Lawrence H. Summers on Lessons Learned from the SVB Bank Failure

okay thanks for everybody for and welcome back to another webinar organized by Princeton fail one worldwide we're very happy to have again Larry Summers with us from Harvard hi Larry it's good to have you on the program again we will talk today about lessons from uh Silicon Valley Banks failure and what are the implications to the financial system more generally so before we go in our discussion I would like to go to the poll questions you answer so generously I'm very grateful for that and here are the poll questions and let's see uh what your opinions uh were so the first question was is the failure of the Silicon Valley Bank is it very specific because it was a particular Bank or is it really a sign of weakness of the financial architecture more generally and the answers was 45 percent of you said it's very specific and 55 said it reveals a weakness of the financial architecture more generally now second question was is the bank's pricing power on demand deposit so when the interest rate goes up the deposit interest rate stays low so the policy rate is for more than four percent While most deposit rates only pay one percent is this unfair is this does this fact that the banks can make a lot of profit in this circumstances contribute to financial stability or is this an asset it's an asset for a bank should this be also reflected on the bank's balance sheet so we should price it and put it on the bank's balance sheet as well and or should this you know this pricing copy eliminated by having some cbdc some digital dollar which is bearing some interest rate based on the policy rate so the banks don't have this pricing power anymore and the answers you gave us it's unfair so you could choose more than one answers it's 20 thought this way it contributes to financial stability 48 thought this way it should be listed as an asset in the bank's balance it's only 24 thought this way and we should introduce some interest pairing cbdc to eliminate this pricing power 18 uh I thought this way I thought question was about the current Swift interventions by the regulatory authorities uh and handling this was this good and because it limits contagion or was it bad because it will create in the longer mobile Hazard 75 thought it was a good a choice and only 25 thought it was um how bad because it might induce moral hazard about financial dominance it was the fact that we have this financial instability does it make an interest rate hike less likely to contain inflation because whenever we raise into States we might bring more financial institutions in the difficulties uh it makes it less likely that's what I thought 60 so there is some clear Financial dominance of financial contagion is actually limiting this the room uh interest rates twenty nine percent thought it's the same it doesn't change it and it makes it less likely because uh the FED might show that there's no Financial dominance and contact this it's only 11 percent not this way and finally the last question was uh should the financial architecture be changed to one with a narrow banking system because the private banks are not really good in maturity transformation particularly if it's government maturity transformed uh into shorter term papers 26 thought only we should go to narrow banking we should just do it with strict regulation that 70 74 thought this way so this gives us a little bit of a background so we go now over these topics uh we talk about what went wrong and you know what's about the bank's pricing power the intervention and implications for monetary policy and lessons for the General Financial architecture and also lessons for other countries across the globe so let me ask you what do you think went wrong prior to the eruption and uh you know perhaps you can outline your perspective a little bit was the too much easy monetary policy for too long regulation was weakened under the Trump Administration and also the stress tests might have been benign and things like that uh perhaps you can tell us your perspective uh of the current devices almost almost all of the uh above that's usually true with respect to bad accidents that there are a lot of things that if they have been different the bad accident would not have happened this was a very poorly managed uh Bank no Chief risk officer for nine months various problematic aspects in the culture extremely rapid growth in uh deposits attracted with uninsured deposits paying uh premium uh rates little attention to duration uh mismatch so the bank was badly managed the supervisors don't seem to have been on the case or to have paid attention although this kind of prodigious growth is the classic thing that supervisors are supposed to be watching carefully going back to the SNL crisis uh before the exchange end of the duration mismatch is something that should have been and was caught by some observers and should have been uh caught uh by uh Regulators of course this probably wouldn't have happened if we hadn't had a major spike in uh interest rates but there's no reason given the major spike in interest rates why this needed to have happened with competent uh management and uh competent uh supervision it certainly does point up a variety of issues with respect to the way in which we do uh bank accounting the way in which we fail to take account of uh Market adjustments in the value of the assets of of Banks and I think that has important implications for the structure of Regulation