, for monetary policy to help curb
Speaker 1: some of the excesses in the economy. And you know,
Speaker 1: how far should we go in the other spectrum to
Speaker 1: where you said we need more active fiscal policy? But
Speaker 1: is there you know, how far actually do we go well,
Speaker 1: you know, I don't go that far. I am more
Speaker 1: in the camp of Tom Pally, who has been a
Speaker 1: critique of m MT. I'm not a critic, bitter critical amity,
Speaker 1: and I consider them my friends. So but I am
Speaker 1: more on the Tom Palley camp that monetary policy is
Speaker 1: too important a tool to be left in the in
Speaker 1: the garage there and then the pool box and not
Speaker 1: to be used. I think it has a role to play.
Speaker 1: So that's what we really need. We need to rethink.
Speaker 1: And I certainly don't think we can just keep it
Speaker 1: at zero and keep it at that, you know, so
Speaker 1: some role to play still, but it's just this overreliance
Speaker 1: that's created the dead bold That's right. That is exactly
Speaker 1: the issue I think the problem in in thinking about
Speaker 1: any policies. We have to be humble. I mean, and
Speaker 1: Minsky said this, that you are never going to be
Speaker 1: Capitalism is is an innovative animal. It's a complex system
Speaker 1: which will adapt and change as you make more rules.
Speaker 1: People who are innovate and find their way out of rules.
Speaker 1: So you cannot think that you're ever going to team
Speaker 1: this beast. So that in in in a way, but
Speaker 1: we have to find ways in which we minimize the
Speaker 1: pain for vast majority of the people. That's the key issue,
Speaker 1: and then we can you know, we used to have
Speaker 1: recessions in there in the fifties and sixties. They were
Speaker 1: severe recessions, but they didn't have lasting scars. Unlike the
Speaker 1: last several recessions, each one of them. We take like
Speaker 1: six years to come out of it in terms terms
Speaker 1: of get back to full employment. You know, that's the
Speaker 1: that's the damage we do. Even though this is a
Speaker 1: you know, we're having this conversation about some big secular
Speaker 1: themes right now in the US economy. Do you see
Speaker 1: signs of other aspects of the private credit market that
Speaker 1: concern you right now? No? I mean the the corporate
Speaker 1: credit corporate that has gone up. People, corporate corporate leverages
Speaker 1: near record levels. Uh. And that's partly because you know,
Speaker 1: interest rates are low and that enables people to when
Speaker 1: earning sealed is high. But you do not have too
Speaker 1: much capacity for growth. You don't need to invest. So
Speaker 1: what you do is you do the buybacks, which people
Speaker 1: keep criticizing. But what else are they supposed to do
Speaker 1: with the money, I mean giving their money? And they're
Speaker 1: doing it all right, well, sure of us. Great to
Speaker 1: have you on. Always love talking to you and I
Speaker 1: appreciate your appearing again on. Thank you so much, Thank you.
Speaker 1: I hope you enjoyed the episode today. Sure, he is
Speaker 1: always one of my favorite people to talk to. And
Speaker 1: I think this idea that you know that the FED
Speaker 1: has created a sort of nirvana for creditors is such
Speaker 1: an important concept because there's a lot of confusion about
Speaker 1: the relationship between monetary policy and asset bubbles and so forth,
Speaker 1: and I find this framework to be uh, this this
Speaker 1: explanation to be very compellingant I hope you did too.
Speaker 1: So this has been another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisenthal. You can follow me on Twitter at
Speaker 1: the Stalwart. And even though she wasn't here, you should
Speaker 1: follow Tracy on Twitter. She's at Tracy Alloway. And definitely
Speaker 1: follow a Strinavas on Twitter. He's at T three one
Speaker 1: of my favorite follows. Just great all around. Be sure
Speaker 1: to follow our producer on Twitter, Laura Carlson. She's at
Speaker 1: Laura M. Carlson. And check out all of the Bloomberg
Speaker 1: podcasts on Twitter set the handle at podcasts. Thanks for listening.
Speaker 1: O