Latest / Masters in Business / Richard Clarida of Pimco on the New Neutral of Monetary Policy

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Richard Clarida of Pimco on the New Neutral of Monetary Policy · Masters in Business

• 0:02
  Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.
• 0:10
  Speaker 1: This week on the podcast, I have an extra special guest.
• 0:13
  Speaker 1: His name is Richard Clarida. He is Where do I begin? Uh.
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  Speaker 1: He's a managing director and global strategist for investing giant Pimco.
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  Speaker 1: He was also had served in the Bush White House
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  Speaker 1: in the Treasury Department and uh informally as an advisor
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  Speaker 1: to various senior people in that administration. What was kind
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  Speaker 1: of interesting to me is that a lot of people
• 0:43
  Speaker 1: kind of came through that administration with their reputation a
• 0:46
  Speaker 1: little dinged up, and Clarida really had no such issue. Uh.
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  Speaker 1: He went in and came out really highly respected. He
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  Speaker 1: is incredibly insightful to things like the fiscal process and
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  Speaker 1: how the Federal Reserve interacts with Congress and how their policies,
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  Speaker 1: how monetary policies and fiscal policies affect each other. He
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  Speaker 1: has really an amazing understanding of government programs and policies, economics,
• 1:20
  Speaker 1: investment theory, and where they all intersect. It really is
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  Speaker 1: not the usual economics conversation. And so the process of
• 1:33
  Speaker 1: looking at the world to finance and looking at investing
• 1:37
  Speaker 1: through that lens really is is makes for for wonderful conversation,
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  Speaker 1: and PIMCO has found that it's tremendously helpful uh to
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  Speaker 1: their process. I think you'll really enjoy this conversation. So,
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  Speaker 1: with no further ado, my conversation with Richard Clarada of PIMCO.
• 1:59
  Speaker 1: My special guest today is Richard Clarada. He is an
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  Speaker 1: economist and Lowell Harris Professor of Economics and International Affairs
• 2:08
  Speaker 1: at the School of Public and International Affairs at Columbia University.
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  Speaker 1: He has been the Global Strategic Advisor for PIMCO since
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  Speaker 1: two thousand and six. He is the former Assistant Secretary
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  Speaker 1: of the Treasury Department for Economic Policy under George W. Bush.
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  Speaker 1: He is the recipient of the Treasury Medal. He earned
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  Speaker 1: his BS from University of Illinois and a master's and
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  Speaker 1: PhD in economics from Harvard University. Richard Clarada, Welcome to Bloomberg. Wow.
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  Speaker 1: Great to be on your show, Barry. I'm a big,
• 2:41
  Speaker 1: big fan, so it's a treat to be in the studio. Well,
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  Speaker 1: it's a treat to have you. You and I know
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  Speaker 1: each other for a while. I've been a fan of
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  Speaker 1: your work for quite a bit. I know of you
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  Speaker 1: from your work in the Treasury Department. Let's begin talking
• 2:53
  Speaker 1: about your tenure as Assistant Secretary to the Treasury for
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  Speaker 1: Economic Policy. You were there really as the dot com
• 3:01
  Speaker 1: bust was accelerating, as the recession was starting. What was
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  Speaker 1: that like during that period, Well, you know, Barry, was
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  Speaker 1: a very eventful time. In fact, interestingly enough, my first
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  Speaker 1: day on the job at Treasury was September eleventh, two
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  Speaker 1: thousand and one. So we all know, we all know
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  Speaker 1: where we were. But I was just checking out my office,
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  Speaker 1: and you may know Peter Fisher. I was in Peter
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  Speaker 1: Fisher's office when when the second tower got hit and
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  Speaker 1: then we were evacuated at Treasury. Actually saw people streaming
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  Speaker 1: out out of the the White House and someone said
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  Speaker 1: the Pentagon has been hit, so we're next. It was
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  Speaker 1: actually quite quite scary, and I can imagine, but it
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  Speaker 1: was an eventful time economically, um the dot com Of course,
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  Speaker 1: we did have the bursting of the dot com bubble.
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  Speaker 1: When I arrived in September Barry of two thousand and one,
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  Speaker 1: the data was sort of close to indicating a recession.
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  Speaker 1: On September t the nb R hadn't called it yet
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  Speaker 1: certainly the day after we we thought we were going
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  Speaker 1: into a recession. So in retrospect and everything that's happened
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  Speaker 1: since then, it may seem like a pretty, uh, pretty
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  Speaker 1: tame and quiet period, but it's pretty eventful. The dot
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  Speaker 1: com bubble, we had, the the end Roun World calm
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  Speaker 1: accounting scandals, uh and and obviously the financial system seizing
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  Speaker 1: up for a while. So yeah, it was a very
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  Speaker 1: eventful time. That that's some first day you know, you
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  Speaker 1: mentioned it was nothing like the financial crisis. I believe,
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  Speaker 1: if memory serves correctly, that recession began around March of
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  Speaker 1: that year, and by the time nine eleven came around,
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  Speaker 1: it was almost over. I think we dated in November,
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  Speaker 1: is that, But that's of course with the benefit of hindsight.
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  Speaker 1: At the time, the nb e R hadn't gotten around.
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  Speaker 1: You're right now, we know started marching into November, and
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  Speaker 1: you were an economist and researcher for nb e R.
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  Speaker 1: I left that out of your your CV. Um what
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  Speaker 1: did you do for them? Well? Nb R is an
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  Speaker 1: incredible organization that I think dates back to the the twenties.
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  Speaker 1: It's essentially an independent organization for doing applied economic research.
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  Speaker 1: Really pioneering work and business cycle analysis. UM. I was
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  Speaker 1: fortunate enough to do my graduate work at Harvard in
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  Speaker 1: the in the late seventies and early nineteen eighties, right
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  Speaker 1: about the time that Marty Feldstein moved the mb e
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  Speaker 1: R from New York to Cambridge, and so it's really
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  Speaker 1: an incredible organization. I started as a faculty of research
• 5:17
  Speaker 1: fellow and then now as a research associate and essentially
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  Speaker 1: part of a group that publishes applied research in my
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  Speaker 1: case and international macro economics. And for people who may
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  Speaker 1: not realize, that's the organization that officially dates starts and
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  Speaker 1: ends of US recessions exactly, the Business Cycle Dating Committee.
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  Speaker 1: And by the way, for people who have never been
• 5:39
  Speaker 1: on the website, there's an enormous amount of of research
• 5:43
  Speaker 1: of data. It's really a tremendous resource for people who
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  Speaker 1: have those fields. Absolutely, so since nine eleven, the immediate response,
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  Speaker 1: so I think it was a week or so after that,
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  Speaker 1: then FED chairman Allen Greenspan cut rates. He took them
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  Speaker 1: at at a rep cutting um period where we were
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  Speaker 1: under two percent for two or three years and then
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  Speaker 1: at one percent for a full year. What was the
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  Speaker 1: impact of those ultra low rates well at the time.
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  Speaker 1: Interestingly enough, the time, there was a concern of of
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  Speaker 1: a deflation UH scare UH. The economy was recovering, but
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  Speaker 1: the recovery and two thousand and two UH was was
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  Speaker 1: was pretty feeble UM and UM, and so as a result,
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  Speaker 1: there was also a lot of changes impacting the financial
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  Speaker 1: system as well UH, and so we did go through
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  Speaker 1: a period of very low rates. I think in that cycle.
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  Speaker 1: The FED cut the funds rate to one percent UH
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  Speaker 1: in UH in June of two thousand and three and
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  Speaker 1: kept it there for a year. Obviously since that period
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  Speaker 1: of time, I must say at the time, I was
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  Speaker 1: at Treasure and I would have weekly meetings at the
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  Speaker 1: FED as part of that job. You know, I was
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  Speaker 1: aware of that policy and was not a critic of
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  Speaker 1: it at the time. It did seemed to be UH
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  Speaker 1: an appropriate UH policy. I think since that point some
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  Speaker 1: critics of the FED had pointed out that the FED
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  Speaker 1: was very slow to begin raising raids in OH four
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  Speaker 1: and oh five and six, And of course we also
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  Speaker 1: had a housing bubble at the time, and so I
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  Speaker 1: guess one can try to make a connection between that
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  Speaker 1: policy and the housing bubble, and that may have been
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  Speaker 1: a factor, But I think there are a lot of
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  Speaker 1: other factors at work as well. Well. Let's discuss that.
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  Speaker 1: That's an interesting issue. I mean, clearly, anything priced in
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  Speaker 1: dollars or credit had a big move upwards. And whether
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  Speaker 1: it was commodities, gold, or mortgages, what other factors did
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  Speaker 1: you think were significant? Then? I think the other thing
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  Speaker 1: is we we had what appeared to be and what
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  Speaker 1: many including my self thought was a innovation uh in
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  Speaker 1: finance securitization UH. And the fact that in mortgages, as
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  Speaker 1: in other parts of the credit market, credits were being
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  Speaker 1: securitized and they were no longer on the balance sheets
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  Speaker 1: of banks and the FED another thought that made the
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  Speaker 1: financial system safer uh. And in theory maybe it did.
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  Speaker 1: But obviously in retrospect there were some accesses insecuritization and
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  Speaker 1: in derivatives, and I think the system was more fragile
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  Speaker 1: than a lot of folks thought at at the time.
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  Speaker 1: And certainly, and I think that was a big part
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  Speaker 1: of it. There was a lot of hey, the sausage
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  Speaker 1: is only as good as put into it, and we
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  Speaker 1: know there was a lot of bed you know, sub
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  Speaker 1: prime mortgages that had gone in exactly clearly clearly a factor.
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  Speaker 1: I have to ask you. You're the recipient of the
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  Speaker 1: Treasury Medal for Distinguished Service. What is this award? What
• 8:29
  Speaker 1: what is it about? That has to be quite a
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  Speaker 1: uh well, it was a real thrill um, and it's
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  Speaker 1: not routinely awarded. I think in my case, the recognition
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  Speaker 1: reflected the fact that because through the coincidence of timing
• 8:44
  Speaker 1: Berry I arrived, as I mentioned, during our recession. Remember,
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  Speaker 1: the prior expansion had lasted ten years, and so a
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  Speaker 1: lot of folks had sort of forgotten what does a
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  Speaker 1: recession look like? How do we know when we're out
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  Speaker 1: of it? Talk a little bit about monetary policy, and
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  Speaker 1: since we were just gusting the financial crisis earlier, what
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  Speaker 1: what are your views on how well the Federal Reserve
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  Speaker 1: performs during that period? Uh, during coming out of the
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  Speaker 1: financial crisis. Yeah, the global financial crisis. Well, I've said
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  Speaker 1: many times on a lot on Bloomberg Air, I give
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  Speaker 1: the Fed generally very high marks for crisis management under Bernankey. Obviously,
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  Speaker 1: you cut rates as far as you can. The Fed
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  Speaker 1: cut the funds rate to zero month or two after Lehman,
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  Speaker 1: so you really go to Plan B. And Plan B
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  Speaker 1: was doing quantitative easing, and in particular in the first
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  Speaker 1: QUI program focused on the mortgage market, so signing up
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  Speaker 1: all the as many as much mortgages as possible to
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  Speaker 1: drive rates to drive. And also remember at that time
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  Speaker 1: both Fannie and Freddie had been put into conservator ship,
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  Speaker 1: and so there was just a huge amount of uncertainty
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  Speaker 1: in the financial markets about what the mortgage market would
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  Speaker 1: look like without that backstop, and so the FED got
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  Speaker 1: in of the mortgage business. I think grudgingly. FED officials
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  Speaker 1: have said many times publicly that they're not thrilled to
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  Speaker 1: be the biggest holder of mortgages, but but they were
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  Speaker 1: put into that position given the crisis. So so I
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  Speaker 1: would give the FED quite high marks during that period
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  Speaker 1: oh eight o nine ten uh in in crisis management.
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  Speaker 1: I think if we fast forward more recently, if I
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  Speaker 1: would have a disagreement with the FED, I think that UM,
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  Speaker 1: the Fed's messaging has been inconsistent UM and a little
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  Speaker 1: bit hard to follow in terms of normalization for for rates,
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  Speaker 1: And in particular, an issue barrier that I look at
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  Speaker 1: a lot is this idea that the fedist targeting inflation.
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  Speaker 1: It says that the targets two percent and yet since
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  Speaker 1: they became an inflation target or formally in two thousand
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  Speaker 1: and twelve, inflation has been below two percent ever every year,
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  Speaker 1: and and so the FED sometimes says that that two
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  Speaker 1: percent should be an average, but they also said they
• 10:56
  Speaker 1: don't want inflation to go about two percent, which means
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  Speaker 1: the average, of course will be below. So I do
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  Speaker 1: think that now that the FED has begun to normalize
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  Speaker 1: policy and there and we're at with the FED things
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  Speaker 1: of his full employment, UH, that I think it is
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  Speaker 1: appropriate to continue that normalization UH in in rates. And
• 11:14
  Speaker 1: obviously the next issue, which I'm sure we'll want to
• 11:16
  Speaker 1: talk about, UH is the Fed's approach to normalizing and
• 11:19
  Speaker 1: shrinking that huge four point five twillion dollar balance sheet.
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  Speaker 1: So two points. I have two questions I have to
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  Speaker 1: ask you about. The first, is it sounds like when
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  Speaker 1: the FED is on their rate tightening cycle or in
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  Speaker 1: this case, normalization, they seem to be a little behind
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  Speaker 1: the curve both this cycle and let's call it oh
• 11:40
  Speaker 1: three to oh six UM, seems that they're they'd rather
• 11:44
  Speaker 1: go slowly, too slowly then too fast. Is that a
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  Speaker 1: fair well? I think I think it is, and I
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  Speaker 1: think I think in both episodes of FED officials have
• 11:54
  Speaker 1: appealed to to risk management. UM. I think in particular, now,
• 11:59
  Speaker 1: given that you know rates are low and we're in
• 12:01
  Speaker 1: what what what I and others have called a new
• 12:03
  Speaker 1: neutral for monetary policy. So your listeners should remember, before
• 12:07
  Speaker 1: the crisis, there was a pretty broad consensus among central
• 12:10
  Speaker 1: bankers that the Fed's policy rate, the funds rate, should
• 12:14
  Speaker 1: be some number add or above four percent once you
• 12:18
  Speaker 1: get to full employment. UM And I believe, and I
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  Speaker 1: think the evidence shows that for a variety of reasons,
• 12:24
  Speaker 1: there's a new destination for the FED rate, which is
• 12:27
  Speaker 1: gonna be say two or two and a half, not
• 12:29
  Speaker 1: not four. Four is not a realistic number? Well think
• 12:31
  Speaker 1: of think about it now, Think about how you would
• 12:33
  Speaker 1: value equities or any asset class if you were discounting
• 12:36
  Speaker 1: those cash flows at four percent as opposed to to
• 12:40
  Speaker 1: to one or two. And I think when when people ask, well,
• 12:43
  Speaker 1: why is it a new neutral? I think there are
• 12:44
  Speaker 1: a couple of reasons. One, growth rates have slowed down.