it has important implications for the way in which uh banks are evaluated uh going forward so there are many different uh causes old-fashioned mismanagement not noticed by supervision being at the center of them aided and abetted by a range of the conceptual issues that are more interesting to uh economists do you think that you know we have now you said the SNL crisis and also in the early 90s we had some huge interest increases and caused some havoc in the bond market the fact that we have the inflation swap Market or the bank could have used the inflation swap Market uh do you think we're in a different circumstance at least we would expect from such a bank to use the inflation swap Market not sure first of all I'm not sure why they would use it for Facebook rather than the interest rate uh swap uh swap Market second given current accounting conventions if they had used that and they had hedged a non-market uh Mark to Market asset with what would have been a mark to Market liability that would not have operated in the direction of necessarily reducing the relevant concepts of volatility so I think the failure to fully hedge is also related to the inappropriate uh treatment of uh market value fluctuations uh in assets I think it's an obvious and egregious problem when uh changes in the port so-called available for sale portfolio of banks are not reflected in uh their capital I think the existence and the whole concept of the whole to maturity of portfolio is something that is potentially quite problematic I recognize the importance of the issues around uh deposits and the sticky below car below Market character of some deposits but I would prefer to move to approaches to put more emphasis on market value taking appropriate accounts where it's appropriate of uh the issues on the deposit side that constitute a benefit uh to Banks but here where you had a whole or you had a substantial hold to maturity portfolio the deposits were uninsured obviously potentially highly liquid and flighty and very recently acquired you had almost a perfect storm of things that could potentially create a very difficult situation do you also think that the social maturity accounting actually affects the long-term yield of the long-term treasuries because many banks might be sitting on them and say we can't really sell them because we would realize losses and hence there's some locked in demand on long-term treasuries which would not be the case I am open to a variety of uh views in general my instincts put less emphasis on price pressure effects as determinants of uh risk of term premiums than do many other uh Market participants and therefore I tend also to assign a bit less significance to the price pressure aspects of uh QE and to all the various effects over long periods of time I don't doubt that there can be huge effects over short periods of time particularly in illiquid markets but I would be surprised if the impact on term premiums for long yields was terribly large if uh this were changed over long periods of time and even if it were I would expect it to be much larger in the treasury market than I would expect it to be in other long-term uh Bond uh in other long-term bond yields so I think of all the arguments for hold to maturity accounting helping the treasury sell longer term debt in an advantageous way is one of the worst and about QE I mean one could argue that the fact that QE in this way the financial sector doesn't have to hold so many long-term maturity treasuries so it might makes the situation better than without QE would you subscribe to that I think that's counterintuitive this is a different uh topic um I find the American systems approach to the debt maturity of the debt that is held by the taxpayer uh to be presumptively bewildering and inappropriate we have simultaneously the spectacle of the treasury clocking like corporate treasurers do the importance of terming out uh the uh debt the importance of containing rollover risk at the same time that we have the FED talking about the desirability of terming in uh the debt on grounds of providing liquidity or uh stimulus and we have the Brokers sitting in the middle making money um as the treasury issues longer term debt and the FED participates in markets to do something about it I think we need some apparatus for having one coherent decision about U.S debt maturity strategy that implicates all the various issues uh that are involved and I find it hard to think about how individual actors motivated by a subset of the concerns should act since it depends on what the effect of their actions will be on all the other uh actors so you will be open for a holistic rethinking of the whole structure the material structure of your treasure is QE of the FED involvement and what extent the private sector two different things like the open too I would be very firmly of the view that the process needs to be completely changed from the current process where the treasury does what it does pretending that that's determining the structure of the debt that's going to be held by the public and the FED does what it does assuming that it's going to have no impact on what the treasury uh does and nobody thinks about the many uh equities uh at the risk of doing what one should do only very rarely in settings like this I would advertise a paper that I wrote some years ago with uh Robin Greenwood and Sam uh Sam uh Hanson that uh laid out uh these various issues in process and in terms of where we should uh overall come uh