A Conversation with Mark Carney and Lawrence H. Summers

good evening and welcome to the John F Kennedy jr. forum my name is Ryan Sears and I'm a sophomore at the college studying government and I'm a member of the JFK junior forum committee here at the IOP before we begin please note the exit doors which are located on both the Parkside nd JFK Street side of the forum in the event of an emergency walk to the exit closest to you and congregate in the JFK Park please also take a moment now to silence your cell phones and you can join the conversation tonight online by tweeting with the hashtag hashtag JFK junior forum which is also listed in your program so please take your seats now and join me in welcoming our guests Mark Carney and Lauren summers [Applause] [Applause] for 2019 albert gordon had a distinguished and remarkable career on Wall Street particularly at Kidder Peabody perhaps the most remarkable aspect of his career is that he lived until the age of a hundred and seven he ran his first marathon in his 19th in his 70s and I'm told that he was dating at the age of a hundred and five he was a past president of the Harvard club and his generosity to Harvard is evident among other things in the Albert H Gordon track and tennis center that many of us have enjoyed over the years he established in 1985 the Albert H Gordon annual lecture series in the field of finance and public policy and I can't think of anybody better suited to be the 2019 lecturer than my good friend Mark Carney there are many distinguished aspects of Mark's career I think locally we might take the position that there's none more important than the fact that he was a 1988 graduate of Harvard College in economics and having been a professor in the department at the time mark I have to say that if you attained that achievement it's all been downhill since then but it's been quite a ride downhill mark received two masters and a doctorate in economics from Oxford mark went on to a distinguished private sector career for 13 years at Goldman Sachs he then became the deputy governor of the Bank of Canada he then became the governor of the Bank of Canada and then he did something quite extraordinary he moved from being the governor of the Bank of Canada to being the governor of the Bank of England the position he has held for last eight years that a proud and strong nation of 50 plus million people would hire as the governor of its central bank a non-citizen is in part a reflection of the cosmopolitanism of the British perspective is in part a reflection of the professional and non-political character of central banking but is overwhelmingly a reflection of the global respect for Mark Carney's qualities as a financial Statesman in addition to being the central bank governor of two central banks mark has been for nearly a decade served as the chairman of the FSB the principal global group in charge of establishing harmonizing financial standards and financial regulations in the wake of the financial crisis and while he cannot quite accept this characterization many who have observed the British seen over the last few years regard him as the lone adult in place as the brexit drama has played out and have been reassured by his presence we were very lucky to have him at Harvard tonight I asked mark what format he would suggest we talked about it a bit and Mark is gonna talk for a little while about how he sees the international financial scene and then he and I will engage in a discussion for some interval and then be formulating your questions because there will be ample opportunity for you to frame and put questions to governor Carney governor Mark Carney of the Bank of England well thank you very much Larry it's it's a great honor truly a great honor to give the Gordon lecture it is a great honor to share the stage with Larry Summers I have to say even 31 years after my received my economics degree I'm still slightly terrified by the prospect of the Q & A so I we have 52 minutes left and I'm going to speak for 51 of those and then short Q&A so just hope you're seated comfortably look what I thought I would do is and and Thank You Ryan as well for for the introduction in Kezia for arranging these lectures what I thought it would do I'm I'm in North America because it's the IMF meetings the g7 g20 meetings around and it's it's my last set of those meetings as central bank governor and so I'm feeling a little wistful and I and I thought I would reflect on International Cooperation the past and the future of international cooperation not least because if I use the term multilateralism I think we're all recognized multilateralism is under some strain and I'll start by just observing that it this it's a legitimate subject for a central banker because there is a long history of cooperation amongst central banks and that began really in the aftermath of the first world war one of my predecessors Montagu Norman he and Benjamin strong who was the first president of the New York Fed and the governor of the Bank of France and the Bundesbank they were the first to well actually not the Bundesbank for this part but they were the first to get together and the first form of International Monetary cooperation was to set up the BIS the Bank for International Settlements for war reparations and they tried to coordinate policy through the stock market crash the aftermath and then through the Great Depression into the Second World War and so there was active International Monetary cooperation at the end of his term as his very long-term 20-year plus term Norman so governor of the Bank of England reflected on that and I'm going to quote him all our thought and good intentions with all of those we achieved absolutely nothing except to collect a bunch of money from a lot of poor devils and give it over to the four winds so that's a pretty low bar in terms of success we've had a little more success of late in particular responding to the global financial crisis and with those financial reform so I'm gonna build on that flimsy track record and talk about international cooperation in what I would suggest is the fourth phase of globalization first phase you know in the great phase of globalization and the run-up to the first world war where the international architecture was very limited in fact in terms of international institutions really the International Telegraph Union was the only one I could I could find the gold standard the monetary system was a convention it wasn't a treaty and property rights international property rights at least were enforced by gunboat the second era that in the interwar years so between the first and the Second World War saw the disastrous breakdown of these conventions and so it's it's a it's a salutary reminder of what could happen with fragmentation and in fact it was clinging to some of those conventions that would prove do great harm actually to the United Kingdom and I'm reminded again I am I'm telling you I'm feeling wistful so I'm thinking back and when I first joined and literally my first day at the Bank of England I was conscious of Montague Norman's history and there are a lot of paintings of Montague Norman in the there's only one representation of the other 119 governor's previous governors but some reason Montague Norman has 13 whose pays to stay around a strong sense of self all that sort of stuff anyways I took down one of those paintings because it was in the it was in the main visitors room and within a few minutes well a few hours actually but it was pretty quick told me something about information control at the Bank of England at the time the Chancellor of the Exchequer called me up and said I heard you took down the painting a Montague Norman and and he asked