• 12:47
  Speaker 1: When you and I began our careers, growth in the
• 12:49
  Speaker 1: economy and a good year was three and a half
• 12:51
  Speaker 1: sometimes four percent. Productivity growth was two two and a
• 12:54
  Speaker 1: half percent. Look at in the nineties. And so in
• 12:58
  Speaker 1: a world where theo's growing up four percent, you sort
• 13:02
  Speaker 1: of need a four percent interest rate, but in a
• 13:04
  Speaker 1: world where the real growth in the economy is too
• 13:07
  Speaker 1: In fact, basically, one thing Barry about the last several
• 13:10
  Speaker 1: years that people may not know is that US has
• 13:14
  Speaker 1: been a very stable economy in terms of volatility GDP
• 13:17
  Speaker 1: growth in a good years two point three and a
• 13:19
  Speaker 1: week years one point seven, but very tightly centered around
• 13:22
  Speaker 1: that two percent number. And so with slow growth, slow
• 13:25
  Speaker 1: productivity growth, and slow labor force growth, uh, the FED
• 13:29
  Speaker 1: needs to normalize, but the destination will be much lower
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  Speaker 1: than before. So let's talk about the Fed's balance sheet
• 13:36
  Speaker 1: four and a half trillion. I think that's off of
• 13:39
  Speaker 1: the highs slightly basically at the peak. So here's the question.
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  Speaker 1: All these holdings, be the mortgage backed securities or treasuries,
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  Speaker 1: they're all dated. None of these are perpetual bonds were
• 13:53
  Speaker 1: not like the UK, not yet. Why can't the FEDS
• 13:57
  Speaker 1: simply let these roll off as they naturally come up
• 14:01
  Speaker 1: on the maturity dates and gradually allow their book to normalize.
• 14:06
  Speaker 1: And that would be one very plausible scenario. And and
• 14:09
  Speaker 1: I think if you go back and read what FED
• 14:11
  Speaker 1: officials said five or six years ago. That's what they
• 14:14
  Speaker 1: thought they would be doing. They thought that eventually they
• 14:16
  Speaker 1: would just step back, they would stop buying, and there's
• 14:19
  Speaker 1: the treasuries mature. Uh, that balance sheet would shrank. And
• 14:22
  Speaker 1: there's the mortgages prepay or people move or refinance those
• 14:25
  Speaker 1: mortgages would would would roll off. Um. It's pretty clear now,
• 14:30
  Speaker 1: based upon the Fed minutes that have been released this year,
• 14:33
  Speaker 1: that they are not going to pursue that passive approach.
• 14:37
  Speaker 1: What they're going to do is they're gonna try to
• 14:38
  Speaker 1: smooth the path of balance sheet reduction. Uh. And I
• 14:43
  Speaker 1: think they're doing so for a couple of reasons. When
• 14:45
  Speaker 1: you say smooth, what do you mean by that? That
• 14:47
  Speaker 1: means not just let them roll off, but but replace
• 14:50
  Speaker 1: some of them as So. For example, what the FED
• 14:53
  Speaker 1: minutes suggested at the last meeting Barry was that in
• 14:57
  Speaker 1: any given month they would set a maximum cap on
• 15:00
  Speaker 1: the amount of treasuries and mortgages that could roll off,
• 15:04
  Speaker 1: and any any additional roll off above that cap, they
• 15:08
  Speaker 1: would then step into the market and buy. So the
• 15:11
  Speaker 1: Fed will be shrinking the balance sheet, but it will
• 15:13
  Speaker 1: still be buying. Along this normalization path. They want they
• 15:17
  Speaker 1: want to smooth it um and they're also in a
• 15:21
  Speaker 1: situation whereby they made the case, which I agree with
• 15:24
  Speaker 1: that when they did qwi at lowered rates. So if
• 15:27
  Speaker 1: you're reversing, QI is probably gonna raise rates, and they're
• 15:30
  Speaker 1: really unsure by how much. And because they're unsure, they
• 15:34
  Speaker 1: want to really smooth this process out, which means it's
• 15:37
  Speaker 1: going to be very gradual. And I think the other
• 15:40
  Speaker 1: issue that your listeners should know, Barry, is there two
• 15:44
  Speaker 1: big decisions for the FED to make. How fast do
• 15:47
  Speaker 1: they let it roll off? And then what is the
• 15:49
  Speaker 1: ultimate destination. They haven't really given us much insight on
• 15:52
  Speaker 1: the ultimate destination, and I suspect that this FED may
• 15:56
  Speaker 1: not in the end make a decision on the ultimate
• 15:59
  Speaker 1: side for the balance sheet that maybe for the next
• 16:02
  Speaker 1: FED chair to figure out. So I would expect that
• 16:04
  Speaker 1: what Yelling and company are likely to do in June
• 16:08
  Speaker 1: or later this year is to lay out, if you will,
• 16:10
  Speaker 1: a glide path or a scenario for balance sheet reduction.
• 16:14
  Speaker 1: They may begin to do that, and then it will
• 16:16
  Speaker 1: be up to the next FED chair to implement as
• 16:19
  Speaker 1: he or she sees fit. Let's talk a little bit
• 16:22
  Speaker 1: about modern economic theory and some interesting and perplexing things
• 16:26
  Speaker 1: that are taking place. Earlier, you mentioned productivity. It seems
• 16:31
  Speaker 1: that we've sort of hit a productivity slump, and that
• 16:34
  Speaker 1: raises the question do we have a productivity problem or
• 16:38
  Speaker 1: do we have a problem measuring productivity? Great point, and
• 16:42
  Speaker 1: I think the truth is it's probably some of both. Clearly,
• 16:46
  Speaker 1: there are enormous amount of innovation, especially web based innovation,
• 16:50
  Speaker 1: and it's tough to measure that we all we all
• 16:53
  Speaker 1: know that, um. But I do think that for a
• 16:56
  Speaker 1: variety of reasons, that there is also a real productivity
• 17:00
  Speaker 1: slow down. Part of it may simply be as you
• 17:02
  Speaker 1: move towards a service economy, it's intrinsically hard to measure,
• 17:05
  Speaker 1: even old fashioned you can you can measure, but you
• 17:09
  Speaker 1: can't measure if you subscribe to something on Apple iTunes
• 17:13
  Speaker 1: and you're getting that service exactly music service, how do
• 17:16
  Speaker 1: you actually measure? So I think, I think, I think
• 17:19
  Speaker 1: there is an element to that. But I but I
• 17:21
  Speaker 1: do think also that we're in a period of relatively
• 17:24
  Speaker 1: slow prot growth in part area because we haven't had
• 17:26
  Speaker 1: a lot of investment in this country really in about
• 17:29
  Speaker 1: a dozen years. Uh and in particular asked capital stock
• 17:33
  Speaker 1: has moved towards equipment that depreciates faster technology becomes obsolete.
• 17:38
  Speaker 1: We probably have more of an investment shortfall than than
• 17:40
  Speaker 1: we're even measuring. Is that at a corporate level, is
• 17:43
  Speaker 1: that at a household level, is at a government level,
• 17:45
  Speaker 1: or is it across the board? I think it's I
• 17:47
  Speaker 1: think it's across. It's across the board. Also, you know,
• 17:50
  Speaker 1: let's face it, in our system, we have different parts
• 17:53
  Speaker 1: of the tax code that encourage different activities real estate,
• 17:56
  Speaker 1: for example, and we have an abysmal tax when it
• 18:00
  Speaker 1: comes to taxing corporations really in senting them to move
• 18:04
  Speaker 1: to move abroad. So there's a lot we didn't we
• 18:06
  Speaker 1: change recently some of the both under Bush and Obama.
• 18:10
  Speaker 1: The capital depreciation that's been accelerated fairly rapidly versus you know,
• 18:15
  Speaker 1: you're not writing down a truck over ten years the
• 18:18
  Speaker 1: way there were. There were some elements of that, but
• 18:20
  Speaker 1: I think that they I think a lot of them
• 18:22
  Speaker 1: actually a lot of them actually expired. But getting back
• 18:26
  Speaker 1: to your initial point, um, I think there is a
• 18:28
  Speaker 1: measurement issue with productivity. But I do think apart from
• 18:32
  Speaker 1: the measurement issue, we're in globally a period of pretty
• 18:35
  Speaker 1: slow growth right now. But as I said, economists don't
• 18:37
  Speaker 1: have a good track record at inflection points, so we
• 18:40
  Speaker 1: can have a big surprise. Perfect example, who would have
• 18:43
  Speaker 1: said ten years ago or even eight years ago that
• 18:46
  Speaker 1: you would see the revolution and fracking and shale that
• 18:49
  Speaker 1: we've seen. That was a technological revolution that's transformed the
• 18:52
  Speaker 1: entire global energy market. Right. Remember, the thinking was, well,
• 18:56
  Speaker 1: what's the big deal with fracking with oil at a hundred, Well,
• 18:58
  Speaker 1: because of fracking oils at six and not a hundreds,
• 19:00
  Speaker 1: that's a huge impact that ten years ago, fifteen years ago,
• 19:04
  Speaker 1: nobody first and we haven't seen sixty in a long time.
• 19:07
  Speaker 1: When oil, which which kind of brings up the whole
• 19:12
  Speaker 1: debate about coal. When technology makes natural gas a with
• 19:18
  Speaker 1: the Saudi Arabia of natural gas as well as the
• 19:20
  Speaker 1: Saudi Arabia of coal, but when they make it so
• 19:23
  Speaker 1: accessible and so inexpensive, why move mountains to get cold
• 19:28
  Speaker 1: when it's so easy to pull gas out of the ground. Well,
• 19:30
  Speaker 1: and and also Barry, the fact is because of the
• 19:33
  Speaker 1: l en G technology, we can actually export our natural gas.
• 19:38
  Speaker 1: And ten years ago the talkers we needed important natural gas.
• 19:41
  Speaker 1: Now we're exportings. I just read the other day an
• 19:45
  Speaker 1: article that said, for the first time, liquid natural gas
• 19:49
  Speaker 1: is a global marketplace. It's not a regional market anymore.
• 19:52
  Speaker 1: And it once was, and it's and you're actually starting
• 19:55
  Speaker 1: to see that gas, which used to be very, very
• 19:57
  Speaker 1: geographically segmented, there's basically now approaching a global market. And
• 20:01
  Speaker 1: gash right, So you you referenced earlier UM the holdings
• 20:06
  Speaker 1: in treasuries and the relative um rarity or or the
• 20:12
  Speaker 1: limited supply of of of quality sovereign bonds. What are
• 20:16
  Speaker 1: your thoughts on this talk about a fifty or a
• 20:18
  Speaker 1: hundred year bonds here in the United States. Well, you know,
• 20:22
  Speaker 1: there is a there is a an issue which is
• 20:25
  Speaker 1: historically the Treasury is not issued beyond thirty years, no
• 20:28
  Speaker 1: pun intended. UH. There is globally a demand. There's a
• 20:32
  Speaker 1: certain community. UH. I think insurance companies, think other managers
• 20:36
  Speaker 1: that really have an appetite for very long duration assets
• 20:39
  Speaker 1: on match actuarial tables exactly UM, and so I think
• 20:43
  Speaker 1: there could be a case for for doing so, UH,
• 20:47
  Speaker 1: in particular long duration inflation index securities. UM. Say that again,
• 20:51
  Speaker 1: long duration and so you have inflation, so we have tips,
• 20:55
  Speaker 1: but they're relatively short again, well, but they go out
• 20:59
  Speaker 1: to thirty years, but beyond beyond that because because essentially,
• 21:04
  Speaker 1: for many individual investors, UH, potentially the biggest risk they
• 21:08
  Speaker 1: face over the life cycle is you you do hall
• 21:11
  Speaker 1: this hard saving, earned some decent returns, and then two
• 21:13
  Speaker 1: or three years of fifteen percent inflation, and of course
• 21:16
  Speaker 1: your younger listeners are saying, oh, fifteen percent inflation, that
• 21:19
  Speaker 1: can't happen. That was my senior year in college. That
• 21:21
  Speaker 1: was that was me in in grammar school, having to
• 21:24
  Speaker 1: go to the gas. They get guests to mow the lawn,
• 21:28
  Speaker 1: and um, we had, we had rates that we're pretty
• 21:32
  Speaker 1: crazy back. So so I do think Barry that that
• 21:34
  Speaker 1: I think there is a case for it. Apparently the
• 21:37
  Speaker 1: Treasury under Secretary Manuch is exploring this, uh this idea.
• 21:42
  Speaker 1: I think what gives them some pause is compared to
• 21:45
  Speaker 1: the UK, where there's a voracious appetite for very long
• 21:48
  Speaker 1: duration assets, there may not be so much of one
• 21:50
  Speaker 1: in the US, and so the Treasury doesn't want to
• 21:52
  Speaker 1: get into an area where it's having to offer up
• 21:55
  Speaker 1: a much higher yield to lock in that money for
• 21:57
  Speaker 1: fifty years. So I think it's under discussion. So the
• 22:00
  Speaker 1: fear is that the Treasury is going to overpay to
• 22:04
  Speaker 1: borrow that money. Yeah, what as if it was tied
• 22:07
  Speaker 1: to something like infrastructure or some other Is that the
• 22:11
  Speaker 1: politics of it or is that the structure of it? No,
• 22:14
  Speaker 1: I think I think it could be tied to It
• 22:15
  Speaker 1: could surely could be tied to infrastructure. And again I
• 22:18
  Speaker 1: think it's under it's under discussion, But I think ultimately
• 22:22
  Speaker 1: the decision is going to come down to how big
• 22:25
  Speaker 1: is the appetite, Because if there really is an appetite
• 22:27
  Speaker 1: for very long duration instruments, and the Treasury would not
• 22:29
  Speaker 1: have to offer much higher yield in order to to
• 22:32
  Speaker 1: sell those bonds, and I think they're still figuring that out.
