Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Allaway. Tracy, obviously, one
Speaker 1: of the big themes that we've been discussing for months,
Speaker 1: for maybe years, is that we really are in a
Speaker 1: era of policy experimentation, particularly with respect to our monetary policy.
Speaker 1: I've been thinking about this, maybe we should change the
Speaker 1: name of odd Looughts to odd Monetary Policy unconventional monetary policy.
Speaker 1: It does feel like we've been talking about this over
Speaker 1: and over and over and over. Let's uh, let's revisit
Speaker 1: that name. That's fair enough. I don't have it quite
Speaker 1: rolls off the time, you guys. I absolutely true. Just
Speaker 1: like an extraordinary amount of sort of rethinking thinking going
Speaker 1: on about the conventional wisdom that Leave talked about. I mean,
Speaker 1: we do episode of their episode and just sort of
Speaker 1: like what people are learning, and it really does feel
Speaker 1: like the sort of this moment is, you know, the
Speaker 1: intersection of two things. There's the long term trends and
Speaker 1: already there was this sort of rethinking about the shape
Speaker 1: of policy, and then this sort of acute need for
Speaker 1: immediate innovation and experimentation and aggressive action on the fly. Yeah.
Speaker 1: I think it's that thing that people have been saying,
Speaker 1: which is that the coronavirus crisis has basically accelerated a
Speaker 1: lot of the trends that we were seeing before this year.
Speaker 1: So with central banking and with monetary policy. We had
Speaker 1: seen a lot of criticism about monetary policies, ability to
Speaker 1: generate inflation, its ability to generate reasonable levels of growth.
Speaker 1: People were already talking about the need for fiscal stimulus
Speaker 1: and the sort of handoff too governments from central banks,
Speaker 1: and all of that has crystallized this year thanks to
Speaker 1: the economic crisis. Now, the one the one thing I
Speaker 1: should uh sort of heavy at this with is it's
Speaker 1: almost always in the context of developed markets that we
Speaker 1: talked about this. So as you mentioned the inability of
Speaker 1: central banks to generate inflation, you know, as they say
Speaker 1: that's a that's a first world problem of the high
Speaker 1: like most of the world, Historically, for most countries, the
Speaker 1: inability to generate inflation has not been the issue and
Speaker 1: arguably still isn't it at all very much a first
Speaker 1: world problem, And a lot of emerging markets they obviously
Speaker 1: would have the opposite problem. I would say that we
Speaker 1: have seen one of the really interesting things about this
Speaker 1: year is we are seeing emerging markets start to do
Speaker 1: things a little bit differently when it comes to monetary policy. So,
Speaker 1: for instance, the Bank of Indonesia is doing debt monetization
Speaker 1: and I think it's really one of the first ones,
Speaker 1: certainly in e M to to do that. And that's
Speaker 1: been interesting to watch to see emerging market economies take
Speaker 1: on unconventional monetary policies that we associate more closely with
Speaker 1: developed markets totally. And I think that actually something we
Speaker 1: need to UH explore a lot more UH in the
Speaker 1: future episodes, which is whether this UM, this crisis actually
Speaker 1: revealed maybe in a good way that e ms have
Speaker 1: more policy space than previously anticipated things like do we
Speaker 1: maybe they have more ability to do that? But I
Speaker 1: want to UM, you know, today's conversation. I'm very excited
Speaker 1: about our guests because she's someone with a very distinct
Speaker 1: background that's very different from most of the people we
Speaker 1: speak to. Our guest today is a Ruth Privoy. She
Speaker 1: is the founder and CEO of SINK. Thisis b NA Sierra,
Speaker 1: which is a Caracas based consulting firm UH focusing in
Speaker 1: large UH in large part on Venezuela and country risk there.
Speaker 1: But also she was the president of the Central Bank
Speaker 1: of Venezuela from to the first woman in that position,
Speaker 1: and just someone who by dint of that perspective Venezuela,
Speaker 1: of course we all currently associate with both the sort
Speaker 1: of massive economic collapse and hyper inflation. Uh. Someone with
Speaker 1: a sort of very interesting perch in perspective on the
Speaker 1: state of the world should be plenty of interesting things
Speaker 1: to discuss. So Ruth, thank you very much for joining us.
Speaker 1: Thanks for having me. Ruth, just sort of give us
Speaker 1: your story, you know, I did I get I mentioned
Speaker 1: your title and your background. Um, but obviously you have
Speaker 1: an extraordinary past, and so for people who aren't familiar
Speaker 1: with the work that you've done and your experience over time,
Speaker 1: sort of give us the short book jacket bios speak.
Speaker 1: My professional career was shaped by the Central Bank of Venezuela.