come down perhaps somebody could put that paper in the chat for anyone find that paper and put it in the chat for anyone who is uh interested in uh looking at it yeah so I was wondering can we come back to the market power of deposits so on the one hand you could say you know Banks they have a lot of cheap retail funding especially when the interest rate goes up they still can you know Finance themselves fairly cheaply and that gives them additional stability uh and that's why they can actually hold this maturity mismatch because they have some natural hatch by you know whenever the interstate goes up they get keep their cheap funding and that's you know Philip schneblo Drexler paper and the focus on that would you argue that that's a good arrangement we should get rid of it by introducing some cbdc or some interest pairing cbdc and then the market power is more constrained from the private Banks or do you think that's too risky in terms of financial stability considerations and and the other thing is if this is a high very available asset in a sense there's Market power on the deposit Market should it be reflected in the balance sheet in our accounting system and we touched upon it to this briefly but what you're taking and you're thinking on on this dimension uh before we broaden out the aperture from uh uh from svb I'd like to make uh one other uh comment about an issue that pens if we were dealing with a systemic financial institution the rules would require that all the assets of the holding company be deployed in support of uh the bank uh which it held we did not make such a declaration on Friday morning but we did by Sunday decide that this was a systemic event in that context it is troubling to me that the investment made by bondholders uh you know holding Bonds in svb holding company is um trading as richly as it is about 50 cents on the dollar it is troubling to me that the holding company has not yet filed for bankruptcy though it seems to me that it clearly is and I think it will be important in terms of the political legitimacy of this exercise to pay close attention to the Deferred Comp liability for executives of the bank that is currently sitting with uh the holding uh company so I think there are some issues around um moral hazard type issues and proper accountability for investors type issues of the kind the authorities stressed that um require close attention and I am not uh close to all of the legalisms and obviously one has to do things that are consistent with the rule of uh law but if it were to be the case as I suspect it might be and I'm not sure that the holding company had deposits in the bank I would be quite sorry to see the federal government guaranteeing those deposits of the holding company in the operating company bank for the purpose of meeting various economic actors particularly the executives who had relationships with uh the holding company uh turning to um turning to your question my instinct is that this is an issue that over time will I can uh to go away seems to me that we would expect in a competitive uh markets with competitive suppliers in the absence of concentration in the presence of uh money market uh funds in the presence of various schemes that enable people to be facilitated to invest directly in interest bearing uh assets that we should expect uh that the premiums on deposits um that are not compensation for the fact that banks are providing their deposit holders with uh services that are costly to provide I think we should expect that over time competition will grind that away and I think we should welcome that process the fed's aversion to supporting various narrow banking models has seemed uh problematic seems to me that if I want to open a bank that simply takes deposits and buys treasury bills that should be an Institutional Innovation that uh the FED is welcoming on the grounds of the contribution to financial stability that it is making rather than opposing on the grounds that it is a threat to traditional banking seems to me there are important issues of progressivity here since it's likely to be the wealthy who are going to find ways to avoid having large amounts of their liquidity held in zero interest rate form I wonder Marcus and this is not an area where I'm an expert and my view should be thought of as raising questions that policy makers should consider rather than offering confident judgments I wonder if we had a much more primitive environment technologically 15 years ago and since then until very recently we have had very low interest rates and so we have not had uh The Coincidence of high interest rates um the ability to highlight the highness of interest rates and the rapid Mobility that is created by uh digital uh banking um to open accounts very quickly I I wonder if this isn't something that is likely uh to uh change um over uh over time independent of government uh actions to answer your other question I think that insofar as there are sticky um sticky lower interest rate balances I think that ought to be reflected in the accounting system my understanding is that well-managed institutions have very sophisticated models for understanding the liquidity of different categories of uh of banks of Bank liability Bank liabilities you know the um there's a big difference between an uninsured deposit of a finance Professor who does a lot of Consulting that one should probably assume has very little stickiness and um the um a stat the deposit represented by an estate where the