• 22:35
  Speaker 1: Let's talk a little bit about some of the private
• 22:37
  Speaker 1: sector working done, because some of that stuff is really fascinating.
• 22:41
  Speaker 1: You've you've consulted for the likes of JP Morgan, Credit Swiss,
• 22:46
  Speaker 1: the Federal Reserve Bank of New York. What does that
• 22:49
  Speaker 1: work look like, what's that process like? Well, it depends.
• 22:52
  Speaker 1: I think in the case of Credit Swiss, that was
• 22:55
  Speaker 1: almost twenty years ago, and I was essentially working with
• 22:58
  Speaker 1: their facts team to build them econometric models of the
• 23:02
  Speaker 1: of the currency market and currency evaluation, so they're essentially
• 23:05
  Speaker 1: outsourcing some of that to me. I was actually sort
• 23:08
  Speaker 1: of proud they actually still they were running that model
• 23:10
  Speaker 1: about for about fifteen years or so. They since retired it,
• 23:13
  Speaker 1: but uh so that was a good project. You know,
• 23:16
  Speaker 1: the New York Fed has a lot of programs. In
• 23:18
  Speaker 1: the case of there, I visited during the summer, worked
• 23:21
  Speaker 1: on some papers, co authored with their staff. Spent some
• 23:25
  Speaker 1: time back in the nineties when Rick Michigan was the
• 23:28
  Speaker 1: director of research at the New York Fed, where he
• 23:30
  Speaker 1: had a little kitchen cabinet of people who would come
• 23:32
  Speaker 1: down every Friday and have have uh lunch. I love
• 23:37
  Speaker 1: that idea of a kitchen cabinet around the New York
• 23:40
  Speaker 1: Is that still going on, I believe so. I have
• 23:42
  Speaker 1: not done it in in in a while, but it's
• 23:43
  Speaker 1: quite an impressive group. You had. Chris Simms is a
• 23:46
  Speaker 1: Nobel laureate, someone named Ben Bernanke was there every week,
• 23:49
  Speaker 1: Rick Michigan, Mike Woodford, So it was it was a
• 23:52
  Speaker 1: real treat to be part of that group. If you
• 23:55
  Speaker 1: remember the book from the sixties, The Money Game by
• 23:59
  Speaker 1: Adam Smith was the nomen Yes, he describes a similar
• 24:03
  Speaker 1: sort of kitchen cabinet um that was run by Scarsdale Fats,
• 24:08
  Speaker 1: and it was movers and shakers on Wall Street would
• 24:11
  Speaker 1: get together on a Friday afternoon and discuss what they
• 24:15
  Speaker 1: were doing, what they were looking at, what they were seeing,
• 24:17
  Speaker 1: and there was all sorts of conspiratorial overtones. Meanwhile, it
• 24:21
  Speaker 1: was just six guys sitting around chewing the fat over
• 24:23
  Speaker 1: what stocks they liked and didn't and they they had
• 24:26
  Speaker 1: far less power than than was ascribed to them. But
• 24:29
  Speaker 1: I like the idea that taking place, UH with with
• 24:32
  Speaker 1: the New York Fed. Speaking of the FED, you did
• 24:35
  Speaker 1: work with a former FED chairman, Paul Volcan. I did,
• 24:38
  Speaker 1: and there was one of the thrills of my professional career.
• 24:41
  Speaker 1: So so tell Paul Volker, better known as Tall Paul,
• 24:46
  Speaker 1: also known as Paul Volker for many years after he
• 24:49
  Speaker 1: left that I should say, Paul Volkers one of my
• 24:52
  Speaker 1: one of my heroes. You know, you talking about profiles
• 24:55
  Speaker 1: and courage. But what Paul Volker did under enorm us
• 25:00
  Speaker 1: UH pressure and with very high stakes to break the
• 25:03
  Speaker 1: back of inflation UH in the early nineteen eighties and
• 25:08
  Speaker 1: really bequeath really the foundations for a twenty five year
• 25:11
  Speaker 1: bull market and bonds and stocks he gets far less
• 25:14
  Speaker 1: credit than he showed. Is really the prime market. He's
• 25:18
  Speaker 1: truly a thirty year bull market. And the recovery in
• 25:22
  Speaker 1: both the U S economy and the U S stock market. Yeah,
• 25:25
  Speaker 1: and and all based upon basically making the right decisions
• 25:29
  Speaker 1: in a in a four or five year period. So
• 25:31
  Speaker 1: literally one of the giants of economics. But to answer
• 25:33
  Speaker 1: your question, after he left the FED, he spent many
• 25:36
  Speaker 1: years at something called the Group of Thirty, which is
• 25:38
  Speaker 1: basically an informal organization of former policymakers, and the Group
• 25:42
  Speaker 1: of thirty commissioned to paper by me. I'm not a
• 25:45
  Speaker 1: member of the Group of thirty. I'm not in that club,
• 25:46
  Speaker 1: but they occasionally commissioned papers uh. And so Paul and
• 25:50
  Speaker 1: his team asked me to write a paper right after
• 25:53
  Speaker 1: the Asia financial crisis on sort of what the what
• 25:57
  Speaker 1: the global UH currency markets would look like in the
• 26:02
  Speaker 1: in the aftermath of that crisis. And so I took
• 26:04
  Speaker 1: it as an opportunity to write along sixty page scholarly
• 26:08
  Speaker 1: paper thinking about the foreign exchange markets after the Asia crisis.
• 26:12
  Speaker 1: So it's a real, real treat to work, to work
• 26:15
  Speaker 1: with him that that's that's quite fascinating. Yeah. Um, let's
• 26:19
  Speaker 1: talk a little bit about PIMCO. Yeah, you're you're global
• 26:22
  Speaker 1: strategist for them. Yeah, you're a managing partner and right,
• 26:26
  Speaker 1: that's right. Tell us what that that work is like.
• 26:29
  Speaker 1: So I've been with PIMCO for eleven years. It seems
• 26:32
  Speaker 1: just like yesterday. So you've been there through a lot
• 26:35
  Speaker 1: of pre and post here and a lot of indeed
• 26:38
  Speaker 1: a lot of interesting times. And and so what do
• 26:41
  Speaker 1: I do for Pimco. Well, I I basically work on
• 26:44
  Speaker 1: global macro, focusing on the G ten economies. Given my
• 26:48
  Speaker 1: interest in my research, I spent a lot of time
• 26:51
  Speaker 1: thinking about the FED and other central banks. Obviously central
• 26:55
  Speaker 1: banks are key to value bonds. PIMCO has a lot
• 26:59
  Speaker 1: of clients, especially around the world, who I go see
• 27:04
  Speaker 1: and then more recently, since two thousand and fourteen, the
• 27:08
  Speaker 1: folks that have asked me to oversee our annual Secontar
• 27:11
  Speaker 1: Forum process, which is really an integral part of pimco's
• 27:14
  Speaker 1: investment process. We've been doing it for thirty six years.
• 27:17
  Speaker 1: We bring an outside speakers three days a year just
• 27:20
  Speaker 1: for the investors and the executives of the firm. To
• 27:24
  Speaker 1: think about what the global economy is going to look
• 27:26
  Speaker 1: like over the next three or five years. So you
• 27:27
  Speaker 1: mentioned the new Normal and one of the earlier segments
• 27:30
  Speaker 1: I talked about the New Neutral. Those are both themes
• 27:32
  Speaker 1: that emerged from our Secontar Forum process, and so that's
• 27:36
  Speaker 1: now essentially my my role is to coordinate that that effort.
• 27:40
  Speaker 1: That that's fascinating. How do you integrate global monetary and
• 27:46
  Speaker 1: global fiscal policy into ideas of either fixed income investing
• 27:52
  Speaker 1: or any type of investing. Yeah, well, and I think
• 27:55
  Speaker 1: that's obviously that's that's that's crucial for me to add
• 27:59
  Speaker 1: value to to the operation. I think I'll give you
• 28:03
  Speaker 1: I'll give you a concrete um example. Uh, this whole
• 28:06
  Speaker 1: idea that we talked about it a moment ago, about
• 28:09
  Speaker 1: the new about the new neutral. That is something that
• 28:12
  Speaker 1: I began to think about based on my academic work, uh,
• 28:17
  Speaker 1: working with something that we would call a forward looking
• 28:19
  Speaker 1: version of a tailor rule. Work I did with Mark
• 28:22
  Speaker 1: Gertler and Jardy Galliott at n y U. So we
• 28:25
  Speaker 1: were pretty early on in the in the late nineties
• 28:28
  Speaker 1: and sort of focusing on a rules based monetary policy.
• 28:32
  Speaker 1: But one of the things about the original tailor rules,
• 28:35
  Speaker 1: it assumed that this neutral policy rate was constant, and
• 28:38
  Speaker 1: I began to be persuaded that, in fact, we're in
• 28:40
  Speaker 1: a world where where neutral is not constant. In fact,
• 28:43
  Speaker 1: it's going to be lower the destination for the funds rate.
• 28:46
  Speaker 1: And so I basically was making the case internally that
• 28:49
  Speaker 1: we needed to factor this in. That became what we
• 28:51
  Speaker 1: call our new neutral thesis, and it's been a really
• 28:54
  Speaker 1: important part of the way that we've been investing for
• 28:56
  Speaker 1: the last three years. So so let me get you
• 28:58
  Speaker 1: to define this. Yeah, dynamic stochastic general equilibrium modeling. Oh,
• 29:04
  Speaker 1: my mouthful, And that's pretty much the name of one
• 29:08
  Speaker 1: of your papers. Yeah, well, and that's that's the that's
• 29:11
  Speaker 1: the name of the branch of economics that I work in. Uh.
• 29:15
  Speaker 1: That's an example where the jargon is probably relevant to
• 29:18
  Speaker 1: other members of that club, but I think to the
• 29:20
  Speaker 1: general public is probably not all that important. Essentially, what
• 29:23
  Speaker 1: it means is that you're building a model of the
• 29:25
  Speaker 1: economy which is going to be modeling the economy over time,
• 29:28
  Speaker 1: so it's dynamic over time, but it also allows for
• 29:32
  Speaker 1: stuff to happen. Stuff happened, so shocks to happen, so
• 29:36
  Speaker 1: you want to know how the economy evolves when it's
• 29:38
  Speaker 1: hit by shocks, you know, oil shocks, supply shocks, fiscal shocks,
• 29:42
  Speaker 1: and so that's the stochastic part of the equation. It's
• 29:47
  Speaker 1: um it's in Otherwise it sounds much worse than it
• 29:50
  Speaker 1: really yah, than it really is exactly. UM. I previously
• 29:56
  Speaker 1: had your PIMCO colleague Paul McCulley on. He's somebody I
• 30:01
  Speaker 1: met fishing in Maine, of all places, and he is
• 30:04
  Speaker 1: a big Himan Minsky fan who was infamous for saying
• 30:09
  Speaker 1: um stability breeds instability. Do you think that's true? And
• 30:14
  Speaker 1: given this period of stability we've seen, are we potentially
• 30:17
  Speaker 1: breeding a more instability? Well, first of all, just since
• 30:21
  Speaker 1: you mentioned Paul, just to know he's teaching at Cornel.
• 30:24
  Speaker 1: Just just mentioned I. One of the real high points
• 30:28
  Speaker 1: of of my time at PEMCA was a chance to
• 30:32
  Speaker 1: work very closely with Paul for six, seven or eight
• 30:35
  Speaker 1: years uh. And I learned so much from him. Uh.
• 30:40
  Speaker 1: And in particular when when I got there and oh six,
• 30:42
  Speaker 1: he was already on the Minsky uh soapbox. And I
• 30:46
  Speaker 1: must admit at that time I had some vague recollection
• 30:49
  Speaker 1: of reading miss Minsky and graduate school. But but obviously
• 30:52
  Speaker 1: that was a very very prescient call on On on
• 30:56
  Speaker 1: his part to your broader question. Clearly in retrospect, and
• 30:59
  Speaker 1: believe me, Barry, I did not have a crystal ball
• 31:01
  Speaker 1: in oh five and oh six, but but clearly in retrospect, Uh,
• 31:05
  Speaker 1: the stability of the of the two thousands did breed
• 31:08
  Speaker 1: instability through as we mentioned, the securitization and the credit
• 31:12
  Speaker 1: derivatives and all of that, on all of that stuff.
• 31:15
  Speaker 1: So what I'd like to say is, I think general
• 31:17
  Speaker 1: the old saying is, you know, generals are good at
• 31:19
  Speaker 1: fighting the last war. So I'm very convinced, Barry that
• 31:22
  Speaker 1: two things, there will be another financial crisis, and I'm
• 31:25
  Speaker 1: convinced of the other thing is it will not look
• 31:27
  Speaker 1: like the last crisis. Is We're always quite good at
• 31:29
  Speaker 1: making sure the next crisis looks different. And that's where
• 31:32
  Speaker 1: I think the real power of Ryan Harton Rogoff is
• 31:34
  Speaker 1: is we keep persuading ourselves that things are different because
• 31:38
  Speaker 1: we're not going to have another you know, subprime meltdown,
• 31:42
  Speaker 1: but it will show up somewhere else. You know, greed
• 31:44
  Speaker 1: is a constant fact of life. And I think in
• 31:47
  Speaker 1: some ways the system still is fragile because of the
• 31:51
  Speaker 1: interconnectedness Now globally, it's no longer a US market or
• 31:54
  Speaker 1: a French market. What happens in Beijing or ri Odd
• 31:57
  Speaker 1: impacts all of our markets as well. Ow uh So,
• 32:01
  Speaker 1: I think one thing that we do know is the
• 32:03
  Speaker 1: big global huge banks have much more capital uh than
• 32:08
  Speaker 1: they did before, and as we mentioned, they have more
• 32:10
  Speaker 1: liquid assets. But that just means I think the risk
• 32:13
  Speaker 1: migration is somewhere else in the system, and I think
• 32:16
  Speaker 1: we know less about that. Frankly, we have been speaking
• 32:19
  Speaker 1: with Professor Richard Clarida, global strategist for Pimco and professor
• 32:23
  Speaker 1: at Columbia University. Be sure and check out my daily
• 32:26
  Speaker 1: column on Bloomberg View dot com. You can follow me
• 32:29
  Speaker 1: on Twitter at rihlts. We love your comments, feedback and
• 32:33
  Speaker 1: suggestions right to us at m IB podcast at Bloomberg
• 32:38
  Speaker 1: dot net. I'm Barry Hults. You've been listening to Masters
• 32:41
  Speaker 1: in Business on Bloomberg Radio. People think that when you
• 32:53
  Speaker 1: are a refugee in very seculated to America, they know
• 32:56
  Speaker 1: your problems and that they don't understand that that's the
• 32:58
  Speaker 1: beginning of everything. I was not born a refuge I
• 33:02
  Speaker 1: was made one learn More and Embrace Refugees dot org,
• 33:06
  Speaker 1: brought to you by the AD Council. Welcome to the podcast, Richard.