Speaker 1: I started working there when I was a student at
Speaker 1: the university. My mentor was a German economist who came
Speaker 1: to Venezuela in nineteen thirty nine fleeing from Germany. His
Speaker 1: wife was Jewish and he sought refuge in Venezuela at
Speaker 1: a time when Latin America was establishing central banks all
Speaker 1: over under the influence of the German economist called Herman Max,
Speaker 1: who went to Chile and other countries and helped establish
Speaker 1: a central bank. And our central bank was created in
Speaker 1: nineteen forty. Mr Peltzer, my mentor, was my professor at
Speaker 1: the university, invited me to work at the central bank,
Speaker 1: and the to a bank became sort of my guiding start.
Speaker 1: I had a career there. I then went to work
Speaker 1: in the private sector, and in in the midst of
Speaker 1: political turbulence, I was invited to become the governor of
Speaker 1: the central Bank. I got to the central bank hoping
Speaker 1: I could help establish the central bank's independence and stabilize inflation.
Speaker 1: At the time, because um I strongly believe that central
Speaker 1: bank independence adds value to a country, to its prosperity,
Speaker 1: to its stability. I got to the central bank. That
Speaker 1: was in itself an ambitious goal because a fiscal dominance,
Speaker 1: if you have a country that is running a heavy
Speaker 1: fiscal deficit, there's little room for monitoring policy. And in
Speaker 1: a country that is oil based, where the money is
Speaker 1: created by extraction of oil and spent by the government
Speaker 1: and largely allocated by politicians on a very short term
Speaker 1: miss perspective. Monetary stability is challenging. UH in the country
Speaker 1: undertook a massive structural reform aimed at deregulating, rebuilding institutions,
Speaker 1: getting rid of controls, and establishing stability. But we also
Speaker 1: had a strong political backlash, and in February of nine
Speaker 1: two we had the first military coup by Ugo Chaoist,
Speaker 1: who then became the president of the country. In April two,
Speaker 1: when I got to the Central Bank, we were in
Speaker 1: the midst of political turbulence which lasted for over two
Speaker 1: years and then got worse and worse, and so the
Speaker 1: banking crisis was brewing and exploded. So I lived through
Speaker 1: the banking crisis from the central back. Can I I
Speaker 1: know you're you're bringing up us up to speed here,
Speaker 1: but can I step back for for one second. I
Speaker 1: think when a lot of people think about Venezuela now,
Speaker 1: they think of sort of a basket case economy, very
Speaker 1: high inflation, despite having all that oil wealth. Can you
Speaker 1: talk about how Venezuela got into that position, Because my
Speaker 1: understanding of Latin American economics is that a lot of
Speaker 1: countries were pursuing import substitution and those types of development policies.
Speaker 1: But something happened in Venezuela that sort of made everything
Speaker 1: go off the rails. What was that. Venezuela never tackled
Speaker 1: its vulnerability to oil and has therefore always been a
Speaker 1: very unstable, volatile etonomy. It didn't create the stabilizing mechanisms
Speaker 1: such as a sovereign wealth fund where you save for
Speaker 1: the future generations. Diversification was not an issue. It was
Speaker 1: lip service. You talk about diversification, but you never really
Speaker 1: tackle it because oil is producing whatever you need to survive,
Speaker 1: and politicians had a short term horizon, so they just
Speaker 1: wandered from one five year election to the next. The
Speaker 1: economy continued being highly dependent on oil, yet there was
Speaker 1: a private sector. The private sector, the non oil private sector,
Speaker 1: was in charge of generating the jobs and producing the
Speaker 1: goods that fill the shelves in the markets. The oil
Speaker 1: economy was generating the revenues that made the government rich
Speaker 1: and made politicians powerful. In nineteen when Chais got to power,
Speaker 1: he started undermining the rule of law, the trust in
Speaker 1: the economy, the confidence in the currency, aggrandizing the government
Speaker 1: and shrinking the private sector. Then companies were expropriated, taken
Speaker 1: over by the government and essentially ruined. Along the way,
Speaker 1: the government became more and more authoritarian. Oil prices remained volatile,
Speaker 1: so we had ups and downs and ups and downs.
Speaker 1: And when Chais died and Mr Magua took over the presidency,
Speaker 1: he was hit by a sharp decline in oil prices.
Speaker 1: And instead of moving in the right direction of an
Speaker 1: economic policy that promotes private investment, that builds confidence and
Speaker 1: real publishes growth, the path was towards lawlessness, destroying institutions,
Speaker 1: destroying the rule of law, undermining the confidence in the currency,
Speaker 1: and expanding the fiscal deficit to the point that led
Speaker 1: to hyperinflation. So while the world moved towards stability, Venezuela
Speaker 1: moved towards instability and authoritarianism. There used to be a
Speaker 1: saying that God is Venezuelan because for decades when Venezuela
Speaker 1: was in trouble, oil prices came up. There was something
Speaker 1: in Saudi Arabia or Ira convated Kuwait, oil prices rose
Speaker 1: and the need for sound economic policies was wiped out.