claimants on the estate have not been found for several years and where nobody's likely to pressure to raise raise it I think that should uh be uh worked uh through I think the whole concept of deposits and uninsured deposits need to be thought through carefully uh the argument is always an argument about Market discipline but it seems to me that a startup company with five million dollars in liquid assets that is trying to innovate a new AI application is really not well set up to be in the position of evaluating uh the credit worthiness of a bank and so I'm inclined to think that we want to move to a world where we are not relying on uh depositors to perform that kind of uh function but rather conceiving Capital structures where those who are more Junior to depositors do have uh that responsibility and where there are where the collective wisdom of markets is uh more extensively brought to bear so just rephrasing it a little bit what you're saying is that it's not really depositors even if they're you know big tech companies or intermediate tech companies it might be more the interbank market which can execute the discipline because there's other Banks but on the other hand we also want the interbank market to channel funds back now if if the interbank market just says you know if money is now flowing out of SVP to another bank JP Morgan and JP Morgan is just turning the funds back to the interbank market it stabilizes that um but overall I guess the the banks themselves can cause more can exert more influence and more discipline on each other Marcus you're raising a you're raising an important point that I think I need to think that I think I need to think through more carefully I had in mind less the interbank market than uh the uh subordinated debt Securities of uh the banks the Securities that are potentially convertible into equity and the pricing of uh those Securities and in all honesty I haven't thought through carefully uh what My Views are on the interbank uh Market as a source uh as a as a source of uh discipline you know I would just step back and say that there are many academics on this call and there are many who are who devote a much larger fraction of their intellectual effort to this range of issues that I've had an opportunity to do it seems to me though that if the 16th largest bank in the United States with less than one percent of the banking assets of the United States if it's failure in a highly idiosyncratic way you know highly idiosyncratic Market constitutes a systemic event because of the contagion it generates that there's a great deal of conceptual rethinking around the structure of our financial system that is uh call that is uh called for and the idea that problems in major institutions can be contained within the current structure um looks less plausible today than it probably did before uh this set of events so let me throw in some questions so get the long outlines a certain thought experiment and said let's suppose Regulators would have said uh on Monday the FDIC gives people the half of their money back the uninsured money and the rest it gives in on Tuesday in form of certificates that can trade and then hopefully on Wednesday uh Bank of America Wells Fargo JP Morgan Chase would then trade the certificates at par uh how about you such a movie how would such a movie play out and I would like to combine it with a question by Martin mullison who said if you look in Europe and Cyprus that write this haircut as well but it didn't really work and then I had to backtrack uh from that as well so do you see do you how would you evaluate such an alternative a strategy where you say I guarantee only 80 of the deposits they are freely available but 20 to get a certificate and it trades I don't know at a discount or hopefully down the road if some other bank jumps in at par hey um General Doctrine that I call huff and Puffin pay which is that the policy makers who in the early stages of crisis um and confidence crisis give the strongest moral hazard speeches and impose the most brutal Solutions on the people who they think are responsible end up authoring the largest uh bailouts and I would give as examples of that uh Doctrine the actions of uh treasury secretary Paul O'Neill in the spring of 2001 when he gave very strong moral hazard speeches and two weeks later was supporting the largest bailouts in history for turkey and Argentina I would give the authorities who Justified their non-action in Lehman on moral hazard uh grounds and found themselves guaranteeing the whole financial system within uh to uh within uh two weeks I would give the British authorities gave terrific biohazard speeches after Northern Rock and found themselves authoring very large uh bailouts I lack the I as a policy maker lacked the courage uh to attempt the experiment uh suggested uh by my friend uh Brad in your question I rather suspect that if Brad were a policy maker he might lack uh the uh courage of it and I'm reminded of the wisecrack uh made with respect to those who um advocated such approaches in the very early 1930s that that was the kind of thinking that made the depression great so um I think that prudent people concerned with uh risk uh control would not have stuck with a strategy of um uh strategy of haircutting those deposits I would say that my concerns unlike some of my friends my concerns last weekend were actually more about Contagion than they were about uh the problems with payroll uh within Silicon Valley I think people would have