to borrow it George Osborne asked to borrow it and you know obviously I wasn't doing anything with it and you could rely on him so I I said okay fine you can borrow it but why why do you want it and Osborne said that he wanted to hang it in the dining room of number 11 Downing Street which is where the Chancellor lives to remind him so because it reminds him of that that was the room there's a famous dinner in monetary history where Montague Norman convinces Churchill when Churchill was the Chancellor of the Exchequer to go back on to the gold standard at the pre-war parity and that plunges the UK into a deep recession and ultimately they have to break it and Osborne wants to hang it in that room to remind him as Chancellor never to listen to the advice of the governor of the Bank of England which I can confidently say he followed he followed through on so so fast-forward we then we get the rules-based the third phase the rules-based architecture of Bretton Woods overseen by the United States as a benevolent hegemon it's turbocharged with the fall of the Berlin Wall and dong shoppings reforms the accession of China to the WTO something Larry played an important role in and this is the golden age in many respects of globalization but at the tail end of that period all is not well beneath the surface and there's these severe fault lines that are building up in in the financial sector particularly and it's only because of learning the lessons of that era the era of the depression the catastrophe is averted and of course Ben Bernanke deserves a great credit for that and again does Larry Summers who comes in to the White House at the perfect time comes back to the White House in the perfect time but it's catastrophe averted and the challenges averting a catastrophe means that what you're you're saying to your citizens and this is very acute certainly when I was in the United Kingdom first got back there it could have been a lot worse and telling people you know the counterfactual it's better than the counterfactual is doesn't quite have the resonance of you know you've never had it so good and on top of that so that's part of this drain that's on multilateralism and on top of that is something that as I'm sure this audience doesn't need telling Danny Roderick is described as the trilemma between economic integration democracy and sovereignty and something that is you know very much a part of the of the brexit discussions in the United Kingdom so you know to set up so that's setting up the challenges and we're seeing these pressures that are fragmenting the system with respect to trade in to some extent with respect to technology and potentially the financial sector so now I want to try to pivot him tell a more positive story and then we'll and give a couple of examples and then we'll have a discussion and I'm gonna argue that there is a form of multilateralism that does work or has worked which is a form of cooperative internationalism and as I'm going to define it it's it it tackles specific problems so it's outcomes based it's not rules based so you can have different approaches to achieve the same outcomes it involves it has flexible geometry so it's different stakeholders for different problem and it is inclusive it's focused on an impact on the lives of our fellow citizens and effectively what it does is it creates platforms in various areas and I will I'll get into that particularly around financial reforms and the role of the FSB because that's the my way of thinking is the is the shining example of that but I want to tell you one other story just before I get into that which is so 11 years ago I attended my first annual meetings as a g7 governor and that was the meeting that followed on from the collapse of Lehman Brothers a few weeks before so it was the future arriving with a bang from the Great Moderation to what would be the group not so great recession from boom to bust and from confidence to mistrust and what happened at that set of meetings was the g7 got together and hammered out a plan but realizing that the world was shifting decided that actually that plan that gee said was no longer miss managing the system by that point but it was the g20 and so there was a hastily called meeting of the g7 finance or g20 sorry finance ministers and governors and at this meeting literally 11 years ago tomorrow President Bush walks in which gets everyone's attention and he sits down and he's got Hank Paulson on one side and Ben Bernanke on the other side and and he speaks you know to my ear he speaks well he says listen you know this this is our fault we're gonna you know we made mistakes we're gonna fix it Hank you're gonna you know Hanks gonna take charge of you know recapitalize in the bank and Ben's gonna make sure the markets work and you know we need your help we need everyone to come in behind it you know it's admits myths the problem action I'm walking out and thinking well that was pretty good that's pretty impressive world get behind this and one of my more experienced g7 colleagues Central Bank colleagues says you know I this guy says I met Gorbachev once I met Gorbachev once when I was a g7 deputy and we went to the USSR at the time you know because we were providing some advice to them and we were providing advice to the finance minister but Gorbachev walks in and this guy my wiser g7 colleague thinks to himself at that time what's a guy like that doing meeting a guy like me these guys are in more trouble than they're letting on and I'm thinking exactly the same thing right now about the Americans and that crystallised you know a point that comes out in the subsequent years the sort of G 1 to G 0 the shift in terms of where the hegemon is and-and-and the cyst it takes a while for this to filter through but it does put pressure on everybody else to get together and find solutions ok let me try to accelerate a bit because I'm gonna use the FSB reforms to try to illustrate my point of how this can how things can work because what was decided at that meeting was that the g20 converted something which was a talk shop there's a useful talk shop but not not a fully effective the financial stability forum into what Larry has described a body that tries to set or agree rather agree global standards for cross-border finance and it by and large has worked the system is safer because of huge reforms to bank capital as this one example it's simpler because a lot of the complexity in fact all of the complexity argues the most talks have bits of shadow banking were stripped out and it's fairer because we're on a road to ending too big to fail and misconduct having consequences and the his worked is that there was a clear mission with political backing the backing through the g20 and reporting to the leaders not to the governor's and finance ministers and using the cycle of g20 summits in order to focus that second and I think almost the most important thing is it had the right people around the table so it was the principal's the most senior people of the central banks of the regulators and then one level down not the Treasury secretary but the undersecretary for example in the US so that when there were discussions of these reforms you'd have lively debates you have different positions but if consensus could be struck then they were senior enough and they had ownership of that consensus they didn't have to go back home and implement those reforms or a variant of those reforms but because they had ownership and believed in them they by and large have and the last aspect which has been important in a more multilateral multipolar world is that not everything came out and this is a gross misrepresentation of the previous period but not everything came