Speaker 1: But as you weaken the economy and also allow for
Speaker 1: the oil industry to be destroyed, wid then you you
Speaker 1: killed the head of the golden eggs and the emperor
Speaker 1: is naked. So that's a short explanation of why Venezuela,
Speaker 1: which used to produce three million barrels of oil a day,
Speaker 1: is now producing two hundred thousand and has lost about
Speaker 1: sevent of GDP in the last five years. Inflation got
Speaker 1: up to two million per year in it's now in
Speaker 1: the thousands per year, which may sound as much lower
Speaker 1: than two million, but it's still extremely painful if you
Speaker 1: think of inflation being two percent or three percent or
Speaker 1: eight percent at the most. So I want to get
Speaker 1: back to um the sort of the hyper inflation and
Speaker 1: the lessons from the Maduro era and also oil. But
Speaker 1: before that, I mean, you mentioned your tenure as the
Speaker 1: head of the central bank, and particularly mentioned the banking
Speaker 1: crisis that you experienced. What was the sort of um
Speaker 1: What was what were the underlying factors that even before
Speaker 1: things really started going downhill in the country, there was
Speaker 1: a banking crisis, And obviously banking crisis are a recurring
Speaker 1: phenomenon all over the world, but also particularly in the
Speaker 1: developed world. What we're what are what do you see
Speaker 1: as the sort of commonalities and lessons from that period.
Speaker 1: The Venezuelan banking crisis came as a result of bad policies,
Speaker 1: bad banking and bad luck. Bad policies, both macro economic
Speaker 1: policies which were not promoting stability, as I said, but
Speaker 1: also banking regulation and supervision. Banking regulation and supervision was
Speaker 1: a weak spot. It was largely dominated by politics. There
Speaker 1: was a cozy relationship between bankers and politicians over the years,
Speaker 1: so there was little concern for having banks being well capitalized,
Speaker 1: lending prudently, being concerned about the long term health of
Speaker 1: the banking system and the securities industry. And this led
Speaker 1: to bad banking because many bankers saw this as the
Speaker 1: path to riches too wealth, and that made the banks weak,
Speaker 1: and we had some very important bank failures in the
Speaker 1: seventies and eighties. Those were all large banks and went
Speaker 1: under because of bad lending connected loans, loans to shareholders,
Speaker 1: to friends and family and so forth, and they were
Speaker 1: bailed out by the government, so neither the bankers nor
Speaker 1: the depositors ever had a loss. The depositors were bailed
Speaker 1: out and the bankers were bailed out. So we ended
Speaker 1: up having a moral hazard problem where everybody was trusting
Speaker 1: that the government would come in and bail everybody out.
Speaker 1: And it doesn't really matter if a bank goes under
Speaker 1: because in the end, you don't lose access to your
Speaker 1: deposits and you can continue your day to day life.
Speaker 1: And then bad luck. Why bad luck, because the lead
Speaker 1: up to the crisis really began in when the reforms
Speaker 1: program were initiated, and it meant increasing prices, increasing the
Speaker 1: price of gasoline, de really deregulating interest rates. Interest rates
Speaker 1: went up, people felt scared um and that was in
Speaker 1: and in Iraq invaded Kuwait and oil prices shot up again,
Speaker 1: and the reform program lost political support. So even accident Ratica,
Speaker 1: which was the president's party, distance itself from the program
Speaker 1: and and the reforms got stuck. And it was really
Speaker 1: a very bad spot because after going up in oil
Speaker 1: prices fell in nine three, and when oil prices fall
Speaker 1: on an oil based economy suffers loss of confidence, capital
Speaker 1: flight and so forth. And in two is when the
Speaker 1: military coups that were brewing came into the open. So
Speaker 1: the country goes from a relatively long term stability with
Speaker 1: prudent fiscal and monetary policies inherited from the post war
Speaker 1: years to a short term, shock prone situation, and the
Speaker 1: military coup in shattered the country's confidence in its democracy,
Speaker 1: and we had a first coup in February, and we
Speaker 1: had a second coup attempt in November, and then the
Speaker 1: president was impeached and in we had four governments until
Speaker 1: we had elections in December. I as a president of
Speaker 1: the Central Bank, had to deal with four presidents and
Speaker 1: four ministers of finance until we had elections in December,
Speaker 1: and the winner was an anti reform candidate, so it
Speaker 1: was clear to everybody that the reforms will get derailed.