• 33:13
  Speaker 1: Thank you so much for doing this. This is fascinating
• 33:17
  Speaker 1: And um you were on my my shortlist of people
• 33:20
  Speaker 1: to reach out to, so I'm glad we managed to
• 33:23
  Speaker 1: get together. Yeah, there are a bunch of things I
• 33:27
  Speaker 1: want to get to before I get to my standard questions.
• 33:30
  Speaker 1: This is me going through all my pages. I hate
• 33:34
  Speaker 1: when it gets printed two sided because I can't find stuff. Um,
• 33:40
  Speaker 1: I asked about dynamic stochastic general equilibrium modeling. You went
• 33:44
  Speaker 1: You went right into academia straight out of college. Is
• 33:47
  Speaker 1: that always the plan? Well, it was so I went
• 33:51
  Speaker 1: straight from the University of Illinois, where I must say
• 33:54
  Speaker 1: I got an incredible education, one of the great land
• 33:57
  Speaker 1: grant universities and was an economics major land grant universities.
• 34:02
  Speaker 1: What is that that? That was a program that started
• 34:05
  Speaker 1: under Abraham Lincoln and the idea was that there would
• 34:09
  Speaker 1: be federal land given to states if they would build universities.
• 34:15
  Speaker 1: UM on it and there were some support. Yeah, so
• 34:18
  Speaker 1: very very much public private partnership. You know. Alexander Hamilton's
• 34:22
  Speaker 1: approach yes, and so University of Illinois, Michigan. They're called
• 34:25
  Speaker 1: the Land Grant UH Universities UM, and I think tuitioning
• 34:30
  Speaker 1: was six d dollars a term or a year in
• 34:32
  Speaker 1: incredible education. And then was an econ major UH and
• 34:36
  Speaker 1: applied to graduate school and in one of the huge
• 34:40
  Speaker 1: surprises and life changing events of my life, actually got
• 34:43
  Speaker 1: into Harvard. No, no expectation that would happen. And so
• 34:48
  Speaker 1: which was where were you expecting to go? Well, I
• 34:51
  Speaker 1: applied to some other good, good schools, but you know,
• 34:54
  Speaker 1: kids from coal mining towns and downstate Illinois UH didn't
• 34:59
  Speaker 1: didn't go to Harvard. But but but I was admitted
• 35:03
  Speaker 1: and went there. And then in those days you could
• 35:05
  Speaker 1: get a PhD in four years. Typically now it takes
• 35:07
  Speaker 1: five or six. And so that I went straight from
• 35:10
  Speaker 1: college to Harvard, and then I went straight from Harvard
• 35:12
  Speaker 1: to my first job as an assistant professor at at
• 35:16
  Speaker 1: Yale back in not not a bad set of affiliations,
• 35:20
  Speaker 1: and my office was right next to someone named Jim Tobin.
• 35:22
  Speaker 1: So talk about talk about an eye opening experience as
• 35:26
  Speaker 1: a twenty six year old assistant professor. And the fellow
• 35:29
  Speaker 1: next door is Nobel laureate and legend Jim Toe. Did
• 35:32
  Speaker 1: you get to interact with you very much? Absolutely? Yeah.
• 35:35
  Speaker 1: It's funny because as I speak with people over the
• 35:38
  Speaker 1: course of the show, it's always fascinating when you find
• 35:42
  Speaker 1: out Mayer Stateman, the professor at Santa Clara, his thesis
• 35:47
  Speaker 1: advisor was Peter Bernstein. Yeah, like just crazy. I really
• 35:52
  Speaker 1: had no idea he was an academic. That just that.
• 35:55
  Speaker 1: That's fascinating. So so that was the plan. Yes, right,
• 35:59
  Speaker 1: so and then him yell, you've been since nine almost
• 36:03
  Speaker 1: thirty years. How have students changed over that period? Wow,
• 36:08
  Speaker 1: that's a great question. I would make the following observations.
• 36:10
  Speaker 1: First of all, there's a lot more interest in economics
• 36:13
  Speaker 1: now than thirty years ago. So the number of economics
• 36:15
  Speaker 1: majors at places like Columbia University of Illinois is double
• 36:19
  Speaker 1: or triple what it was one of your thirty years
• 36:23
  Speaker 1: at whose expense? Is it that much less frenchise or
• 36:27
  Speaker 1: they're coming up coming out of somewhere. I won't I
• 36:29
  Speaker 1: won't speculate where, but they're coming into economics. Given the
• 36:33
  Speaker 1: given the cost of colleges, one would think that a
• 36:38
  Speaker 1: move towards is this going to help me get a
• 36:40
  Speaker 1: job and paying off these loans might be driving something
• 36:43
  Speaker 1: that that could that could well that could well be
• 36:45
  Speaker 1: so I the other the other things. Certainly when I'm
• 36:49
  Speaker 1: now talking about maybe in the graduate program, is it
• 36:53
  Speaker 1: is truly now a global market for students who are
• 36:56
  Speaker 1: applying to graduate school. So when I was a graduate student,
• 37:00
  Speaker 1: I think in my class at Harvard, of the twenty
• 37:02
  Speaker 1: five students who I entered with, I think twenty one
• 37:06
  Speaker 1: were educated in US UH colleges um and I think
• 37:10
  Speaker 1: in the typical US pH d program now a fewer
• 37:13
  Speaker 1: than half the students are US students because there's a
• 37:15
  Speaker 1: global market from people in Europe, South America, Asia, and
• 37:18
  Speaker 1: so the number of applications to US pH d programs
• 37:21
  Speaker 1: from around the world has just gone up by leaps.
• 37:24
  Speaker 1: And also it's a very international student body. You know.
• 37:28
  Speaker 1: I've seen data that says half of the sea level
• 37:30
  Speaker 1: Silicon Valley UM executives are farm born. Come here and say, hey,
• 37:36
  Speaker 1: we like it here, let's be let's build a company.
• 37:40
  Speaker 1: Are you seeing these students staying here, getting jobs, staying
• 37:42
  Speaker 1: in America or do they take this knowledge and go
• 37:45
  Speaker 1: back to wherever it It depends? I think many of
• 37:48
  Speaker 1: them desire to stay here, uh if if they can,
• 37:52
  Speaker 1: but certainly there are global opportunities as well. But I
• 37:56
  Speaker 1: think the third thing I would mention, and now I'm
• 37:58
  Speaker 1: gonna maybe a little bit of an odd thing to say, um,
• 38:03
  Speaker 1: but I think the amount that the mathematical background now
• 38:07
  Speaker 1: of students in US PhD programs, um it is really
• 38:11
  Speaker 1: off the charts. So programs do now do a very
• 38:14
  Speaker 1: good job of sorting students by pure math ability. UM.
• 38:19
  Speaker 1: I don't know if that's necessarily an unallied positive. I
• 38:23
  Speaker 1: think there's more to economics than math, and I think
• 38:25
  Speaker 1: in some ways that maybe dates my vintage of people.
• 38:28
  Speaker 1: So for me, economics is always about understanding the economy
• 38:31
  Speaker 1: and tutorly, and then the math was sort of a
• 38:33
  Speaker 1: tool to to get at it. But I do think
• 38:35
  Speaker 1: now that there is the pendulum is definitely swung towards
• 38:39
  Speaker 1: beginning with the math and sort of reverse engineering the economics,
• 38:42
  Speaker 1: which always makes me uncomfortable. So even when I teach
• 38:45
  Speaker 1: a PhD course, before I launch into the math, I
• 38:48
  Speaker 1: try to do the intuitive version, and so I may
• 38:51
  Speaker 1: be the last generation of people who still do it
• 38:53
  Speaker 1: that that way, where you start with the economics and
• 38:55
  Speaker 1: then you do the math later. Your your Columbia colleague,
• 38:58
  Speaker 1: Emmanuel Derman. Yeah, this financial engineering school. And he was
• 39:02
  Speaker 1: telling me that he's just watched over twenty years it
• 39:06
  Speaker 1: go from more mostly Americans with a smattering of um
• 39:12
  Speaker 1: foreign born students to more and more farign born students.
• 39:16
  Speaker 1: And he said, the quality of the math skills of
• 39:20
  Speaker 1: kids coming in these are all PhD level, brilliant students.
• 39:26
  Speaker 1: And that's just the cost of entry. If you build
• 39:29
  Speaker 1: from there, it's quite it's quite fascinating. Um So, let's
• 39:33
  Speaker 1: let's go over a couple of other questions I missed.
• 39:37
  Speaker 1: I want to see what I didn't get to that
• 39:41
  Speaker 1: I thought was important. Oh so we we talked about
• 39:45
  Speaker 1: the financial crisis. What do you think are some of
• 39:49
  Speaker 1: the bigger misconceptions about monetary and fiscal policy? And following
• 39:55
  Speaker 1: the crisis, we we had a huge monetary response but
• 40:00
  Speaker 1: not much of a fiscal response. What what do you
• 40:03
  Speaker 1: what was the impact of that. Well, let's let's start
• 40:05
  Speaker 1: with with the second part of your question. Uh. There,
• 40:09
  Speaker 1: um So, I think the consensus among academic and economist
• 40:14
  Speaker 1: and policymakers going into the crisis was that in practice
• 40:19
  Speaker 1: in the US fiscal policy UH is not a particularly
• 40:23
  Speaker 1: effective tool because of the lags and implementation and the
• 40:27
  Speaker 1: politics involved in getting bills through. In the view as
• 40:30
  Speaker 1: you should really just have monetary policy focusing on counter
• 40:33
  Speaker 1: cyclical objectives. You know, as rates have gone to zero,
• 40:37
  Speaker 1: we've gone into quantitative easing, and the year if they've
• 40:40
  Speaker 1: gone to negative rates, I think certainly the profession is
• 40:43
  Speaker 1: more receptive to thinking about fiscal UH. Fiscal policy. You know, Barry,
• 40:47
  Speaker 1: we did have a big fiscal response in two thousand
• 40:49
  Speaker 1: and nine. We had a one trillion dollar deficit that year.
• 40:52
  Speaker 1: So but but you're right that we went actually from
• 40:55
  Speaker 1: stimulus and O nine to a period of a fiscal
• 40:59
  Speaker 1: austeria D after two thousand and ten or or or so. UH.
• 41:05
  Speaker 1: And and and I think I think as a practical matter,
• 41:09
  Speaker 1: UH most of commers would agree that there are a
• 41:11
  Speaker 1: lot there's a lot of positive that fiscal policy can
• 41:14
  Speaker 1: do in terms of infrastructure, in terms of encouraging investment
• 41:18
  Speaker 1: and the like. But I think in terms of being
• 41:21
  Speaker 1: a supple tool for countercyclical UH uses it it has
• 41:25
  Speaker 1: a lot of problems. How how long of a lag
• 41:28
  Speaker 1: do we typically see with monetary policies implementation, How soon
• 41:33
  Speaker 1: as it felt well the old Yeah, exactly. So there's
• 41:37
  Speaker 1: no implementation lag of monetary policy. In fact, the Fed
• 41:40
  Speaker 1: doesn't even have to wait for a meeting if if
• 41:41
  Speaker 1: the situation calls that you can have an intermeding move
• 41:44
  Speaker 1: as we know. So there's no there's no implementation lag
• 41:47
  Speaker 1: of monetary policy. But there is a lag from when
• 41:50
  Speaker 1: policy impacts the real economy. You know. Milton Friedman famously
• 41:54
  Speaker 1: said at one time that you know, monetary policy operates
• 41:58
  Speaker 1: with long and variable lags. I think more recent research
• 42:01
  Speaker 1: is indicated that the lags perhaps because the economy has
• 42:04
  Speaker 1: become more financialized, the lags that perhaps not so uh,
• 42:08
  Speaker 1: not so long. And in particular now FED officials like
• 42:11
  Speaker 1: Bill Dudley, who I think does a great job, talk
• 42:13
  Speaker 1: about financial conditions as being an input into the FEDS calculation. Um.
• 42:19
  Speaker 1: I think the best example of the challenges with counter
• 42:22
  Speaker 1: circle fiscal policy as you look back in the President
• 42:25
  Speaker 1: Obama administration when we had a big recession, they wanted
• 42:28
  Speaker 1: to do kind of circle policy. Uh, there's some talk
• 42:31
  Speaker 1: about doing infrastructure. I think you can look it up
• 42:33
  Speaker 1: on Google. President already yeah, he said, I found the
• 42:36
  Speaker 1: herd out the hard way. There aren't a lot of
• 42:38
  Speaker 1: shovel ready projects. So that's sort of an example of
• 42:40
  Speaker 1: the implementation. But if you think about it, coming out
• 42:43
  Speaker 1: of a financial crisis, you don't want shovel ready products projects.
• 42:48
  Speaker 1: You want long scale things that will put people back
• 42:52
  Speaker 1: to work. Start that. You know, if you're really dealing
• 42:55
  Speaker 1: with a keensie stimulus to replace the private sector shortfall,
• 43:00
  Speaker 1: well why not have a two three four year post
• 43:02
  Speaker 1: crisis project instead of all right, we're going to repay
• 43:06
  Speaker 1: a few roads and then we're done. Yeah, yeah, no,
• 43:08
  Speaker 1: I I agree, and I and I think that that
• 43:11
  Speaker 1: We'll see what comes out of the discussions in Washington
• 43:13
  Speaker 1: on on on infrastructure. But I think clearly the economy
• 43:18
  Speaker 1: needs better and more infrastructure. But but so far there's
• 43:21
  Speaker 1: a staleman about putting more in place. Is it is
• 43:25
  Speaker 1: it the spending aspect of it is or is it
• 43:28
  Speaker 1: a lack of consensus on what needs to be spent upon.