out of Washington so actually the Chinese were quite influential in some of the too-big-to-fail reforms Singapore for derivatives and the Mexicans around the issues around bank liquidity and so again that builds up the sense of sense of ownership it's quite messy to do it takes a lot longer than it does just to think of all the answers yourself but it in in my view at least has has been effective now I'm gonna finish by just flagging three issues where this approach can work one is very simply is applying this approach to services trade and explain what I mean is that it is very very unlikely cast your mind back to Dani rodrik's trilemma where of sovereignties very unlikely that we're all going to adopt the exact same rules from some global body for data for example or for certainly financial services legal norms others other services but if you can agree on achieving certain outcomes say of consumer protection or data privacy or then trade deals can be struck around it now that's the Nirvana and by the way there's no way to really meaningfully address bilateral imbalances without further liberalization of services in our view secondly on climate change so tried the Kyoto Protocol binding treaty didn't work very well the Paris Accord is an outcome focused agreed outcome but nationally differentiated and nationally determined but differentiated approaches to try to achieve that developed with heavy stakeholder involvement and then the mechanisms in the financial sector that are seeking to be aligned with achieve stabilizing temperatures ultimately achieving net zero carbon are developed the same way so there is something called the task force for climate related financial disclosures it's a it's a long name it's it's a private-sector run task force chaired by Mike Bloomberg which has come up with a sort of comprehensive set of climate disclosure recommendations there's now a hundred and twenty trillion of assets behind those disclosures in other words all the top systemic banks all the top asset managers and insurance companies pension funds looking for companies now to disclose against that okay so outcome focus and and what's going to happen in the next couple of years is this is going to get refined and this could be made in my view is probably going to be made mandatory the second element on climate and the only other one I'll mention which is around risk management so if the first is reporting the second is risk management we are now the Bank of England the first central bank to stress-test were just starting to stress test our banks against climate risk and so the question is not the how exposed are they to physical climate risk but how resilient is their strategy as the UK which has legislated to move to Net Zero and has policies that are headed in that direction how resilient is their lending book five 10 20 years out are those companies effectively adjusting for a transition that is the law of the law of the land and if not what is the bank going to do about it that approach is going to be adopted or variants of that will be adopted by a coalition remember variable-geometry of forty forty six other central banks and supervisors which oversee fifty five economies that produce fifty five percent of global emissions the u.s. is not a member of the ng FS but all the major emerging markets are I'm not suggesting the US as an emerging market but I'm just noting that last point and then the last one which I won't go into detail because I think we should turn to discussion but I just want to flag on payment systems and potential currency areas so there's a host of issues around what's going to happen with digital currency whether there will be digital currencies and to what extent whether there will be multiple cross-border digital currencies that are determined in part by standards of data standards around privacy and what the underlying fiat currency is related to that that's an open question but it is the kind of question that gets answered by this this type of approach which does and I'll finish on this I'm trying to be glass half-full about multilateralism I think what you can gather that with the exception of the FSB reforms that most of the other ones that I've talked about are partial so it's multilateral in the sense of building a platform and ideally if that platform successful others will join but it is not the comprehensive multilateralism that that reigned up until the great financial crisis so with that I'll turn it over with some trepidation to do my Inquisitor thank you very much mark let me ask you a couple questions about what you talked about and then a couple other questions and let me preface it by saying that I have enormous admiration for the perseverance and determination with which you have pushed a variety of things through the international system and a real awareness of the great difficulty that there is and accomplishing anything and that I'm very much aware of that as I put questions that perhaps might be in other people's minds having heard your very thoughtful but your very thoughtful presentation it's great all the things you talked about are terrific if I lived in Ohio saying Youngstown and you said and I voted for Donald Trump and I was thinking about whether I'd screwed up or not by voting for Donald Trump and you said we're Paul you know getting killed by China and like columns to all the factories in my city and they can't afford to teach my kid calculus in high school anymore because the tax base has collapsed cuz the house prices have fallen by half because they closed all the factories and that's what globalism is meaning for me and the banks and the central bankers they kind of figured it out but what they kind of figured out to do was to write hundreds of billions of dollars of checks and be proud of themselves and nobody wrote a check to me when I got unemployed except for regular unemployment insurance and now you're saying that globalism is that we had this thing about the FSB and liquidity in banks that's what we had and then we're gonna have another thing that's about digital currencies like for those people who were doing crypto stuff and sounds like you guys are organizing yourself to license that that doesn't feel like it's gonna help me very much and you're gonna give me a lot of grief about driving my big car it's like the one thing I still gotten that I really like and you're gonna give you a lot of grief about that because you're gonna have to disclose about how much fossil fuels it's gonna make and now you're like saying us and our Jeep is like some source of systemic risk that's gonna mess things up like can we have any multilateralism that's about protecting me and if not shouldn't I kind of go with Trump and pull out all these stupid trees and like produce our own stuff in the United States and make it all work and isn't this like an agenda for people at the Kennedy School rather than an agenda for people like me how would you respond how would I respond so I'm okay so I'm in so I'm in Youngstown Ohio this is I've been transported from the Kennedy School I might have brought a different speech but the so there's a couple things one I'll say on the financial side and we have well historically we've we've been a slightly different place on the continuum of how close we are to this but what your individual in Youngstown has personal experience with which is that the plant he or she worked at when the company went bust nobody came and bailed him out right but somebody went bailed out the banks right so why in the in our system market system why our banks special well actually what we just spent ten years doing is making sure that the banks are treated the same way as the tool and die company that