Speaker 1: And furthermore, he didn't want to get involved in the
Speaker 1: banking crisis that was around the corner. So that was
Speaker 1: bad luck because we had a combination of oil price
Speaker 1: spikes in the wrong moment that in influence our political
Speaker 1: support for reforms. And after the coups everything went down
Speaker 1: the hill. So essentially, when you have all these combinations,
Speaker 1: it's uh, it's a disaster waiting to happen. Can you
Speaker 1: talk about the impact that the banking crisis had on
Speaker 1: monetary policy at the time, because I think nowadays, in
Speaker 1: most parts of the world, if you think about a
Speaker 1: banking crisis and the central bank response. You would probably
Speaker 1: be thinking of a central bank immediately dropping interest rates
Speaker 1: to stimulate growth, But I think in the case of Venezuela,
Speaker 1: when you were heading the central bank, you did something
Speaker 1: very different. Could you talk about your policy response in
Speaker 1: a banking crisis? The central banks initial fundamental concern is
Speaker 1: the stability of the payment system, which means you cannot
Speaker 1: allow payment not to be settled efficiently and securely, because
Speaker 1: that really put sands in the gears of the economy
Speaker 1: and stops the economy. So when we had the banking crisis,
Speaker 1: my first concern was to keep the payment system running.
Speaker 1: That is why you see central banks being concerned about
Speaker 1: the money market and trying to sustain the flow of
Speaker 1: transactions all over. My concern at the central bank was
Speaker 1: the payment system because when I was faced with the
Speaker 1: banking crisis, of our banks where about to be closed
Speaker 1: or taken over. And um, I would like to clarify
Speaker 1: that in my case, the central bank did not have
Speaker 1: supervisory responsibilities and could only lend to solvent banks, and
Speaker 1: we had an insolvent deposit insurance institution, so all I
Speaker 1: could do from the central bank was lend money to banks.
Speaker 1: I did it through the deposit insurance and in fact
Speaker 1: we kept the payment system running. Of course, as you
Speaker 1: mentioned initially, you when you have this unorthodox monetary policy.
Speaker 1: In a way, there's a parallelism between monetary policy in
Speaker 1: a banking crisis and monetary policy in a pandemic in
Speaker 1: the sense that you have to help the economy keep moving.
Speaker 1: That means you're pumping money into the system. If there's
Speaker 1: confidence in the currency and confidence in the long term
Speaker 1: stability of the country, there is no major damage because
Speaker 1: the demand for money that is their means that people
Speaker 1: keep the local currency and use it legitimately for transactions.
Speaker 1: When you don't have confidence in the currency, or in
Speaker 1: the country or in the government, this increase in money
Speaker 1: supply translates into capital flight, and when there's capital flight,
Speaker 1: the country loses its international reserves, and that means it
Speaker 1: may not be able to import what it needs to
Speaker 1: feed its people. So in Venezuela that was a big challenge,
Speaker 1: and that is why one of the things that was
Speaker 1: important to me at the time was that the government
Speaker 1: should tackle the insolvency of the banking system. While the
Speaker 1: central bank was tackling the illiquidity. So you may have
Speaker 1: a liquid banks you lend to them, but if you
Speaker 1: are at the same time trying to make them solvent
Speaker 1: and keep the confidence of the people in the banking
Speaker 1: system them, then you can muddle through and after an
Speaker 1: interim period of instability, you get the economy back on
Speaker 1: track and you clean up the banking system and you
Speaker 1: move out of the crisis. So in a way, this
Speaker 1: is something that you can connect to the current challenges
Speaker 1: of monetary policy. When monetary policy experimentation and the move
Speaker 1: to unconventional monetary policy or two heterodox monetary policy is
Speaker 1: nowadays more acceptable than it was ten or fifteen years ago,
Speaker 1: and new instruments are being developed. The key for success
Speaker 1: is to keep the trust in the central bank and
Speaker 1: the currency, otherwise these policies get derailed. I'm glad you
Speaker 1: said that, because that is exactly sort of what I
Speaker 1: where I was going to go next with this question.
Speaker 1: Because people tell this story and it's like, Okay, there's
Speaker 1: a bunch of money printing, whether it's at the central
Speaker 1: bank or maybe through the treasury or whatever, and they say, okay,
Speaker 1: that leads historically to inflation or hyper inflation. It sounds
Speaker 1: like what you're identifying here is that you can do
Speaker 1: a lot of different things. It's really the sort of
Speaker 1: trust in the institutions of government that really sort of
Speaker 1: perceived that and that the flexibility works belong is um
Speaker 1: you know, have this trust and as such, in the
Speaker 1: Venezuelan context, what you describe under the Chavez uh presidency
Speaker 1: and then Maduro, it's not perhaps it's not so much
Speaker 1: about the money printing or the deficits per se, but
Speaker 1: the destruction of the rule of law and civil society
Speaker 1: which catalyzed the law the confidence collapse. Yes, it mean
Speaker 1: is that it's sort of is that sort of how
Speaker 1: we should think about what really cattle the Venezuelan hyperinflation
Speaker 1: more so than the money printing per se. Money printing
Speaker 1: has been one of the ingredients of Venezuela's hyperinflation, but
Speaker 1: it's not the total explanation. Uh. The fiscal deficit, the
Speaker 1: lack of fiscal rules and transparency has been very, very damaging.