• 43:32
  Speaker 1: I think it's all the above. I mean, infra infrastructure,
• 43:35
  Speaker 1: if it's done appropriately, UH should generate future tax revenues
• 43:40
  Speaker 1: with more economic growth, I think. I think so that
• 43:44
  Speaker 1: needs to be factored in. I think the element is
• 43:46
  Speaker 1: how you select projects and how you prioritize obviously, you
• 43:50
  Speaker 1: know that that sometimes is also a bottleneck in these
• 43:55
  Speaker 1: uh in these things. Yeah. So, but by the way,
• 44:01
  Speaker 1: here are my my standard questions, and I'm holding them
• 44:04
  Speaker 1: off because I know so many of these we we
• 44:07
  Speaker 1: blew through because as we were chatting, Um, each of
• 44:13
  Speaker 1: your comments led to a different question, and so I really,
• 44:17
  Speaker 1: I really hardly used my my usual questions, UM, new normal,
• 44:24
  Speaker 1: no signs inflation? Uh, okay, so we could talk next question.
• 44:31
  Speaker 1: So I referenced the FED as as being the only
• 44:34
  Speaker 1: game in town when there was monetary policy but not
• 44:38
  Speaker 1: fiscal policy. Is that still the case today because we
• 44:42
  Speaker 1: haven't seen a whole we were expecting a wall, We
• 44:45
  Speaker 1: were expecting some infrastructure respecting a lot of things. Hey,
• 44:49
  Speaker 1: we're kinda you know, it's it's we're halfway through the
• 44:52
  Speaker 1: first year. We really haven't seen a lot of motion
• 44:55
  Speaker 1: on any of these things. Yeah, well, exactly so. And
• 44:58
  Speaker 1: I think the economy right now East, according to the FED,
• 45:01
  Speaker 1: is close to full uh employment. So you're we're probably
• 45:04
  Speaker 1: not at a point bearer where we need, you know,
• 45:06
  Speaker 1: a lot of counter cyclical policy. But you're right, there
• 45:09
  Speaker 1: had been some view coming out of the election. By
• 45:11
  Speaker 1: now we would have some tax reform, infrastructure and uh
• 45:15
  Speaker 1: the like patriation of which could be which could be used.
• 45:19
  Speaker 1: And I mentioned in an earlier segment, you know, our
• 45:21
  Speaker 1: our corporate tax code is really an abomination. It doesn't
• 45:24
  Speaker 1: raise a whole lot of money, and it encourages multinational
• 45:27
  Speaker 1: companies to locate abroad. So there's a lot that we
• 45:29
  Speaker 1: can do there. But but I think really the mode
• 45:32
  Speaker 1: that we're in now is, you know, the FED wants
• 45:35
  Speaker 1: to normalize. I think a point I've made uh many
• 45:38
  Speaker 1: times on on Bloomberg and other places is I think
• 45:41
  Speaker 1: right now we have to think of the FED with
• 45:43
  Speaker 1: the funds rate at less than a percent, with inflation
• 45:46
  Speaker 1: around two, policy is now still very accommodative in the US.
• 45:50
  Speaker 1: So I prefer not to call the Fed as as
• 45:53
  Speaker 1: necessarily tightening rates. I think I think here Yelling's correct.
• 45:56
  Speaker 1: I think the Fed is removing accommodation. I think as
• 45:59
  Speaker 1: we remove a common addation, we get to a point,
• 46:01
  Speaker 1: perhaps uh into into team where you can think of
• 46:04
  Speaker 1: policy as being tight. But with a fully employed economy
• 46:07
  Speaker 1: and inflation around too and the federal funds rate at
• 46:09
  Speaker 1: ninety basis points, this is not a tight monetary policy.
• 46:12
  Speaker 1: You've used the phrase normalization. We're moving from a emergency footing, yeah,
• 46:18
  Speaker 1: back to a more normal rate, and the emergency is over.
• 46:21
  Speaker 1: That's the emergency is over. So so I have to
• 46:25
  Speaker 1: go to the abomination that is the tax code. This
• 46:29
  Speaker 1: is very much a series of Christmas ornaments, unrelated, all
• 46:34
  Speaker 1: hung on on the tax code as as responses to
• 46:39
  Speaker 1: specific lobbying by specific things. Let's talk about what the
• 46:44
  Speaker 1: US corporate tax code should look like. So what do
• 46:48
  Speaker 1: you think would make the most amount of sense if
• 46:51
  Speaker 1: you had if you got tagged by this White House
• 46:55
  Speaker 1: and they said, give us five things we should do.
• 46:58
  Speaker 1: What would your response base? Well, I would I would
• 47:01
  Speaker 1: make a couple of points with a proviso that I'm
• 47:03
  Speaker 1: not a tax expert, but but what I would say
• 47:06
  Speaker 1: is we need lower rate, lower rates and a broader base,
• 47:11
  Speaker 1: and we need a code. I would go through the
• 47:13
  Speaker 1: code with a magnifying glass and a microscope to get
• 47:16
  Speaker 1: rid of anything that would encourage a US company to
• 47:19
  Speaker 1: locate production abroad when it could do that production in
• 47:23
  Speaker 1: in the US. UM. And there are different ways to
• 47:26
  Speaker 1: do that, UM. But I, to me, my principle would
• 47:30
  Speaker 1: be lower rates because we do have very high rates
• 47:32
  Speaker 1: now a base actual rates effectively there about but effectively
• 47:39
  Speaker 1: because of all the especially for multinational companies, and if
• 47:43
  Speaker 1: you're a US based company, you more or lesser paying
• 47:45
  Speaker 1: close to that rate. So multinationals I would really go
• 47:49
  Speaker 1: I guess my bottom principle be lower rates, a broader base,
• 47:51
  Speaker 1: and really go through with a magnifying glass and a microscope.
• 47:55
  Speaker 1: Any item in the code that actively encourages a company
• 47:58
  Speaker 1: to locate abroad, and we have a out of those now,
• 48:01
  Speaker 1: so what what about the repatriated earnings? For example? Those
• 48:04
  Speaker 1: are sitting abroad doing doing, doing nothing, um. And the
• 48:09
  Speaker 1: reason they're broad is our code is said, if you
• 48:11
  Speaker 1: quote keep your form profits abroad, you know you're not
• 48:14
  Speaker 1: facing a US level of tensation. So I think any
• 48:17
  Speaker 1: deal that we do see in Washington will have you know,
• 48:20
  Speaker 1: a levy on those overseas profits brought into the US.
• 48:23
  Speaker 1: And then going forward, we really need a code that
• 48:25
  Speaker 1: doesn't encourage companies to do that in the first place.
• 48:28
  Speaker 1: What's a reasonable rate for corporate taxes? Trump wants. The
• 48:33
  Speaker 1: number we've been hearing from from people in the House
• 48:37
  Speaker 1: has been what what do you think is both reasonable
• 48:42
  Speaker 1: economically and politically feasible. I don't put you on the spot, No,
• 48:46
  Speaker 1: I understood. I I think. I think if you actually
• 48:49
  Speaker 1: do a real reform all a Reagan in eighties six, uh,
• 48:53
  Speaker 1: when you're doing when you are broadening the base, uh,
• 48:56
  Speaker 1: and you could afford much lower rates, certainly some in
• 49:00
  Speaker 1: the range of in a serious tax reform I think
• 49:03
  Speaker 1: would be would be feasible and appropriate and would make
• 49:06
  Speaker 1: us competitive. And then the conversation that's come out of
• 49:10
  Speaker 1: Paul Ryan's office was making small businesses theoretically one of
• 49:15
  Speaker 1: the prime economic engines of growth, and he wants to
• 49:19
  Speaker 1: make the LLC rate the small companies, partnerships, etcetera. Wants
• 49:25
  Speaker 1: that rate to be the equivalent of the corporate rates.
• 49:28
  Speaker 1: Is that a realistic possibility? Well, I think, I think,
• 49:32
  Speaker 1: And again with the proviser that I I focus on
• 49:34
  Speaker 1: money and not taxes. My understanding of that issue, um,
• 49:39
  Speaker 1: is that it would have to be structured in a
• 49:42
  Speaker 1: very careful way, or otherwise you open up a big
• 49:46
  Speaker 1: gap between the personal rate and the corporate because, as
• 49:49
  Speaker 1: you know, a lot of those LLCs are now probably
• 49:52
  Speaker 1: familiar with that pay at the personal rate, and so
• 49:55
  Speaker 1: um and so um it would it would not be
• 50:00
  Speaker 1: ample to go down that road. I'm not saying it
• 50:01
  Speaker 1: couldn't happen, but but it would have to be structured
• 50:04
  Speaker 1: in a way that you're not essentially uh, you know,
• 50:07
  Speaker 1: eliminating tax at the individual as individuals, we can all
• 50:11
  Speaker 1: become corporations to lower at tax rates. Partnerships so so
• 50:17
  Speaker 1: so the rate the base. What about all those favored
• 50:22
  Speaker 1: UM one office and and specific UH special interest lobbied
• 50:29
  Speaker 1: UH breaks for in the tax code. Is it possible
• 50:33
  Speaker 1: to get rid of those in exchange for a lower
• 50:35
  Speaker 1: rate or is that just not realistic? You know, doing
• 50:40
  Speaker 1: Barry doing true tax reform UH is actually hard. The
• 50:44
  Speaker 1: last time we really did in the US was was
• 50:46
  Speaker 1: thirty plus years ago. UH. So I think that the
• 50:53
  Speaker 1: most likely scenario, based on history, UM, is that we
• 50:57
  Speaker 1: do get a reduction in corporate race, we get some
• 51:00
  Speaker 1: base broadening UM potentially some movement on infrastructure. But but
• 51:06
  Speaker 1: I think that it's a pretty much of a large
• 51:07
  Speaker 1: shot now that we get a true tax reform UH
• 51:10
  Speaker 1: in this process. I hope I'm wrong. I'd love to
• 51:12
  Speaker 1: see it. But but is that a function of just
• 51:15
  Speaker 1: a loss of momentum and other politics or is it.
• 51:19
  Speaker 1: It's so complex, and I have to I think the
• 51:22
  Speaker 1: eighties six episodes instructive and so of my some of
• 51:25
  Speaker 1: my friends get bored when I say this, but well,
• 51:27
  Speaker 1: it was instructive about that episode. And I should mention
• 51:30
  Speaker 1: that that I had the good fortune early in my
• 51:32
  Speaker 1: career to work at the Counts of Economic Advisors in
• 51:35
  Speaker 1: the Reagan administration. So on my wall is a picture
• 51:38
  Speaker 1: with me and the Oval President Reagan UM and so
• 51:41
  Speaker 1: I was there in eighties six as a junior economist,
• 51:44
  Speaker 1: and so it was a vivid impression on me. And
• 51:47
  Speaker 1: what people have to remember about that is that that
• 51:49
  Speaker 1: process was bipartisan from the get go. Bill Bradley, you know,
• 51:52
  Speaker 1: hall of fame basketball player and legendary senator from New Jersey,
• 51:56
  Speaker 1: was a big proponative doing tax form. Dick Geppard in
• 51:59
  Speaker 1: the House, Dan Rostenkowski, you know, the kingmaker from Illinois,
• 52:03
  Speaker 1: were big parts of of that. So I think the
• 52:06
  Speaker 1: long shot now is, at least as of June two seventeen,
• 52:10
  Speaker 1: we don't see a lot of bipartisan consensus on tax
• 52:13
  Speaker 1: reform like we did in eighty six. And was Jack
• 52:16
  Speaker 1: Kemp around that point is we're just getting just getting
• 52:19
  Speaker 1: started in the House. Yeah, so that that's you're describing
• 52:23
  Speaker 1: what is essentially a different era, different both economics, tax policy,
• 52:28
  Speaker 1: and politics. And when that bill passed, I don't have
• 52:31
  Speaker 1: the exact numbers in front of me, but I as
• 52:33
  Speaker 1: I recall when it did pass the Senate, it was
• 52:36
  Speaker 1: with well over sixty votes and and so yeah, it
• 52:38
  Speaker 1: was definitely a bipartisan bill. So I have a friend
• 52:41
  Speaker 1: who will go nameless, but he's involved in the Trump
• 52:45
  Speaker 1: administration and he knows that fiscally, I'm fairly conservative. Socially,
• 52:50
  Speaker 1: I'm much more liberal than than Trump is. And when
• 52:55
  Speaker 1: the travel Band first came out the direct messages back
• 53:00
  Speaker 1: and forth, I said, listen, you have a narrow window
• 53:03
  Speaker 1: to get some corporate tax reform through. I know he
• 53:06
  Speaker 1: doesn't like to take counsel from other people. You gotta
• 53:09
  Speaker 1: get this nonsense to stop, because this window isn't gonna
• 53:12
  Speaker 1: be open forever. And this is really the single most
• 53:15
  Speaker 1: important thing facing the U. S. Economy. If you could
• 53:18
  Speaker 1: get a major corporate of corporate tax reform, a lower
• 53:22
  Speaker 1: rate of broader brace, and repatriate a few turillion dollars overseas,
• 53:27
  Speaker 1: you're teeing up the next two or three decades of economics.
• 53:31
  Speaker 1: So stop messing around with a travel ban, and you
• 53:36
  Speaker 1: think this window is gonna be open forever. It's not.
• 53:38
  Speaker 1: And what I'm hearing from you is a sense that
• 53:41
  Speaker 1: that window is closing. Well it it. I hope I'm wrong.
• 53:44
  Speaker 1: I hope we're wrong, but right now it appears to
• 53:47
  Speaker 1: be the The other thing. Remember Barry about the way
• 53:50
  Speaker 1: Washington works, and again I spent most of my career
• 53:53
  Speaker 1: outside of Washington, but a couple of tours of duty
• 53:55
  Speaker 1: there is We think about a president having a four
• 53:57
  Speaker 1: year term, but if you to people who have actually
• 54:01
  Speaker 1: done it. I've gotten to know some former chiefs of staff.