went bust I mean that they play by the same rules so that next time this happens the management the shareholders a bunch of the fat cat bondholders are going to bear the cost not the taxpayer and that's what all of this architecture I mean a terrible word to use it but you know around ending too-big-to-fail delivers plus if you're in the UK what we've changed there and you at the US has not been able to do this yet a different system but the senior managers on some sort of vague set of individuals but the CEO the CFO the chair the chief risk officer that's it are personally on the line for the conduct not just mismanagement of an institution so if it's a failure of an institution but if it's misconduct in the institution so there's a set of things that shifts the you know the discipline and the rules of the markets and the harsh realities which are experienced with great pain obviously in Youngstown but to the financial sector where it's always should have been so they're not special anymore first point second point is that one of the reasons why and maybe one skips the here's why I'm talking about digital currencies because you wouldn't talk about digital currencies the way you go into the conversation about it is to say you know summers when he was at Treasury and when he was in the White House yeah the US was cutting deals we're cutting deals for big corporations all the you know ninety-nine percent of the time they spent having these discussions it was about Boeing and you know it was a big corporation that's what globalization or globalism was about well what about the small medium sized enterprise what about the you know the businesses that are employ and but the in the UK the stat is sixty percent so I'll use the UK sixty percent of them boyís in the UK were for an SME okay and two of the issues SMEs have in the UK or half of them can't get access to capital and of those a little more than half should be able to get access to capital so we've got a twenty two billion funding gap annual funding gap for SMEs sure there's similar numbers in the US I just don't happen to know so part of this is to make sure that we arrange a system so that we you know hard-working you know entrepreneurs and Youngstown up and down the country they can get finance and then the second thing is to link and this would be part of the agenda it doesn't happen to be I didn't originate with me but it's it's the right idea it's Jack Maas point which is and maybe I wouldn't bring up Jack Ma in Youngstown but bear with me I'm just I'm just sourcing the idea that's I'm trying to respect academic standards here I'm not plagiarizing the idea which is you know free trade for recipes right and in order to have for your trade for SME so the next trade deal should be an SME trade deal I should have some threshold in terms of size of business you can define it by revenue or employees or whatever and that you accept and this is where my fancy words come in you accept that broadly between the US and Canada and China or you know that the standards for those smaller business are broadly acceptable so we're not going to force them to validate their product or their service on the other standard you need though a and I'm gonna use fancy words but this is just the plumbing behind it you need an architecture there in both payments and fulfillment getting the product from A to B that is linked together on a platform right either an e-commerce platform or a digital payments platform and then you move into a world where any of us when we're going on whether it's Amazon Shopify and team all the Youngstown the you know the the Sunderland SME Sunderland in the UK or the Shanghai as me they are there at the same way and it is as easy for me to buy from any of them and it says competitive amongst them as it is for me to buy from next door so you bring local to global in a way and and of course what you're saying to the people in Youngstown or we're saying that people in Sunderland is that you know the fact is there is a lot of creativity in these in these places but they don't have ax to a big enough market and this is about building it is about opening up the world for them through a new and again I caught me on the back foot because I've thought of the right words around it but it's a new form of globalization which is a globalization that knits together the entrepreneurs of this world that the smaller businesses the developing businesses as opposed to one that is you know designed by the and okay this gets into political framing but designed by the big corporations for the big corporations we try to understand a slightly different aspect of your sort of theory of what I might call associational bottom-up globalization that you're advocating are you saying that it's okay for stuff like brexit to happen and stuff like the United States pulling out of the Paris agreement to happen because we can put things together in this alternative way are you saying that it's too damn bad that the people won't let us stay in the Paris agreement and the people voted for brexit and so the best you can do is this alternative associational vision and so that's what dedicated people like yourself should should work on is this kind of a second best alternative to you know WTO trade rounds and the European Union and the Paris agreement is it like a second best because we can't do those things anymore and everybody's pulling out of them or is it kind of a different way that might actually work out better for the world and so it's kind of okay to have brexit there's so many questions in there that I just can't answer but I mean yeah general direction I mean the decisions that are taken in terms of what people you know where our citizens want control and over what they want control or you know the right decisions might by definition that's what they want and the question it becomes given that given those priors how do we make sure that those same individuals can maximize their opportunities in a in a safe and prudent but you know productive say prudent productive ways and I think it is not going to be the case that there is a universe you know a hundred and eighty nine countries sign up to X in terms of how you know we're going to regulate data privacy or or that there's going to be one digital currency area if I could put it that way or that there will be a global WTO SME deal but there could be [Music] you know there could be plural lateral deals along those lines in fact there likely will be and that that gives you know that that optimizes the system or moves towards the optimism up optimum because the the political choice is where people and again um maybe I'm leaning too heavily on it but where societies with different societies want to land on the Roderick trilemma that's the prior and then you and then you move from there as opposed to questioning the the choice is not questioning the choice let me bring this you know well which but I it's probably what's also important to introduce into this analytically is that many of the challenges of course are caused by technology not by globalization many of the displacement challenges the adjustment challenges the inequality issues but you know one good one can make the argument about it and can be right but it kind of irrelevant in terms of facts on the ground particularly I'll finish on this which is that quite often what technology is displacing is are not just jobs but identities and then and and the consequence of that identity theft if I put it that way is you know is much more resonant in in terms of political realities that then different governments have to work with let me bring you back more to the center of your job as a central banker which is around setting