Speaker 1: And when you think of a country that loses its
Speaker 1: anchors because it doesn't have sound fiscal policy, it doesn't
Speaker 1: know where the government is going. The government runs a
Speaker 1: deficit and the central bank funds the deficit by printing money.
Speaker 1: And even if the law says that the central bank
Speaker 1: cannot lend to the government, it says it can lend
Speaker 1: to government owned entities. So what the central bank is
Speaker 1: doing is lending to pay the west UH, the oil company,
Speaker 1: and BAA transfers the money to the government, which is
Speaker 1: simply is one step along the way. So you do
Speaker 1: have monetary expansion and you have a fiscal deficit. That
Speaker 1: creates the so called fiscal dominance of monetary policy, and
Speaker 1: that that's the worst of both evils. So how can
Speaker 1: central banks avoid that intertwining of government and independent monetary policy?
Speaker 1: Because you know, especially in the current climate, there is
Speaker 1: a lot of talk about the need for unconventional monetary
Speaker 1: policy to be augmented with government spending. As I mentioned,
Speaker 1: we've seen some new ways of doing this, for instance
Speaker 1: the debt monetization program in Indonesia, where the central bank
Speaker 1: is effectively directly financing the government deficit. How do central
Speaker 1: banks maintain independence while still working together with governments to
Speaker 1: augment physical spending. Part of the answer to your question
Speaker 1: is on the word independence. What what do we really
Speaker 1: mean by central bank independence? What we mean is the
Speaker 1: central banks ability to say no to a government that
Speaker 1: wants to derail the basics of economic stability. So there
Speaker 1: may be times at which the central bank agrees to
Speaker 1: fund in an unorthodox way the needs of the economy
Speaker 1: for a while, but it has to have a clear
Speaker 1: stance on what it means and how you will exit
Speaker 1: from this policy and why the economy needs it. So
Speaker 1: the economy needs the monetary stimulus to prevent a strong recession,
Speaker 1: and at some point the central bank expects or demands,
Speaker 1: like Mr Powell has done in recent days, that the
Speaker 1: government and fiscal policy take its role in in the
Speaker 1: stimulus and money supply can then take a backstage. That's
Speaker 1: fine as long as people trust what the central bank
Speaker 1: is doing and UM is willing to accept this increase
Speaker 1: in money supply. Independence for a central bank doesn't mean
Speaker 1: that the central bank is a state within a state
Speaker 1: and won't listen to anybody. Monetary policy is part of
Speaker 1: the economic policy mix, and by definition it has to
Speaker 1: be consistent with the country's growth and inflation goals. The
Speaker 1: other thing is that you need anchors to anchor expectations
Speaker 1: of the people, and here you have inflation targeting, for example,
Speaker 1: where people know that if inclation goes beyond a certain
Speaker 1: limit or folds below a certain limit, the central bank
Speaker 1: will step in and will keep things on track. The
Speaker 1: same thing happens with a fiscal deficit target. People know
Speaker 1: that if the fiscal deficit goes beyond a certain percentage
Speaker 1: of GDP, the government will cut expenditures or raise revenues
Speaker 1: in order to not put undue pressure on the central bank.
Speaker 1: And there's also a foreign exchange anchor when countries have
Speaker 1: a clearly stated exchange rate policy. In the case of Venezuela,
Speaker 1: we lost all anchors. We have no anchors. There's no
Speaker 1: fiscal anchor, there's no monetary anchor, there's no foreign exchange anchor.
Speaker 1: So what do people do. They look for dollars, and
Speaker 1: any additional believer that comes into the money supply goes
Speaker 1: to the foreign exchange market and ends up triggering the
Speaker 1: need for exchange controls. And exchange controls are the representation
Speaker 1: of the lack of confidence. You can't keep the money
Speaker 1: in the country unless you fence it in, and that
Speaker 1: is a sign per se that things are not going well.
Speaker 1: When a government, like the Indonesian example, undertakes debt monetization
Speaker 1: and establishes a stimulus to the economy. The basis for
Speaker 1: the Central Bank of Indonesia is to retain the people's
Speaker 1: trust and that is a subtle combination of science and
Speaker 1: art that goes through the central banks law, what it
Speaker 1: can do, what it should not do, how it communicates
Speaker 1: with the people, and in fact, central bank communications are
Speaker 1: a very important tool to build confidence and are especially
Speaker 1: important also in times of crisis when you need a
Speaker 1: single voice to re establish confidence of the people. So
Speaker 1: at the beginning in our introduction, I joked that, uh,
Speaker 1: you know, in the developed market context that inability to
Speaker 1: generate inflation is kind of the ultimate First world problem.