• 54:04
  Speaker 1: For example, when you're in the White House, you don't
• 54:06
  Speaker 1: think you've got four years. You're thinking you've maybe got
• 54:09
  Speaker 1: fourteen months because basically you've got the midterm elections and
• 54:14
  Speaker 1: your popularity. And at that point we'll determine whether the
• 54:17
  Speaker 1: coomass gritters are gonna either be accommodative or are going
• 54:22
  Speaker 1: to run away from you in the next day. And
• 54:24
  Speaker 1: then you might say, well, but then in year three
• 54:26
  Speaker 1: you get past the midterm elections, well, then in year
• 54:28
  Speaker 1: three that we're all speculating on what the next presidential
• 54:32
  Speaker 1: election is gonna look like so it's fourteen an eight
• 54:36
  Speaker 1: year president maybe has twenty four months. That's amazing to
• 54:39
  Speaker 1: actually get stuff done. Reagan was the exception because he
• 54:42
  Speaker 1: got a lot done at the end of his second term.
• 54:45
  Speaker 1: But but in his popularity also people forget his popularity
• 54:50
  Speaker 1: then was through the roof. I mean, if you look
• 54:53
  Speaker 1: at the past couple of presidents, Bush had a huge
• 54:57
  Speaker 1: popularity surgeon, you know, one and eleven, and that gradually faded.
• 55:02
  Speaker 1: And Obama's popularity really was the last six last year
• 55:06
  Speaker 1: of his presidency and beyond he was most popular out
• 55:10
  Speaker 1: of office. And I'm not saying that sarcastically. If you
• 55:15
  Speaker 1: really only have fourteen months, that really changes the dynamic
• 55:20
  Speaker 1: of what can be accomplished. Reagan really is the except,
• 55:24
  Speaker 1: I guess to some degree, Clinton Clinton got a lot
• 55:26
  Speaker 1: done as well, not counting notwithstanding the impeachment and and
• 55:29
  Speaker 1: and by the way, in both cases, it helps to
• 55:32
  Speaker 1: have a booming economy and seven of your you know,
• 55:35
  Speaker 1: Clinton's economy and Reagan's economy were a lot of ways
• 55:38
  Speaker 1: very similar, and that they had legs. They had strong
• 55:41
  Speaker 1: growth in year seven, year year eight, and very much
• 55:45
  Speaker 1: technology driven a whole lot of new industrial about absolutely
• 55:49
  Speaker 1: and to our earlier point, both enjoying the fruits of
• 55:53
  Speaker 1: Paul Wolkers. Thank you, thank you, Paul my hero. So
• 55:57
  Speaker 1: on that note, let's jump to some of our favorite questions.
• 56:01
  Speaker 1: So the standard questions I ask all of my guests,
• 56:04
  Speaker 1: some of which I created, some of which actually came
• 56:06
  Speaker 1: from listeners, including uh no, this question is my question,
• 56:11
  Speaker 1: which is tell us something that people don't know about
• 56:15
  Speaker 1: your background. Well, very I'll tell I'll tell you something.
• 56:19
  Speaker 1: A lot of people to know my background. I am
• 56:22
  Speaker 1: a very avid amateur musician, and I've recorded my first CD.
• 56:27
  Speaker 1: I have a copy for you and all original tunes
• 56:33
  Speaker 1: and which absolutely recorded with some of the best session
• 56:36
  Speaker 1: players on the planet, and two of the tracks were
• 56:39
  Speaker 1: recorded at Abbey Road Studios for those of us Studio studio.
• 56:46
  Speaker 1: So that's a little present for you and I. Well,
• 56:49
  Speaker 1: I play a little acoustic guitar and some bass. But
• 56:52
  Speaker 1: my real my real realization is I'm at a point
• 56:56
  Speaker 1: now where if I hear a song, I am able
• 56:59
  Speaker 1: to work top session players through this technology, send them
• 57:02
  Speaker 1: my song files. They overdubbed their parts and I mixed
• 57:05
  Speaker 1: them in my home studio on Connecticut. Yeah, so that's
• 57:08
  Speaker 1: how um Ben Gibbert of of Deathcap for Cuties created
• 57:14
  Speaker 1: Postal Service, the name of the now today you do
• 57:18
  Speaker 1: it electronically. The name Postal Service comes from them mailing
• 57:21
  Speaker 1: tapes back and forth up from I think it was
• 57:24
  Speaker 1: California to Seattle and back. So you're doing this all
• 57:27
  Speaker 1: digitally online and you're you're, yeah, working with tops in anyway.
• 57:31
  Speaker 1: It's available on iTunes. Richard Clarena. The album is called
• 57:34
  Speaker 1: Time No Changes. So that's that's amazing. And we were
• 57:39
  Speaker 1: talking earlier about Lawrence Juber. Yeah, go to YouTube search
• 57:44
  Speaker 1: for for Lawrence Juber Beatles. I mean he has a
• 57:48
  Speaker 1: whole universe of his own original recordings, which if you're
• 57:52
  Speaker 1: at all a guitarist you'll find. Yeah, but the Beatles
• 57:58
  Speaker 1: stuff is back back to Derrick Thompson's comment, it's familiar
• 58:04
  Speaker 1: enough that it catches your ear, but it's different enough
• 58:08
  Speaker 1: that it it throws you off step and and that Um,
• 58:12
  Speaker 1: I'm trying to remember who the graphic designer was an
• 58:16
  Speaker 1: engine architect in the thirties who called it um most
• 58:22
  Speaker 1: advanced yet acceptable. Maya was Musically, it's how far away
• 58:29
  Speaker 1: can you get? From what you're familiar with and yet
• 58:31
  Speaker 1: still have enough recognition that it's accessible. And that's one
• 58:35
  Speaker 1: of the reasons I find the Juber Beatles and McCartney stuff.
• 58:39
  Speaker 1: It's it's clearly, oh I know this song, I know
• 58:42
  Speaker 1: this melody, but it's such a different arrangement that it stands.
• 58:46
  Speaker 1: It's not just a cover. I mean, when you hear
• 58:48
  Speaker 1: Beatles covers, they're either too similar or two different. It's
• 58:52
  Speaker 1: very tough to cover the Beatles. Believe me, I tried
• 58:54
  Speaker 1: it earlier. When when you hear Juber stuff, you can say, oh,
• 58:58
  Speaker 1: that is the sweet spot. Beat mean, the melody is
• 59:01
  Speaker 1: note for note perfectly, the arrangement is so and there's
• 59:05
  Speaker 1: no overdubs or electronics. It's just him plants remarkable, Um
• 59:09
  Speaker 1: cutting room this week you should use definitely, and I
• 59:12
  Speaker 1: it's an early show. It's like seven thirty that I
• 59:15
  Speaker 1: was gonna say for an early rising is great. So
• 59:18
  Speaker 1: thank you for the c D. I will definitely uh
• 59:21
  Speaker 1: reference that uh and and listen to it this weekend. Um,
• 59:25
  Speaker 1: you mentioned James Tobin. Tell us about some of your
• 59:28
  Speaker 1: early mentors. Well, I would list three. Um. I was
• 59:32
  Speaker 1: very lucky in college to have a mentor professor University
• 59:36
  Speaker 1: of Illinois, gentleman who I'm still great professors at Georgetown now,
• 59:41
  Speaker 1: guy named Matthew CANZONERI and went to Matt's office as
• 59:44
  Speaker 1: a sophomore, and I basically said, I've taken your course,
• 59:47
  Speaker 1: So what does someone have to do to actually become
• 59:49
  Speaker 1: an economics professor? Like what is how do you actually
• 59:52
  Speaker 1: go from being an undergraduate and economics professor? And he
• 59:55
  Speaker 1: took out a legal pat and he said, you need
• 59:57
  Speaker 1: to take these courses and you need to do have
• 1:00:00
  Speaker 1: this math and this preparation. And he basically gave me
• 1:00:03
  Speaker 1: a template that I followed. And so that mentorship and
• 1:00:06
  Speaker 1: that support as a ninth year old, twenty year old
• 1:00:08
  Speaker 1: undergraduate was was incredibly viable for me. And I'll be
• 1:00:11
  Speaker 1: forever grateful. And we're still friends and I we still
• 1:00:15
  Speaker 1: you know, with each other. At Harvard, I had the
• 1:00:18
  Speaker 1: good fortune to work with a guy named Benjamin Friedman.
• 1:00:20
  Speaker 1: Ben is an incredible economist, and one thing I learned
• 1:00:24
  Speaker 1: from Ben is Ben always thought good economics was about
• 1:00:27
  Speaker 1: the questions that we asked, not about the methodology we use.
• 1:00:31
  Speaker 1: And I've always tried to remember that because economics can
• 1:00:33
  Speaker 1: get our Kane in mathematical So in my own work,
• 1:00:36
  Speaker 1: I always try to start with with an interesting question
• 1:00:39
  Speaker 1: and then let the methodology work out as it will.
• 1:00:42
  Speaker 1: And I learned that from from Ben. So I think
• 1:00:44
  Speaker 1: i'd name those those two. That's that's that's really quite fascinating.
• 1:00:49
  Speaker 1: You knew it nineteen exactly what you wanted to do. Yeah,
• 1:00:53
  Speaker 1: I know it was clear. I mean not everybody that
• 1:00:55
  Speaker 1: that's quite I actually lived. I I knew at eighteen
• 1:00:58
  Speaker 1: because I took principles of economy much at the University
• 1:01:00
  Speaker 1: of Illinois from a very dynamic professor, and I just said,
• 1:01:04
  Speaker 1: that's that's what I'm doing. I want to be an
• 1:01:06
  Speaker 1: economics professor. Yeah, I won't tell you what my first
• 1:01:10
  Speaker 1: economics course was like, not have made any sense to me. Wait,
• 1:01:14
  Speaker 1: humans are rational profit um so, so what about investors?
• 1:01:21
  Speaker 1: What investors out there have influenced the way you look
• 1:01:24
  Speaker 1: at markets and the economy. Yeah, I think I would.
• 1:01:27
  Speaker 1: I would name you mentioned him in an earlier segment.
• 1:01:30
  Speaker 1: I bring it up again, Paul McAuley. I think given
• 1:01:33
  Speaker 1: that my background is in macro economics, I tend to
• 1:01:37
  Speaker 1: be influenced by people who try to use macro to
• 1:01:39
  Speaker 1: think about markets, and I think I think Paul is
• 1:01:43
  Speaker 1: a genius in that he's very creative, he's not tethered
• 1:01:47
  Speaker 1: to convention or custom, and has got a great gut
• 1:01:51
  Speaker 1: for macro and markets. So I probably mentioned Paul very
• 1:01:54
  Speaker 1: much in that in that category. Now he's gonna come
• 1:01:58
  Speaker 1: to me and said, you know, Clara said I was
• 1:02:00
  Speaker 1: a genius. I have to listen to that. When I do,
• 1:02:04
  Speaker 1: it's like, now, now you pay corner. Let me give
• 1:02:09
  Speaker 1: you an anecdote. So I did a paper for a
• 1:02:11
  Speaker 1: Boston FED conference in two thousand and ten on the
• 1:02:14
  Speaker 1: financial crisis, and so in researching that, I went back
• 1:02:17
  Speaker 1: and read all of the people who claimed they had
• 1:02:21
  Speaker 1: called the financial crisis uh, and I basically concluded that
• 1:02:25
  Speaker 1: there are only two people who basically not only got
• 1:02:28
  Speaker 1: it right, but got the reasoning right. And McCauley was one,
• 1:02:31
  Speaker 1: and Rogy Roger and mcgreing rog And at Chicago was
• 1:02:34
  Speaker 1: the other. So a lot of people are saying we
• 1:02:35
  Speaker 1: could have a crisis, but they got the reasons wrong.
• 1:02:38
  Speaker 1: The other the people who actually saw the fragility in
• 1:02:40
  Speaker 1: the financial system and the Minsky stability creating instability, really
• 1:02:44
  Speaker 1: McCulley and to some extent roging. That's that's fascinating. If
• 1:02:49
  Speaker 1: I remember Rajin spoke at Jackson Hall in seven, very
• 1:02:55
  Speaker 1: people like what is this guy talking? Yeah, it was
• 1:02:57
  Speaker 1: very much not only prescient, but timely, because there have
• 1:03:01
  Speaker 1: been people who have been calling the calling for the
• 1:03:04
  Speaker 1: crisis every year for the past twenty years. They don't
• 1:03:06
  Speaker 1: they don't get credit exactly, but oh seven, yeah, August
• 1:03:10
  Speaker 1: of seven. That's a good call. That's a really good call.
• 1:03:14
  Speaker 1: Let's talk about books. This is very often listeners favorite
• 1:03:18
  Speaker 1: UM segment. What what sort of books do you read? What?
• 1:03:21
  Speaker 1: What have you enjoyed? What do you recommend? Well, I'll
• 1:03:24
  Speaker 1: I'll just give you ones that have made an impact
• 1:03:26
  Speaker 1: on me as opposed to what's on my nightstand now
• 1:03:28
  Speaker 1: I named I name three UM. I would start with,
• 1:03:32
  Speaker 1: I think a classic in both its scholarship and influences,
• 1:03:36
  Speaker 1: a book that some of your listeners may or may
• 1:03:38
  Speaker 1: not know, called The Best and the Brightest by David
• 1:03:40
  Speaker 1: Howiebert Stam, which is a model of how to do
• 1:03:43
  Speaker 1: concise biographies of a number of individuals who were all interacting.
• 1:03:49
  Speaker 1: So there's been so much mythology about the Kennedy administration,
• 1:03:52
  Speaker 1: but Halbert Stam is of course passed away brilliant writer
• 1:03:56
  Speaker 1: and reporter and just goes these wonderful character sketches of
• 1:04:00
  Speaker 1: all the people from different backgrounds McNamara, the Kennedy's, the
• 1:04:03
  Speaker 1: Bundyes and Hall the how they all led to this
• 1:04:05
  Speaker 1: what we now know group think in crisis collapse over Vietnam.