interest rates and ask you to reflect a bit on negative interest rates so kind of two views out there and I'm interested in which one you have one view is zeros just another number and you know three two one zero negative one if you have to cut interest rates you have to cut interest rates and negative interest rates or just what's going to need to happen sometimes when you need really low interest rates one kind of view and another is it's just unbelievably weird for me when I have a house to get paid for taking money off your hands in order to buy my house which is what happens when I have a negative interest rate mortgage and something's like kind of insane with a society or an economy where people are having negative interest rates and governments that are implementing or central banks that are implementing negative interest rates are just kind of in a crazy place and it's just ridiculous to get paid for the primp get paid for borrowing money that borrowing money is something you pay for not something you get paid for where are you on the question of negative negative interest rates as a not as a policy for the UK in the next three months but as a general policy tool to use in the world okay so I mean the first thing to say and I'll just acknowledge it that of course the question arises because of secular stagnation and the level of equilibrium interest rates in general so the that which appears to be highly stimulative is much less simulative than otherwise but you know all that and you you know have driven it I've not driven those rates down but driven the understanding of it to be clear second is should just acknowledge for those who don't follow central banking pointed context which I belong to the world's tightest mutual admiration society there which is central bank governors so everything that my colleagues have done and are doing at president is right and so nothing I say should be and and for you know their circumstance given their policy options a roughly lunatic criminal who was the central bank governor of Russia in the early 90s who was like creating hyperinflation and they were like stealing money from the bank and they were money laundering and if he asked like all the central all the other central bankers I think there's a fantastic guy we really enjoy meeting him in Basel he's really great he's the life of the party in Basel so what Mark says about their mutual loyalty they're much more loyal to each other than they are to their countries I mean understand that when it's like your fellow central bankers versus like the political authority of your country well you're obviously independent of the political authority of your country and you can't be but talking to like the head of state who got elected in your country but like you share your most intimate secrets with your fellow central bankers okay alright my loyal closeness I didn't central bankers didn't think you'd take it in that direction but the the our loyalty is to the people of the United Kingdom which is the first our job at the Bank of England's to promote the good of the people of the United Kingdom that's the mission it's first line in our charter struck 325 years ago so just to clear in terms of our loyalties but so going to negative interest rates the I mean I have not faced this issue either the Bank Canada or Bank of England in Canada we we substituted duration for level so early forward guidance when we got to our effective lower bound didn't go below and in the UK we've used other tools including quantitative easing once we got there I would say I'm a couple general points one is that the effectiveness of negative interest rates tends to be you know a given move in negative territory tends to be less effective than a given move in positive territory and there's various imperfect estimates of that but it's you know it's it's a significant difference between the two the second is that of course the conduct of negative interest rates has tended to it and and and in virtually every jurisdiction there's now a few exceptions but there is a lower bound on returns to savers so that unnatural nature as you put it of actually charging savers for money at the bank is not followed through which does cause issues or could cause issues in terms of bank profitability and the effectiveness of the financial system but has not I think they're the in concept it's right but if you look at the facts of what's happened in the jurisdictions that have had negative interest rates for material period of time and I'll use Europe including Switzerland the banks remain remain profitable they've a creative capital they credit growth has been stronger than when the policies were put in place you know after the fact than before so there is some transmission there and there's certainly not evidence of the contract certainly not evidence to the contrary and of course part of the reason for that is you know but just so people on the same page is that the negative interest rate is often a it's a tiered interest rate from the central bank that only applies to a portion of the of the central the reserves of that the banks have with the central bank's so it's something that's more relevant for the wholesale markets as opposed to the recent brief the retail markets so it's a tool if I have the misfortune of being at the at if I if I in the next three months is extremely unlikely but we were near the effective lower bound I'm not sure it's the first tool I would look for in the toolbox in the UK and just to be clear actually so just finished that thought which is the guidance that we have given as the Bank of England is that the effective lower bound so in other words as low as we would go is close to zero but a little a little above so we don't see negative interest rates as being part of the toolkit in the back of so this is unlikely to be your problem because it's only it's only three months but suppose for some set of reasons perhaps because we had the mother of all trade wars perhaps because the US stock market decided to crack suppose the UK moved into recession really significant recession normally you'd need to reduce interest rates by three hundred five hundred basis points to respond to that do you think that your other tools forward guidance QE can achieve the equivalent of that as a matter of arithmetic you don't have much room on rates where do you think the world's gonna have to look and look away from monetary policy when the next recession happens two things one a little different system in the UK than the u.s. you're right on obviously in the u.s. three hundred three hundred fifty basis points sort of average easy and cycle the UK the average easing cycles 150 basis points well already there and now you don't want to overplay that because past is not always prologue but that's the historical we're at 75 at the moment we do have room on quantity easing site we also have which is a strength of the system both in a low for long world where you're trying to avoid financial excess but also in a world if there were a shock and we want to make sure that there's full transmission of whatever policy were were enacting is we have macro-prudential tools very active macro-prudential tools in the UK and I'll give you one example which is so we have built up the counter cyclical capital buffer at the banks it's a percentage point of capital we'd like to have it at least at that in resting-state so in normal times and the reason you do that is if you our banks our banks have three and a half times the capital they had prior to the crisis okay relative to the size of their assets so they've got more than enough capital for big shocks but in order to make sure that that you know the spigots are