Speaker 1: And you know, if you obviously inflation in the US
Speaker 1: and Europe UK hasn't really been an issue for a while,
Speaker 1: but persistently high unemployment has been then for almost uh
Speaker 1: you know, for several decades now. The unemployment rate in
Speaker 1: the US has been above what economists perceived to be
Speaker 1: full employment. So this is a consistent issue. Do the
Speaker 1: lessons that you identify um apply and so when we
Speaker 1: think about questions like confidence in the currency, the exchange rate,
Speaker 1: and so forth, do the issues that sort of face
Speaker 1: a developing market central banks such as Venezuela or others.
Speaker 1: Should these lessons apply to, say, the FED, or should
Speaker 1: they be thinking about solving other problems? And as such,
Speaker 1: perhaps notions about central bank independence earner is important. Central
Speaker 1: bank independence is an important issue everywhere, and there's a
Speaker 1: lot of studies and discussions and measurements on how you
Speaker 1: measure central bank independence and how you make it work
Speaker 1: prison irving the value the institutional value of an independent
Speaker 1: central bank is important everywhere. The central the United States
Speaker 1: have less restrictions because they issue the currency that the
Speaker 1: world uses, so you don't have the connection that you
Speaker 1: may find in the rest of the world, and especially
Speaker 1: in emerging market where the countries depend on their revenue
Speaker 1: on their foreign exchange revenues through imports or capital influence
Speaker 1: in order to keep the country running. And that is
Speaker 1: why countries need healthy foreign reserves to build long term stability,
Speaker 1: and that is why you are so much more vulnerable
Speaker 1: to the confidence problem in emerging markets. And confidence in
Speaker 1: the currency is built by confidence in the government, the
Speaker 1: government's policies, and the central banks ability to reign in
Speaker 1: excesses not to hinder growth, but to avoid excesses. So
Speaker 1: there's there's a simple way of putting things. When you
Speaker 1: have a strong banking system and you have a strong economy,
Speaker 1: you tend to have stability because your system can withstand shocks.
Speaker 1: When you have a weak banking system and you have
Speaker 1: a strong economy, you can solve the banking systems problems
Speaker 1: with less disruption on the economy. But when you have
Speaker 1: weak banks, a weak economy, and a weak institutional framework,
Speaker 1: that is a recipe for disaster. And that's why you
Speaker 1: have to try to fix the three legs of this stool,
Speaker 1: the health of the banking system, the health of the economy,
Speaker 1: and a good policy mix. I'm curious as you survey
Speaker 1: the impact of the pandemic on monetary policy and on economies,
Speaker 1: is there one major lesson that you think we've sort
Speaker 1: of seen demonstrated over the past few months, or one
Speaker 1: big takeaway um in terms of the way economies work
Speaker 1: and the way they interact with monetary policy that you've
Speaker 1: seen recently. As I see the consequences emerging from the
Speaker 1: effects of the pandemic, it becomes clear that the basic
Speaker 1: principles to prevent the recessionary impact of pandemics and lockdowns
Speaker 1: and so forth is again the basic combination of confidence, trust,
Speaker 1: and consistent policies. The central banks are called to provide support.
Speaker 1: Companies big and small need loans, and unless you relax
Speaker 1: the monetaries policy, monetary policy stands, you can't provide this
Speaker 1: increase in lending that the economy needs. And the room
Speaker 1: for this expansionary policy is the fiscal space that the
Speaker 1: countries need to have in order to produce this stimulus.
Speaker 1: And fiscal space is a term for the help of
Speaker 1: the public finances and how much deficit can you run
Speaker 1: before derailing the economy, So the central banks have to
Speaker 1: step in. They have to provide the stimulus. And again
Speaker 1: going back to an example where there's little room for
Speaker 1: this stimulus is again Venezuela. Venezuela needs the fiscal stimulus
Speaker 1: and the monetary stimulus to prevent the recession from getting worse,
Speaker 1: but there's no room for it because every believer that
Speaker 1: gets into the system goes to the foreign exchange market,
Speaker 1: pushes the price of the dollar up. The currency loses
Speaker 1: value and inflation goes up, so there's no room for
Speaker 1: any kind of mitigating policy. Two, avoid the pains of
Speaker 1: the pandemic compounding with more economic pain, and instead of
Speaker 1: moving towards reforms, the government moves towards more authoritarianism, which
Speaker 1: makes things worse. I I would want to share with
Speaker 1: you UH some aspects of what we learned without from
Speaker 1: our banking crisis, which are overarching lessons for the world,
Speaker 1: both in emerging markets and developed markets, and they are
Speaker 1: relevant in times of a pandemic, because a pandemic may
Speaker 1: raise systemic risks when banks are not strong, when governments
Speaker 1: don't have more sufficient fiscal space, and when there's a
Speaker 1: there's a crisis that may be brewing. And in fact,
Speaker 1: there's a lot of work being done now on how
Speaker 1: to better equip banking supervisors with the tools, the knowledge,
Speaker 1: and the wisdom to deal with the financial instability risks
Speaker 1: that come with COVID, and the lessons are essentially the
Speaker 1: same that we face in our banking crisis twenty years ago. First,
Speaker 1: get politics out of banking regulation and supervision. That is
Speaker 1: a mantra and that is true everywhere, because when you
Speaker 1: have politics and politicians fiddling with banking regulation and supervision,
Speaker 1: you end up having a weak financial system that is
Speaker 1: not able to withstand the shocks. The second is not
Speaker 1: to underestimate systemic risks, and that means that you need
Speaker 1: to be proactive and have early actions before things get worse.