• 1:04:08
  Speaker 1: So I name that. I would also name a book
• 1:04:11
  Speaker 1: that's been very often cited but had a big impact
• 1:04:14
  Speaker 1: on me, Jared Diamonds, Guns, Germs and Steel, as a
• 1:04:18
  Speaker 1: model of how to What's great about him is that
• 1:04:21
  Speaker 1: he spans multiple disciplines, and so academics oftentimes focus very
• 1:04:26
  Speaker 1: narrowly on one little thing, and his understanding and breadth
• 1:04:30
  Speaker 1: of pulling in different disciplines history and sociology and anthropology
• 1:04:35
  Speaker 1: is really uh remarkable in that Another one which very
• 1:04:39
  Speaker 1: popular but I thought was a model of of being
• 1:04:42
  Speaker 1: both clever and well thought through as the Gladwell tipping
• 1:04:45
  Speaker 1: point argument, which I remember from an essay he did
• 1:04:48
  Speaker 1: in The New Yorker and then turned that into a
• 1:04:50
  Speaker 1: book and now in an industry. Uh So, those those
• 1:04:53
  Speaker 1: would be three that I would that that I would
• 1:04:56
  Speaker 1: mention in terms of recently, again getting back to the
• 1:04:59
  Speaker 1: muse Element. There's a wonderful, uh exhaustive biography of the
• 1:05:05
  Speaker 1: Beatles by Mark Lewison called uh all those Years. Uh.
• 1:05:10
  Speaker 1: He's spent eleven years just doing the period from nineteen
• 1:05:13
  Speaker 1: fifty five to sixty two. It's come out in two versions.
• 1:05:17
  Speaker 1: One is the version that that's about four hundred pages
• 1:05:19
  Speaker 1: that you can get, you know, at any place. And
• 1:05:21
  Speaker 1: then in the UK they released actually the first manuscript
• 1:05:25
  Speaker 1: he submitted, which is fourteen hundred pages. And so if
• 1:05:28
  Speaker 1: if you want to know everything on every day, what
• 1:05:31
  Speaker 1: newspaper they were reading, and how much they paid for
• 1:05:33
  Speaker 1: a beer at the pub in ninety six, then you
• 1:05:36
  Speaker 1: want you want the original manuscript version of have you
• 1:05:39
  Speaker 1: seen the Black Um Black Covered Beatles Book? I think
• 1:05:44
  Speaker 1: Spitzer Spit Bob Spitz that one too. I haven't gotten
• 1:05:48
  Speaker 1: to it yet, but it's like also almost a thousand pages.
• 1:05:51
  Speaker 1: It's monstrous, and people who have plowed through it said
• 1:05:53
  Speaker 1: it's wonderful. It is, but it's just an intimidating but
• 1:05:57
  Speaker 1: but but Louis but Lewison is the is the gold stand.
• 1:06:02
  Speaker 1: Give me one more that you're reading recently or currently. Um,
• 1:06:06
  Speaker 1: I'm I'm I'm trying to keep up on um. I'm
• 1:06:09
  Speaker 1: trying to keep up on on geopolitics and China actually,
• 1:06:13
  Speaker 1: and for for the most part, books are not as useful.
• 1:06:16
  Speaker 1: So I'm trying to get step I'm trying to get
• 1:06:18
  Speaker 1: steeped because I think what's going on now Barry is
• 1:06:22
  Speaker 1: a remarkable transition. And the thing about China is one
• 1:06:25
  Speaker 1: of my friends told me a guy named Dave Smick.
• 1:06:28
  Speaker 1: I don't know if you know Dave Spick, but by
• 1:06:29
  Speaker 1: the way, would be a great guest recommend Dave. Dave
• 1:06:32
  Speaker 1: is a fascinating fellow. And in Dave's line on on
• 1:06:36
  Speaker 1: China was um thing he said, Rich. The thing about
• 1:06:39
  Speaker 1: China is that they're billion people, but they're only six
• 1:06:42
  Speaker 1: who know what's going on, and they're not and they're
• 1:06:44
  Speaker 1: not talking. So I think we're all we're sort of
• 1:06:47
  Speaker 1: all on the fly with with China. But what's going
• 1:06:50
  Speaker 1: on there, both economically and now the transition potentially geopolitically
• 1:06:54
  Speaker 1: and militarily, it's really going to transform the next ten years.
• 1:06:58
  Speaker 1: And so anything I can get on China by and
• 1:07:00
  Speaker 1: for I guess of those Kissingers probably the best. So
• 1:07:03
  Speaker 1: Kissingers written really written a book on China that is
• 1:07:06
  Speaker 1: a must must read. I've been the CFRs regular updates
• 1:07:12
  Speaker 1: on China are they have boots on the ground. They're fascinating,
• 1:07:16
  Speaker 1: and the thought of any sort of book is immediately
• 1:07:19
  Speaker 1: dated because seen stuff seems to be changing so rapid.
• 1:07:23
  Speaker 1: But that that's scenario where the Internet and having networks
• 1:07:26
  Speaker 1: of people either directly or indirectly can be very valuable
• 1:07:30
  Speaker 1: because you know, we can assemble things now. Uh, you
• 1:07:33
  Speaker 1: know on our computer screens that twenty years ago would
• 1:07:36
  Speaker 1: have been possible, it would have been impossible. So on China,
• 1:07:38
  Speaker 1: I'm doing it sort of on the fly. Yeah, So
• 1:07:41
  Speaker 1: let's talk about what's changed since you became an economist.
• 1:07:45
  Speaker 1: What is different in the industry today versus ten years ago. Well,
• 1:07:51
  Speaker 1: as I said, I think the preparation, I think the
• 1:07:54
  Speaker 1: sorting in terms of getting into graduate programs is is
• 1:07:58
  Speaker 1: very effective at word, getting in people with like six
• 1:08:02
  Speaker 1: sigma math skills. I guess I'm a bit of a
• 1:08:05
  Speaker 1: bit of a skeptic that that's all you need to
• 1:08:07
  Speaker 1: do economics. So that would be one thing. The other thing,
• 1:08:10
  Speaker 1: of course, is big data. That's the buzzword now. But
• 1:08:13
  Speaker 1: I think about my early efforts as an empirical macro economist,
• 1:08:16
  Speaker 1: and how what a big deal it was, you know,
• 1:08:18
  Speaker 1: to get a data set and to clean a data set,
• 1:08:20
  Speaker 1: and we just now take it for granted because on
• 1:08:22
  Speaker 1: our Bloomberg term. I mean still I'm not that Bloomberg
• 1:08:28
  Speaker 1: needs the plug, but I'm a kid in the candy
• 1:08:30
  Speaker 1: store in a Bloomberg terminal. I mean, the amount of
• 1:08:32
  Speaker 1: data available is just astonishing. It's astonishing, and your ability
• 1:08:36
  Speaker 1: to to sort it and compare and into it. So
• 1:08:38
  Speaker 1: so I think we're just at the infancy, you know,
• 1:08:41
  Speaker 1: in the sort of baseball analogy. We're not even out
• 1:08:43
  Speaker 1: of the first ending in terms of what big data
• 1:08:45
  Speaker 1: is going to do. The challenge a big data, of course,
• 1:08:47
  Speaker 1: is there's gonna be a lot of a lot of
• 1:08:49
  Speaker 1: dead ends and a lot of false promises. But I'm
• 1:08:52
  Speaker 1: absolutely convinced in next ten years, someone or some group
• 1:08:56
  Speaker 1: of entrepreneurs are going to get big data right, and
• 1:08:59
  Speaker 1: it's gonna it's to transform economics and probably every other
• 1:09:03
  Speaker 1: social science. I read the policy I read not too
• 1:09:06
  Speaker 1: long ago. Steve Balmer, former CEO and Microsoft, has been
• 1:09:11
  Speaker 1: assembling and releasing these giant data sets for people to play.
• 1:09:14
  Speaker 1: You know, for example, earlier we talked about now casting
• 1:09:17
  Speaker 1: the idea that instead of forecasting the future, you're trying
• 1:09:20
  Speaker 1: to track the present. Uh And now casting is all
• 1:09:23
  Speaker 1: about about big data. And we could be at a
• 1:09:25
  Speaker 1: point in ten years where when by the time the
• 1:09:28
  Speaker 1: GDP numbers come out, nobody even really cares because we
• 1:09:31
  Speaker 1: will have processed all of that on our Bloomberg terminal. Now,
• 1:09:34
  Speaker 1: don't you think day to day, week to week, month
• 1:09:36
  Speaker 1: and month GDP activity is so volatile, Not that it's
• 1:09:41
  Speaker 1: volatile in a negative way, but the weekly and monthly
• 1:09:44
  Speaker 1: cycle is so all over the map that it's very
• 1:09:47
  Speaker 1: hard to extract a credible because so far, I think
• 1:09:51
  Speaker 1: it's the Atlanta and the New York beds have the
• 1:09:54
  Speaker 1: GDP now exactly, and neither of them have been especially
• 1:09:58
  Speaker 1: active well, and in it shows you how hard it
• 1:10:01
  Speaker 1: is to look. US economy makes seventeen trillion dollars worth
• 1:10:04
  Speaker 1: of stuff every year, and that doesn't even count all
• 1:10:07
  Speaker 1: the churning of existing assets. So it is a complex beast.
• 1:10:12
  Speaker 1: But but I but I think that there are there
• 1:10:15
  Speaker 1: are things we're learning from from this that are going
• 1:10:17
  Speaker 1: to be useful. And I am Barry I can tell
• 1:10:19
  Speaker 1: you I definitely see it in financial markets look, for example,
• 1:10:23
  Speaker 1: the Bloomberg surprise index. So this whole idea instead of
• 1:10:27
  Speaker 1: is the data stronger weak? Is the data stronger weaker
• 1:10:30
  Speaker 1: than expected? That's that's revolutionizing the way people think about everything.
• 1:10:35
  Speaker 1: Every everything's relative expectation. When people before, folks like Bloomberg
• 1:10:39
  Speaker 1: archive that you sort of knew it, but there was
• 1:10:41
  Speaker 1: no data set on primet. We used to see it
• 1:10:44
  Speaker 1: with quotaly earning surprise and sometimes you'd have a good
• 1:10:48
  Speaker 1: number in the market, stock would sell off, and sometimes
• 1:10:51
  Speaker 1: you'd have a lousy number and it would rally. And
• 1:10:53
  Speaker 1: really the question isn't what are the earnings, it's exactly
• 1:10:56
  Speaker 1: what you reference. What are the earnings relative to expectations?
• 1:10:59
  Speaker 1: Is this an upside or downside surprise? A negative number
• 1:11:02
  Speaker 1: could be an upside surprise, and positive number could be
• 1:11:05
  Speaker 1: a downside. It's very countintuitive until you start realized thinking
• 1:11:08
  Speaker 1: about what's already reflecting. But that's an area where the
• 1:11:12
  Speaker 1: data is now available, and even fifteen years ago it
• 1:11:15
  Speaker 1: wasn't that that that's quite fascinating. What do you so
• 1:11:18
  Speaker 1: big data? What do you see as the next major
• 1:11:21
  Speaker 1: shifts in economics? Well, everyone says behavioral and I don't
• 1:11:27
  Speaker 1: want to reign too much on the behavioral parade. I
• 1:11:29
  Speaker 1: think that already had well. I think behavioral economics is
• 1:11:32
  Speaker 1: very important. Here's what the stumbling block is. The stumbling
• 1:11:36
  Speaker 1: block is we have very good insights into individual behavioral
• 1:11:41
  Speaker 1: um departures from rationality, and we focus on this a
• 1:11:44
  Speaker 1: lot of pin power. Our c I. O. Dan Iverson
• 1:11:47
  Speaker 1: is very interested in this. In fact that our form
• 1:11:49
  Speaker 1: we had a speaker, a woman named talently share It, who,
• 1:11:51
  Speaker 1: by the way, with beating on optimism bias. Yes, yes,
• 1:11:56
  Speaker 1: and so she does the neuroscience. Our brains are wired
• 1:11:59
  Speaker 1: to be optimists, dig and it's pretty neat stop. So,
• 1:12:02
  Speaker 1: by the way, there's an evolutionary reason for that, and
• 1:12:04
  Speaker 1: that's her argument. If you're not optimistic, so ten of
• 1:12:10
  Speaker 1: us are going to go down and were kill a mammoth.
• 1:12:12
  Speaker 1: And if we're successful, hey, the group will have meat
• 1:12:15
  Speaker 1: well winter. Yeah, a few of us may not make
• 1:12:17
  Speaker 1: it back, but the species you've you've nailed. And so
• 1:12:20
  Speaker 1: we actually had her at our forum and may talking
• 1:12:22
  Speaker 1: about optimism bias to a bunch of bond traders. So
• 1:12:26
  Speaker 1: so so behavior is very relevant the the area that
• 1:12:30
  Speaker 1: it's either going to be a stumbling block or will
• 1:12:32
  Speaker 1: be a breakthrough is to put behavioral economics in general
• 1:12:36
  Speaker 1: equilibrium with markets. Right, So, yes, you know you've done
• 1:12:40
  Speaker 1: this very successfully as an investor. You know that there's momentum,
• 1:12:43
  Speaker 1: there's pessimism, optimism, and markets there there's a psychology in
• 1:12:47
  Speaker 1: markets um. But at some point people are buying and
• 1:12:50
  Speaker 1: selling and it's got to add up. So I think
• 1:12:53
  Speaker 1: we're still falling short of having a general equilibrium model
• 1:12:56
  Speaker 1: of how different behaviors interact. Uh, But that would be
• 1:13:01
  Speaker 1: the next big thing if we could get what I
• 1:13:02
  Speaker 1: would call a general equilibrium of behavioral economics. You know,
• 1:13:05
  Speaker 1: I'm in the middle of a I'm reluctant to call
• 1:13:08
  Speaker 1: it a debate. It's really an argument within this seemed
• 1:13:10
  Speaker 1: to lab about the issue of how we perceive or
• 1:13:15
  Speaker 1: misperceived risk. And I think when you look at the
• 1:13:19
  Speaker 1: actual numbers of a total number of deaths relative to
• 1:13:23
  Speaker 1: things like heart disease, cancer, falling out of bed, more
• 1:13:27
  Speaker 1: many more people diets, you you're falling out of bed
• 1:13:30
  Speaker 1: or in the shower, that that that are killed by terrorists.
• 1:13:32
  Speaker 1: But but his argument is, well, you're looking at it
• 1:13:36
  Speaker 1: in a normal distribution. It's really a fat tail event.