figured out ways of lending money to people to handle payroll and the like and that would have been very messy and that might have been sufficient ground to ensure the deposits of svb but my larger concerns last weekend were about uh Contagion and how would you see how well did the resolution work in your judgment how what grade would you give the authorities and you know that affected svb the holding company is this is still yeah I I would I would give uh the Authority's high grade uh High grades these days when uh the average grade point average at Harvard or Princeton is 3.8 um giving somebody an a is not a very strong statement since the majority of the grades are a but I would certainly give them I would certainly give people an a uh questions I would ask are whether we could have averted some of this had we recognized that it was systemic on Friday during the day rather than initially announcing we were going to haircut I think there are questions about how the holding company is uh going to be uh handled I am not entirely I would have wanted to look very hard at The Lending at par uh feature of the fed's facility it may be that if I had been involved in the decision making I would have decided that that was necessary but I would have found it painful to come to that conclusion and I would have wanted to take warrants in institutions that made substantial use of borrowing above market value between market value and Par I would have thought that if the FED is going to provide that service it should get in return a uh sliver of equity in the form of warrants that had no control rights again I want to be careful I'm saying that is a question that if I had been a policy maker I would have pushed and asked I might well have been persuaded that that was infeasible or a bad idea but I think it's a question that should have been on the table and in the various postmortem analysis I haven't seen uh very much discussed and if I just go a little bit ahead so you know you do a reborn at Park for U.S treasure it makes sense but if you were to go to Europe and you have different Southern bonds would you you know how would you treat this power in Europe depending that different bonds with different riskiness underlying it's even a more challenging so no that's another question that's another good good good question where I don't have a well-considered view in general I am uncomfortable with doing things that are based on uh par values rather than uh Market values I think there's a Broad and I'm also concerned about questions around the term of uh lending I think there's a view that many people have that somehow if you lend money against a highly volatile security um with a high degree of Leverage that's a very risky thing to do but I would rather lend somebody money 95 against their Apple stock with a one day um screwing up on the margin then lend somebody 50 percent against their Shopping Center with an every five year uh truing up uh because the asset is always held at its uh value and so in general I would want to push things towards uh more Reliance on uh market value and it makes me nervous to uh contemplate moving even further in that regard in a case like the European situation where there's credit risk um as well as uh uh as as well as uh duration risk so if we so Harold James would like to know probably in context or credit Swiss uh you know if there's also exchange rate risks so for example if the Swiss National Bank has to lend two credit Swiss in the foreign currency in dollars and it might be that the country is not big enough to support such a big large financial institution so see this do you see particular problems then in Central Banking what central banks would do so you have on top of uh here are um what do you think the swap Arrangements will take care of that exchange rate component the honest yes sir Mark the honest answer is Marcus I don't uh I don't know I think there is a serious obviously a very serious set of issues involved in global institutions headquarters in relatively small uh countries I think the nature of the right answer involves um the establishment of rules and principles that cause there to be separate holding companies in each of the major jurisdictions and therefore permit separate uh resolutions in uh separate uh countries I have a and the world Community has worked extremely hard on this for uh the last 15 years in the United States is heavily invested in the idea that it can handle foreign banks located in the United States uh come what may on the part of their local uh regulators how well that works um is something that I and was is likely to work I think will be importantly tested uh going forward with what happens at uh credit uh credits uh at credit Suite but I'm not in a position to make a clear recommendation on that so let's go to the next topic which are the implications of monetary policy and you know Daryl Duffy pointed this out in one of these questions as well so is there some Financial dominance I call this the financial dominance that you know the Central Bank might be limited how much you can fight inflation given that it might cause some havoc in the financial markets and or does it have to act even stronger in order to signal that it is not Guided by Financial dominance and do you think you know it would have been easier to start earlier with inflation fighting and have a more credible approach was it a sharp increase in the interest rate which caused the the tensions in the financial markets or