Speaker 1: And that means having well defined roles for each government
Speaker 1: agency involved, be at the central bank, the supervisors that
Speaker 1: deposit insurance, managing a crisis, having contingency lanning as an
Speaker 1: essential tool, and in the central banks independence and the
Speaker 1: and the independence of bank supervisors. And there are two
Speaker 1: things that are normally overseen because in some countries, especially
Speaker 1: in developed countries, they don't seem to be a big problem.
Speaker 1: One is legal protection for regulators. Being a regulator and
Speaker 1: supervisor is a lonely job, and being a supervisor in
Speaker 1: an emerging market is also a dangerous job because supervisors
Speaker 1: don't have the necessary legal protection that makes them comfortable
Speaker 1: in make them making decisions with incomplete information, which is
Speaker 1: what you have to do when you face a crisis,
Speaker 1: So they risk being sued by depositors, by shareholders of
Speaker 1: banks or companies, and even by the government. And when
Speaker 1: supervisors feel insecure, they tend not to act and not
Speaker 1: to make decisions and hope that things will get solved.
Speaker 1: So legal protection for regulators and supervisors is in my view,
Speaker 1: a key element of stability in the financial sector, and
Speaker 1: the fourth is international rules. International rules became important in
Speaker 1: the ninety nineties and for banks in emerging markets international rules.
Speaker 1: Compliance with international rules is a way to ensure their
Speaker 1: ability to do business in the global markets. If the
Speaker 1: country doesn't comply with international rules, be it in banking,
Speaker 1: securities or insurance, the domestic players are restricted, and in
Speaker 1: an increasingly interconnected world, that means you're condemned to poverty.
Speaker 1: You can't do anything. We lived a very interesting experience
Speaker 1: in Venezuela when we were trying to implement the Basil
Speaker 1: rules in a country that never had it. The bankers
Speaker 1: that initially opposed reforms, when they understood that unless the
Speaker 1: country moved towards compliance with Basil regulations, they would not
Speaker 1: be able to continue doing business in the United States,
Speaker 1: they switched gears and they became more accepting and they
Speaker 1: finally agreed to have the reforms in the banking law
Speaker 1: and to comply with the Basil rules in exchange for
Speaker 1: being able to continue to have their business in the
Speaker 1: major markets of the world. And that is why the
Speaker 1: international rule setting bodies play an important rule in overall
Speaker 1: stability in the financial system, and those four lessons I
Speaker 1: think apply everywhere and should be forefront in our menu
Speaker 1: for financial stability. And in times of a pandemic, when
Speaker 1: you're trying to prevent the collapse of a financial system, uh,
Speaker 1: you have to think of these things. And let me
Speaker 1: add one more idea I would like to share with you.
Speaker 1: Banking crisis are very harmful to the poor. And whenever
Speaker 1: an emerging market or a low income countries offers a
Speaker 1: banking crisis, it is the poor that are more strongly hurt.
Speaker 1: And it's the women and girls among the poor who
Speaker 1: get more strongly hurt. And financial crisis have a regressive
Speaker 1: effect on income distribution and make society is more unequal,
Speaker 1: and we are seeing it with the pandemic. We're seeing
Speaker 1: how countries, including the United States, are seeing that the
Speaker 1: poor and the underserved communities are being hurt or strongly
Speaker 1: by the pandemic. Imagine what happens if the pandemic also
Speaker 1: adds up to a financial crisis, and then you get
Speaker 1: a double warming. And that is why this whole idea
Speaker 1: of working towards financial stability and preserving the confidence in
Speaker 1: the currency is so important. Ruth. That was fantastic discussion.
Speaker 1: Really appreciate your perspective, and thank you so much for
Speaker 1: coming out on odd lot. Thank you for inviting me.
Speaker 1: It's been a pleasure. Thank you, Tracy. I loved ruth perspective.