• 1:13:39
  Speaker 1: And if a terrorist gets a biological weapon or a
• 1:13:41
  Speaker 1: nuclear weapon and the numbers are just throw those all out,
• 1:13:44
  Speaker 1: it's millions. And part of me is I understand the
• 1:13:48
  Speaker 1: fat tail to the guy who wrote the black swan, though,
• 1:13:51
  Speaker 1: does everything begin to look like a fat tail? And
• 1:13:54
  Speaker 1: are we being pessimistic and fearful and giving into a
• 1:13:59
  Speaker 1: worst things which is kind of how terrorists operate and
• 1:14:03
  Speaker 1: they want to and and Barry, I have to tell
• 1:14:06
  Speaker 1: you that certainly, one thing that I've observed and that
• 1:14:09
  Speaker 1: we've noticed again compared when we began our career, if
• 1:14:13
  Speaker 1: you had told us in the nineteen late eighties or
• 1:14:16
  Speaker 1: early nineties, fast forward in the seventeen there will be five,
• 1:14:19
  Speaker 1: six or seven wars in the Middle East. They're all
• 1:14:21
  Speaker 1: shooting each other. Everybody's blowing each other up. Oh. And
• 1:14:23
  Speaker 1: by the way, North Korea has got a nuclear warhead,
• 1:14:25
  Speaker 1: and and I see BM Oh and by the way,
• 1:14:28
  Speaker 1: someone full plane into the World Trade Center. You would
• 1:14:31
  Speaker 1: basically say, you know, the SMP will be down right.
• 1:14:34
  Speaker 1: So we're in a world where there is this overlay
• 1:14:37
  Speaker 1: of all the stuff that can happen, all these black
• 1:14:40
  Speaker 1: swarms that can happen, and you have financial markets you know,
• 1:14:44
  Speaker 1: move on. So I the one way to look at
• 1:14:47
  Speaker 1: that is to say the market has looked at it
• 1:14:50
  Speaker 1: discounted the likely possibility of that occurring, and is looking
• 1:14:54
  Speaker 1: at the probabilities that although the that that something awful
• 1:15:00
  Speaker 1: isn't gonna happen. And then the counter argument as well,
• 1:15:02
  Speaker 1: the markets seem to think the same thing around oh
• 1:15:04
  Speaker 1: seven and look what happened. Man. So it's really a
• 1:15:08
  Speaker 1: fascinating um question. Let's let's talk about failure. Tell us
• 1:15:12
  Speaker 1: about a time something you try to do uh and failed.
• 1:15:16
  Speaker 1: What was that? Why? What did you learn from the
• 1:15:19
  Speaker 1: experience of something not working out as expected? Well, I
• 1:15:22
  Speaker 1: think what I would I would say early in my
• 1:15:26
  Speaker 1: career I made a misjudgment of failure to think that
• 1:15:31
  Speaker 1: I was going to be a mathematical economist and make
• 1:15:35
  Speaker 1: my breakthrough by sitting in a room with equations and
• 1:15:39
  Speaker 1: some and reveal some ultimate mathematical truth. And I spent
• 1:15:43
  Speaker 1: about five years doing that, not very successfully to myself
• 1:15:47
  Speaker 1: for others. And I really realized that what I got
• 1:15:49
  Speaker 1: into economics was to actually be trying to understand the
• 1:15:52
  Speaker 1: world the way it was, not the way it fit
• 1:15:54
  Speaker 1: into a model. So I had to shift gears away
• 1:15:56
  Speaker 1: from thinking of myself as an abstract mathematician to someone
• 1:16:00
  Speaker 1: who began to think of himself as doing empirical work too,
• 1:16:04
  Speaker 1: more or less understand the world as messy as it was.
• 1:16:07
  Speaker 1: And I get back to the point I made about
• 1:16:08
  Speaker 1: Ben Freedman, give me the advice, which is economics is
• 1:16:12
  Speaker 1: about the questions we asked, not about the methodology that
• 1:16:15
  Speaker 1: that we use. But it took me about five years
• 1:16:17
  Speaker 1: to to sort of realize that that that's really interesting.
• 1:16:21
  Speaker 1: It was I don't I don't picture you as a
• 1:16:24
  Speaker 1: equation guy. I was a question. I was, um, tell
• 1:16:30
  Speaker 1: us about something you do outside of the office, What
• 1:16:32
  Speaker 1: do you do to keep I already I already plugged
• 1:16:36
  Speaker 1: the plug to c D. So that's the relax Oh, absolutely,
• 1:16:42
  Speaker 1: a method of unwinding. Well. It also helps me to
• 1:16:45
  Speaker 1: commute because I live in Connecticut, so I spend you know,
• 1:16:48
  Speaker 1: two and a half hours plus a day on Metro
• 1:16:50
  Speaker 1: North and through the wonders of technology. Thank you, Steve Jobs.
• 1:16:53
  Speaker 1: You know, I have a lot of my musical projects
• 1:16:55
  Speaker 1: on my iPad, so I can do editing and stuff
• 1:16:57
  Speaker 1: on the train. In terms of away from that, I'm
• 1:17:00
  Speaker 1: sort of a weekend golfer with my boys. Uh, they're
• 1:17:03
  Speaker 1: much better than I am. So it's it counts as
• 1:17:05
  Speaker 1: both some golf time and family time. And you know,
• 1:17:09
  Speaker 1: in my forties I took up downhill skiing and I'll
• 1:17:11
  Speaker 1: never be great, but one week a year I go
• 1:17:14
  Speaker 1: skiing and I love it. So that's sort of my
• 1:17:17
  Speaker 1: sort of my outside the office. And I love to
• 1:17:20
  Speaker 1: go for walks with my wife in eectiquette. Yeah, where
• 1:17:23
  Speaker 1: do you go skiing? Well, that's the great thing. We've
• 1:17:25
  Speaker 1: been skiing a lot of people. So we've been to Europe,
• 1:17:27
  Speaker 1: We've been to the Dolomines in Italy, we've been to
• 1:17:30
  Speaker 1: to the Swiss Alps, we've been out to Deer Valley,
• 1:17:32
  Speaker 1: to Taws and so you get to see different parts
• 1:17:34
  Speaker 1: of the world that way. One week a year, yeah,
• 1:17:38
  Speaker 1: maybe two. Yeah, that's all I can afford. So so
• 1:17:41
  Speaker 1: quick footnote in grad school, my best friends undergrad had
• 1:17:46
  Speaker 1: been Dartmouth and he had been on the ski team
• 1:17:48
  Speaker 1: and I used to go to Hunter another local mountains
• 1:17:51
  Speaker 1: and I thought I was okay, and he suggested we
• 1:17:56
  Speaker 1: join a ski group in our last year of grad
• 1:17:59
  Speaker 1: school where we would take a bunch of college kids
• 1:18:03
  Speaker 1: on some ski tour group and this way, broke grad
• 1:18:05
  Speaker 1: students would get transportation, lift tickets, food housing. And so
• 1:18:10
  Speaker 1: we did that and he was just amazing. And all
• 1:18:14
  Speaker 1: I would do is try and keep up with him
• 1:18:17
  Speaker 1: and not hit a tree. Those were my two goals.
• 1:18:20
  Speaker 1: And you really it's one of those things I mentioned
• 1:18:23
  Speaker 1: done in Kruger earlier. It's one of those things where
• 1:18:26
  Speaker 1: you quickly are disabused of any false impression that you
• 1:18:31
  Speaker 1: have some sort of skills in that area. It's like, oh,
• 1:18:34
  Speaker 1: I can make it down the mountain without falling down.
• 1:18:37
  Speaker 1: He's plowing through moguls at sixty and just blowing my mind.
• 1:18:42
  Speaker 1: But that's what four years at Dartmouth will get you
• 1:18:45
  Speaker 1: into a decent grad school and and great uh skiing skills. Um.
• 1:18:51
  Speaker 1: So you work with a lot of students, you work
• 1:18:53
  Speaker 1: with millennials. What sort of advice would you give to
• 1:18:57
  Speaker 1: someone who was just starting their care year or thinking
• 1:19:01
  Speaker 1: about starting a career in economics. Well, I've been doing
• 1:19:05
  Speaker 1: some thinking on that and and I guess the one
• 1:19:08
  Speaker 1: thing I would mentioned in this regard because I think
• 1:19:11
  Speaker 1: relative to when when we were coming up, it's students
• 1:19:14
  Speaker 1: have more of a choice now. Um, And I think
• 1:19:18
  Speaker 1: that a lot of students starting out are attracted uh
• 1:19:23
  Speaker 1: naturally to you know, being the next Mark Zuckerberg or
• 1:19:27
  Speaker 1: or you know, or Bill Gates, and you know, sort
• 1:19:33
  Speaker 1: of you sort of immediately go into an entrepreneurial wage
• 1:19:36
  Speaker 1: or not an organization, and obviously that worked out great
• 1:19:40
  Speaker 1: for them. I guess the thing that I observe is,
• 1:19:44
  Speaker 1: I think I've always been part of organizations that I've
• 1:19:47
  Speaker 1: been proud of, I've learned enormously, and obviously you know
• 1:19:50
  Speaker 1: I So I'm a big believer that if you have
• 1:19:53
  Speaker 1: some choices in your career, aligning yourself with quality organizations
• 1:19:58
  Speaker 1: is a positive. You know, we think of negatives in
• 1:20:01
  Speaker 1: this corporate politics and there's back stepping and all that stuff,
• 1:20:04
  Speaker 1: but that's also true in the entrepreneurial world as well.
• 1:20:07
  Speaker 1: So I think I think a career path where you
• 1:20:10
  Speaker 1: if you have some choice both working within and learning
• 1:20:13
  Speaker 1: within quality organizations and and also doing the entrepreneurial path
• 1:20:18
  Speaker 1: at some point makes sense. But I think some folks
• 1:20:20
  Speaker 1: immediately go from college, eating without college, right into that
• 1:20:23
  Speaker 1: I'm going to be the next Mark Zuckerberg, And I
• 1:20:25
  Speaker 1: don't know if that's necessarily going to serve them well.
• 1:20:28
  Speaker 1: You need the skill set that you can only learn
• 1:20:30
  Speaker 1: learning an organization. As a kid, I used to hear
• 1:20:34
  Speaker 1: people want to become the next Michael Jordan's. The odds
• 1:20:37
  Speaker 1: of that are just so hard, so long. And think
• 1:20:40
  Speaker 1: he played in North Carolina, which is a very good organization.
• 1:20:43
  Speaker 1: That's why I went right from high school to the NBA.
• 1:20:45
  Speaker 1: That's why in a good organization. So so there are
• 1:20:49
  Speaker 1: things to be garnered from from quality um UH surroundings
• 1:20:54
  Speaker 1: And and our final question, and one of my favorites,
• 1:20:57
  Speaker 1: what is it that you know about the world of
• 1:20:59
  Speaker 1: economic ex global macroeconomics, investing today that you wish you
• 1:21:04
  Speaker 1: knew years Yeah, And and I think to me the
• 1:21:09
  Speaker 1: financial crisis UH was a real eye opener on this.
• 1:21:14
  Speaker 1: I you know, I think the one thing that at
• 1:21:18
  Speaker 1: least I and I think a lot of us understand
• 1:21:20
  Speaker 1: now about global the global financial system UM is that,
• 1:21:25
  Speaker 1: in some very important respects UM, it only operates with
• 1:21:31
  Speaker 1: a level of transparency and oversight and regulation UM because
• 1:21:39
  Speaker 1: in the absence of that, there are just too many
• 1:21:40
  Speaker 1: incentives and there's too much money floating around. And I'm
• 1:21:43
  Speaker 1: talking about things that are illegal. But I'm saying that
• 1:21:46
  Speaker 1: I think a lot of the global financial system before
• 1:21:48
  Speaker 1: the crisis was essentially priced and traded on a view
• 1:21:52
  Speaker 1: that there was an implicit put option to some central
• 1:21:54
  Speaker 1: bank somewhere the Greenspan put well as it had been
• 1:21:59
  Speaker 1: alluded to um and and I think the failure to
• 1:22:03
  Speaker 1: recognize that was was very was very costly. So now
• 1:22:08
  Speaker 1: whenever I look at global macro, anything involving credit, or
• 1:22:12
  Speaker 1: anything involving lending and borrowing, the first question I asked,
• 1:22:16
  Speaker 1: how who do Marcus think has got the put option
• 1:22:19
  Speaker 1: on this? And how and how is it priced? And
• 1:22:21
  Speaker 1: I think a lot of a lot of mistakes and
• 1:22:23
  Speaker 1: finance are about either opaque or miss price put options
• 1:22:27
  Speaker 1: to central banks or governments. We have been speaking with
• 1:22:31
  Speaker 1: Professor Richard Clarida. Richard, thank you so much for being
• 1:22:34
  Speaker 1: so generous with your time. If you want to find
• 1:22:38
  Speaker 1: more of Professor Clarda's writings, you can go to the
• 1:22:42
  Speaker 1: NBER website. You have a page at Columbia University. And
• 1:22:47
  Speaker 1: where else can they find information about your c D
• 1:22:50
  Speaker 1: or anything else? Well, this the the CD is on
• 1:22:52
  Speaker 1: iTunes and on Apple Music. So you just type in
• 1:22:56
  Speaker 1: Richard Clarida and the name is Time no changes. It
• 1:22:59
  Speaker 1: will pop right up. Fantastic. If you enjoyed this conversation,
• 1:23:03
  Speaker 1: be sure and look up an Inch or down an
• 1:23:05
  Speaker 1: inch on Apple iTunes or SoundCloud overcast Bloomberg dot com
• 1:23:09
  Speaker 1: and you can see any of the other hundred plus
• 1:23:12
  Speaker 1: g We're coming up on a hundred and fifty other
• 1:23:15
  Speaker 1: such conversations. I would be remiss if I did not
• 1:23:19
  Speaker 1: thank my engineer uh Medina Parwana, my booker and producer
• 1:23:24
  Speaker 1: Taylor Riggs, and my head of research Michael bat Nick,
• 1:23:28
  Speaker 1: for all of their assistance in putting these questions and
• 1:23:31
  Speaker 1: interviews together. We love your comments, feedback and suggestions right
• 1:23:36
  Speaker 1: to me at m IB podcast at Bloomberg dot net.
• 1:23:41
  Speaker 1: I'm Barry Ridholts. You've been listening to Masters in Business
• 1:23:44
  Speaker 1: on Bloomberg Radio.