open appropriately open right lending the viable businesses we would very likely and we've said this remove that counter-cyclical capital buffer take it from one to zero and what does that do that gives 11 billion of capital Headroom that's there and there's various ways you can capitalize it but that's a that is enough capital to cover about three years of lending to banks or sorry to households and businesses in the UK so that's stimulus that also would come in a recession now demand as you know for Borum would be lower but on the margin it provides a complement to monetary policy so we have a few other tools that some other central banks don't have so you would anticipate you would anticipate in the UK that in a severe recession with asset prices falling bank profits going down that you that you would likely reduce capital requirements and in order to be able to do that you have to have built them up enough so that it's still credible that in now but this is a system and it was probably but this is a system that when we run a stress test we have house prices fall by 1/3 unemployment go up five four and a half percent interest rates go up by a similar amount and you know and the u.s. u.s. takes another twenty billion or so of misconduct costs out of the out of the UK system just to help the fund the current account deficit okay let's open the floor up to questions and please introduce yourself and I'm I think I'm supposed to remind everybody that questions end with a question mark I governor Connally thank you for joining us tonight I'm just North End I'm a mid-career student here originally from the UK and you've talked a lot publicly about the UK's productivity performance over the past particularly three years but also in the years post recession just wonder if you'd be able to give us your latest reflections on on our productivity sluggish productivity performance and what that means both nationally and for places like Sunderland that you referred to earlier and if I might just in the recognition that we're going to have you know ongoing uncertainty for many years how you would like us as policymakers to think about this problem going forward which policymakers how you would like us as a future generation well there's a job open by the way still in the UK Sofia the yeah you're absolutely right productivity performance has been and there's always miss measurement issues and other issues but it's been remarkably weak since the crisis I mean initiative this variety of explanations and it's you know initially financial scarring and the the problems of the financial sector some of it it's his measurement because we actually used to get productivity used to run two and a quarter in the UK but fifty basis points of that was financial sector productivity which at least at the time was measured by how many loans you pushed out which was it turned out not a great way to measure it but had that I mean latterly in the last few years I mean it's because of this entrenched uncertainty that businesses have been facing entirely understandably they haven't been investing investment you probably know this but is 25 percent below where we thought it would be you know if we extrapolated from the referendum 25 percent below and and that's you know that's hard investment or measured investment not necessarily the process and other investments that's there as well and as a consequence that's you know the short-term drag on productivity would largely appear to be that plus some skill shortages and others that are starting to appear how are we going to deal with entrenched uncertainty I mean go directly to the issue that is the uncertainties of globally taking the uncertainty on the trade side off I mean obviously resolving brexit not just I mean very important discussions literally going on underway right now but the the future relationship nailing down the future relationship is critical but what you know what is needed and will come is positive forward agendas for the financial sector for example and look the product at last thing I should say which maybe insist this is off the record bit which is that you know the productivity plan that the government's put out which I think came out on the day that I think it came out the day that Meghan Markel and Prince Harry got engaged so it was like it did not get reported it was the absolute work but which tells you something maybe that's a Productivity issue anyways it it's actually that the the guts of it are quite sound in terms of what its attacking so it's but it's it's it's the 10,000 foot level so bringing that down in a much more granular way would be my advice ponder them as a group okay yes I my name is John Hurley I'm an MPP student here at the Harvard Kennedy School as somebody that also has a Canadian citizenship I'd like to congratulate you and your international fame I think you're probably the second most popular Kenny alongside Justin Bieber outside of outside of Canada pushing professor summers black hole economics idea a bit further I'm curious if the counter-cyclical capital buffers don't work out in the next recession do you think that we need to lean more so on fiscal policy in the future barring that you know qyz 200 whelming negative interest rates you know don't really get passed through in helicopter money maybe to inflationary don't even want to try that I'm do you agree with professor summerses analysis that I guess barring counter sickled capital buffers don't work out this time that we may need to rely on fiscal policy more so going forward Oh time coming tonight my name's James Hart I'm a student at the grad school of Arts and Sciences you'll have heard I suspect many people in the room as well there's been a lot of discussion about how political pressure has affected the central bank governor governor Powell here particularly the president's comments and tweets and how it's affected his reaction function you yourself and the bank came under a lot of criticism for cutting after the brexit vote in 2016 pre-empting the effects of an economic shock which detractors claim never fed through into a growth downturn and something that the bank acknowledged by raising rates fifteen months later so my question is specifically about the UK how is this political criticism affected to your reaction function for the next few months when we might see similar shocks and to what extent do you think smoothing those shocks is the work of monetary policy rather than fiscal policy thanks mark for your comments today particularly on climate change my name is Emily fry I'm a public policy student here at the Kennedy School I'm interested in how TCF tea is obviously fought on individual companies reporting their risks and and reporting around climate change I'd be interested in your views on the types of policies that governments are putting out that are going to influence the risks to the companies themselves and whether there are specific policies related to climate change that you think would be effective okay fiscal possible fiscal politics companies in client okay so first thing just before I answer the politics one I don't agree with your characterization of what happened after the referendum at all we stepped in when and this is it slightly goes to an earlier question which what I mean you were talking about a more profound and enduring uncertainty but you had confidence dropped off a cliff in the UK corporate confidence and household confidence and we stepped up and we stepped up and that brought it back and you know if the downside of acting aggressively is that you have to tweak things down the road when the global economy has picked up a point as well which also happened during that period that's fine do