Speaker 1: That is not a sort of angle that a lot
Speaker 1: of our guests have had in the past, and I
Speaker 1: thought that was really enjoyable. Yeah. I think one thing
Speaker 1: that comes out a lot in that discussion is the
Speaker 1: importance of strength of institutions when it comes to emerging markets,
Speaker 1: and I mean Roof made an excellent case of how
Speaker 1: that didn't necessarily happen in Venezuela, and we've seen the
Speaker 1: result of that, which was massive capital flight and lots
Speaker 1: of inflation. Yeah. I think, I mean that was my
Speaker 1: big takeaway too, and I think it shows um this
Speaker 1: sort of the limits to mathematical approaches to understanding inflation
Speaker 1: is sort of what I take away from that, because
Speaker 1: you know, you could always chart deficits to the central
Speaker 1: banks monetary supply or the amount of foreign reserves that
Speaker 1: a central bank holds at any given point, but you
Speaker 1: can't really chart um credibility of institutions, rule of law,
Speaker 1: things like that. And when that kind of thing is
Speaker 1: so important for confidence in the currency, confidence in the
Speaker 1: banking system, the maintenance of the exchange rate, and thus
Speaker 1: the ability to import food and other things for a country.
Speaker 1: It kind of really speaks to how hard it is
Speaker 1: to model some of these things. Yeah, I think that's
Speaker 1: exactly right. And the other thing that really struck me
Speaker 1: was her definition of central bank independence, because I think
Speaker 1: it is true that there's a knee jerk reaction out
Speaker 1: there that central bank independence means that the policymakers are
Speaker 1: sort of off doing their own thing and not necessarily
Speaker 1: paying attention to what the government is doing at the
Speaker 1: same time. And she put it really well that it's
Speaker 1: it's about the ability to say no, but not actually
Speaker 1: necessarily saying no every single time you might be asked
Speaker 1: to do something. Yeah, I mean, I really do think
Speaker 1: this is just going to increasingly, especially in the developed
Speaker 1: market contact this is just going to be an increasingly
Speaker 1: contested question because it doesn't it's such a fine line,
Speaker 1: isn't it. Yeah. And you know, obviously, uh, we had
Speaker 1: these sort of series of I mean, one of the
Speaker 1: whole things, you know, going back to the FED is
Speaker 1: these framework review because part of the problem was, like
Speaker 1: they identify it. It's like, wait, we keep hiking rates
Speaker 1: too early, we keep tapping the brakes on the expansion,
Speaker 1: we never really hit our inflation goals. What exactly does
Speaker 1: it serve? And you know, something I was thinking about
Speaker 1: during this crisis is that our conception of central bank
Speaker 1: independence has changed, maybe in a good way, and it's
Speaker 1: less about helping the government know and more about just
Speaker 1: sort of being an independent, competent actor when elected officials
Speaker 1: can't agree on anything, which is a slightly different framework.
Speaker 1: But arguably it was kind of nice to have this
Speaker 1: time round. I mean, I think that might be true
Speaker 1: of one economy in particular. I'm not sure that that
Speaker 1: will always be the case, especially when it comes to
Speaker 1: emerging markets, but it is. It is going to be
Speaker 1: a fascinating thing to watch because it is really hard to,
Speaker 1: I guess, disentangle a central bank that is trying to
Speaker 1: help the economy by augmenting whatever it is that the
Speaker 1: government is actually doing an amplifying fiscal stimulus when it can,
Speaker 1: and a central bank that is basically in the pockets
Speaker 1: of the government for whatever reason. I think that's going
Speaker 1: to be hard, um, but a fascinating thing to watch
Speaker 1: you know. One other thing I just before you go
Speaker 1: that I thought was interesting was her description of the
Speaker 1: sort of resource curse of Venezuela and you hear that
Speaker 1: a lot and a lot of different emerging markets that
Speaker 1: happen to have some big natural resources, typically oil, and
Speaker 1: how it ends up being a net negative. Sort of
Speaker 1: funny the description, and you know, they're multiple ways. One
Speaker 1: is it allows governments to paper over other problems. It
Speaker 1: also raises the value of the currency, making other domestic
Speaker 1: manufacture perhaps less competitive, causing atrophy. But her description of
Speaker 1: every time Venezuela gotten to any sort of trouble historically,
Speaker 1: we just happened to be some oil price bike. Uh.
Speaker 1: I got to kick out of the idea that God
Speaker 1: being Venezuelan with oil always coming to the rescue each time. Yeah.
Speaker 1: I hadn't heard that one before. Um, but pretty amusing
Speaker 1: and kind of ironicum in retrospect when we're talking about
Speaker 1: it now. Um, okay, shall we leave it there? Yeah?
Speaker 1: All right. This has been another episode of the All
Speaker 1: Thoughts Podcast. I'm Tracy Alloway. You can follow me on
Speaker 1: Twitter at Tracy Alloway and I'm Joe wisn't Thal. You
Speaker 1: can follow me on Twitter at the Stalwart. Follow our
Speaker 1: producer Laura Carlston. She's at Laura M. Carlston. Followed the
Speaker 1: Bloomberg head of podcast, Francesco leaving at Francesco Today and
Speaker 1: check out all of our podcasts under the handle at podcast.
Speaker 1: Thanks for listening to