that any any day so but the fiscal thing and then I'll answer the politics question is an important question the fiscal absolutely agree and I think I've supplemented in a sense that a greater role for fiscal first point second is that I you know said that we have room on the conventional policy but there's other things we can do and we have this complimentary thing of the counter-cyclical buffer and a few other things we can do but you certainly can paint scenarios globally and then in the UK where that may not be enough and certainly you can paint scenarios where you want to do some of that but you absolutely want it complemented by fiscal policy you know we are globally and say I think you've said this but I'll say it from my perspective we're pretty close to a global liquidity trap and you know textbook what do you do in a liquidity trap well fiscal policy is gives you traction the liquidity trap now if you're a central bank what you don't do is you if you have room you don't say well I'm just gonna hang on to that room and not do my job but you know that that you know broad-brush without talking about any particular country that is that is the case that is the case globally and some of the solutions if we could pull off some of that entrenched uncertainty that would start to move us back out of it but that's not happen overnight on the on the political side two things one no chair pal well as Larry he would never and has never never will make a decision because of political pressure he'll make a decision because he thinks it's the right decision to make and a full confidence that that's the case with the rest of the FOMC and the second thing though I'll just tell you a very quick story in Canada the thing about when your central bank our own political pressure on whether or not you should move or do whatever eyes you're said of like you're a lousy politician that kind of comes with the territory was why your central bank right and in Canada 11 years ago 11 years plus two weeks ago there was a federal election the government was running on the on a platform of everything's alright and you know something these short elections it's hard to pivot I guess their platform so they kept saying everything was all right even though everything was clearly not all right globally and there was I know if you remember there was a coordinated interest rate cut ourselves the Fed Bank of England and the ECB and we agreed on that and I thought as the governor of the Bank Canada this is a real political problem it's the right thing to do we got to do it because we got to get to this equivalent of g7 meetings IMF meetings to figure out what to do for the system but it's going to undercut the government but it's the right thing to do and if I don't do it because I'm worried about undercutting the government then I'm being political so we did it and I told finance minister at 9 o'clock at night you know before it was announced at 7 a.m. and very professional look it and government goes up in the polls because you know people are taking action people confuse the central bank in the government it just hammered home for me like don't think through the pulp think what is the right answer sometimes you're going to get it wrong obviously although I don't think we obviously we got it wrong after the referendum but but as soon as you start putting politics into your reaction function you're gonna you're gonna make mistakes and and that's the Fed is absolutely doing what they it might be they're doing what they think is right and and since we're in the world's tightest mutual admiration society they're getting they're getting it right the last question on climate policies which is a huge question and it's it's one of those areas like productivity where it's a broad suite of policies which implied in here the most challenging one of course is is having some form of carbon tax and having a price on pollution and having a design so it is transparently returned to individuals and maybe even over return to individuals so that it's clear that you know the guy driving the truck in Youngstown is getting it back and that's that is that is hard to do it's necessary though to do ultimately I mean I'm not going to be able to candidly do it all justice and this but you do need a price on pollution I think in the end and but you it it has to go back to individual it has to be a relative price as opposed to a new form of revenue raising sorry my name is Marcie meringue Han and I'm a graduate of Harvard I have a doctorate from the ed school and got that 36 years ago since then I've been working in what the Financial Times calls the moral money business and I want to go back to this issue of the emergence of multilateralism with focus on climate and what that means for the bloke in in Youngstown I'm from Michigan a Canadian neighbor so I know well the problems of the Rust Belt and the reality on the ground I'm wondering in your speech last week in Japan you talked about the Task Force on climate disclosure and the fact that you guys have created a knowledge hub to share best practices and information about how to move forward not just on climate but also ESG my question is how might that reach the ground in a way that educates a broader population on the ground what's the definition of multilateralism at the local level that then becomes polycentric because you've got local regional global but you've got information flowing back and forth thank you my name is Connor Cheung and I'm a first year at the college now you've spoken in the past and during your speech today about the systemic risks that climate change poses to global financial markets whether it's to avoid exposure those risks or satisfy some moral imperative do you think institutions that handle large amounts of assets like Harvard should consider divestment from fossil fuels ok great twin question ok so two things one on the let me try and link the two questions if I may and I'll try to bring it down to the local level at the end but so one of the issues and I think probably if you're referencing the thing I think you are you'll see in there the the most sophisticated investors in the world the Japan Pension Fund which is 1.6 trillion dollars the big insurance companies in Europe ally else AXA two examples they degree rate their asset side of their balance sheets of their assets by which I mean they say ok the companies and governments in which we invest have strategies not this point in time but have strategies that are consistent with in the case of the Japan pension fund three point seven degrees global warming okay and this is if this is a pension fund that actively manages tries to actively manage these risks okay so when you're when you're doing that estimate you're do you're making a judgement not where it come he is today but we're company is going which is a bit analogous to what we're doing as the Bank of England when we go to the banks and say oh you're lending to company X what's is that loan still going to be good in 10 years time or 20 years time when the UK has a price on carbon that's high and when certain activities aren't allowed do they have a strategy that brings them there for reference the the carbon the degree warming estimate at least of AXA for the US Treasuries this is in public domain is five point four degrees which is a comment on the okay the issue from I would suggest the issue in terms of moving the system if you will the world from where we are today to some form of stabilization at some degree level which means getting ultimately to net zero carbon right wherever you know this everyone knows this is it's not just about divestment it's not just about excluding it's not just about at least on this phase of the adjustment renewables and and windmills it's actually a lot of it is about moving from worst in class to best in class in terms of carbon footprint or towards best in class whether you're an auto manufacturer or even if you're an energy company moving from where you are here to there and it can be better for the system to put capital into an energy company that is going from you know oil coal heavy or you know certain types of grades and moving towards a more renewable mix that they wouldn't otherwise do if they didn't get the capital in the and the value now to try to bring it down to more of a local level and the question is how so one of the questions is I think one of the big system questions is if the world's most sophisticated investors can do estimates of this shouldn't ultimately that be something that other pools of capital just just right and it should be no surprise by the way that the system as a whole is probably at four degrees or so if you look at the public capital markets what's invested in because no but you know look at the IPC see reports and others they're expecting temperatures to stabilize that much if they stabilize in much higher levels because climate policy is not yet collectively strong enough to and and you know bringing out the new technologies and the changes in behavior but that's information there should be on the public domain and a more I absolutely understand the divestment movements and things but we won't get there just by like the core of the system has to move everybody has to move and those who move or those who put in place plans to move if followed by use of the verb they should be it should be rewarded and supported but we need a more consistent way to to measure who's doing what and then the question is can you can you map it from the company level you know I'm a three and a half degree company we're doing X Y is that including this in Youngstown and that's going to bring us towards two degrees and by the way because I've got a two degree factory that jobs going to be that's a resilient job right because it's it's it's it's resilient to that at best is one can tell the type of policy frameworks carbon prices and other things that would be necessary to stabilize we're a long way from there obviously but that's one way the system could have Marc guessing that I've probably read the Carver Crimson significantly more recently than you have perhaps you'd let me address your remarks in one way by just saying that I don't think you intended to take any position one way or the other on the question of whether it would be a valuable thing for the university to make a political statement through its investment policy about any aspect of the climate change debate and I don't think you intended to weigh in on that controversy which is an important one to some people a first-year student at the college for bringing me into the center of that controversy by doing that that question optimal optimizing investment strategy recognizing that one needs to think about all the scenarios that may unfold in man may unfold in the future yeah I'm trying to make a system point as opposed to a certain pool of capital specific point so as not to have given myself the last any word anywhere near last I'm gonna let you ask one last question and then we're going to conclude okay thank you two less questions for your talk and say my question is what do you think are the key risks to a knodel brexit which the general public in UK might not know or appreciate to to it not being conveyed by the media or whatever and how would you convey these messages and secondly what what can the Bank of England or the government do to you miss Katie's oh sorry so you mentioned earlier that banks are a lot safer now because capital buffers are larger but actually I think professor summers in 2016 had a paper that showed that market measures of risk are higher post crisis despite higher capital requirements and that's measures such as volatility and implied volatility option implied probability of default so why do you think the market disagrees with that assessment and is it possible that you're being too optimistic about how safe banks are post crisis I'm right I'm to that I'm right he's wrong I I sleep serenely about this issue and it's on my head okay and I'm potentially 10 days away from a very large shock to the financial system in the UK and the only reason I stayed on the only reason I'm still governor of the Bank of England was to be there you know put put myself where my words are have been around the system being ready so and look the other thing the only other thing I mean I was a good paper and everything but the no but the only I think one of the things with the institutions is that now actually you can fail right I mean in the UK or the loss the the losses will be will be much more evenly evenly spread in terms of the public and biggest risk it's tough to say what look there are a series of there are two types of things that are gonna would happen with a No Deal brexit which is there's no real and I'm not sitting here I have no inside information to suggest that that's what is going to happen and the the general posture has been encouraging in the last last few days of negotiation so it'd just be absolutely clear but there's there there are issues around disruption and so in other words the ability for goods and particularly goods to get through the ports and get to people and those are real the government has made a lot of progress the European governments have made a lot of progress but you know we're still talking 1/3 to 40% maybe more of the the normal volumes at the ports be restricted and potentially for some time it's very hard to be more precise than that but that's that's material and that has material impacts on activity and availability of goods particularly but particularly economic activity and then that knock on the those are disruption issues I think what probably is underappreciated and and or there's a higher degree of uncertainty around is the economic the actual economics of changing overnight from a relationship which is the most open and integrated in the world to a WTO standard and just that there's a series of businesses that they're there their profitability of their there their core activities will will shift and you know all of all of my professional life and life actually has been that trade deals have been forms of integration with transitions to that integration and so you have time to get ready and even then you know there's a gradual ramp up and exploitation of the opportunity this is instantaneous would be instantaneous d-- integration which is you know has never been tried and at least if you follow the logic of trade deals you should have a transition period which is what the UK government is looking for and and making some progress in getting mark thank you for an extraordinary performance we note that you will be leaving formal sector employment at the end of january we note that the audience has looked at you and i've been at many of these fora with a rare degree of intensity and interest as you have spoken and we hope that you will have occasion to return frequently and often to enlighten us on the many subjects on which you have so much light to shed even if you do remain slightly in need of education on some aspects of bank capital it has been an enormous it is that it has very enormous privilege to have you here delivering the Gordon lecture thank you very much Mark Carney [Applause]

Channel: Institute of Politics Harvard Kennedy School

Views: 5,959

Keywords: Harvard Institute of Politics, Harvard University

Id: 9yEYLKxkz4I

Length: 78min 26sec (4706 seconds)

Published: Thu Oct 17 2019