among these Banks and so I would like to get your take how do you manage it so if we would not have intervened so strongly to save the bank and we had some contagion effects it might also limit dramatically what we can do in order to fight inflation uh so it's one motivation to be very forthcoming and can extend guarantees in order to keep the space the policy space to hike interest rates and in order to contain inflation or would you say but then anyway there will be a credit Crunch and the economy will tank so inflation might not be an issue or we could also go to stagflation I don't know how it will play out so here I have uh uh relatively clearer views that I do on some of the other uh questions I think uh Christine Lagarde gets an a gets an A plus uh today the fact that the ECB carried through on its monetary policy uh plan did so with clear rhetoric separating the monetary policy concern from the financial stability concern pointed out that what's important when you have multiple objectives is to have multiple instruments and to be prepared to use the multiple instruments I think was exactly uh right and the fact that people are able to listen to this seminar without obsessing on the volatility of markets every five minutes after the ECB raised rates by 50 basis points is a is evidence that uh Christine Lagarde took uh the right approach and it would be my very strong hope that unless there are significant changes from current facts which of course there might be that raise rates at uh its next meeting and will make clear its preparedness to use the various uh tools to address problems in financial uh in the financial in financial uh institutions or in financial markets so I think it is very important to Signal um very strong resistance to the idea of uh Financial dominance and to the idea of slacking off in uh the effort to resist inflation um because of uh Financial stability concerns now I do think and you touched on you touched on this in the way you asked uh the question Marcus that quite apart from anything about financial dominance a reasonable Observer looking at the U.S economy today might well revise downwards their assessment regarding the flow of credit and therefore revise downwards their assessment about spending and therefore about inflationary pressure and I think it's entirely appropriate that the Central Bank in making judgments about uh monetary policy take account of factors that are influencing the flow of credit just like it would take account of a big change in a big defense buildup or would take account of a change in the animal spirits of consumers or uh anything else my judgment is that at this point the likely effect is not sufficiently large and the inflation problem in the United States is sufficiently large that I think it is appropriate to raise rates by 25 uh basis points at the next uh meeting but I want to be very clear that there are are two rationales for financial disturbances leading to a change in the monetary policy path One Financial dominance which I would want very very much to resist and the other assessment of economic conditions which I think is right to take account of but just not sufficient to make a case for not moving rates on current facts and of course current facts could change uh very rapidly as one learns more um about uh what the uh what the situation is I do think that if uh the FED had um not allowed itself to fall so far behind uh the curve um during 2021 and the earlier part of 2022 there would have been a more gradual set of adjustments of interest rates and that would have been an environment that would have been more conducive to uh Financial stability I also think it's important to remember that the considerations that we're discussing that are relevant here primarily has to do with the level of longer term rates rather than the left rather than real rates and therefore falling behind the curve and allowing inflation expectations to rise uh is not conducive uh to financial stability so being perceived as having a financial dominance uh problem might well exacerbate uh difficulties both ironically in terms of inflation expectations and in terms of recession forces because if the FED were to decide not to act people would think if they're so scared maybe I should be so scared as well and adjust their spending uh plans so on current facts I would be very strongly of The View that the FED should be moving um next week you know just jump in a little bit on you know hacking rates versus quantitative tightening so quantitative tightening essentially you affect more the long end of the yield curve and writing hex uh hiking rates your effect more the short end of seal curve and as you said it's mostly the long end which is for many banks a problem uh so you would say if you were to give in on financial dominance you would give in on quantitative tightening rather than the rate hikes probably probably uh yes Marcus for the reason you say but heavily qualified by two things I said earlier one that I believe these price pressure effects are all smaller than many others believe they are and two I really have trouble relating to these discussions of the maturity of America's debt that are partial from the perspective of one but not both of the involved institutions [Music] great so that's uh leaves the topic of the whole monetary policy implications of the current events but we touched upon already earlier you know should we actually restructure the whole financial architecture go to more narrow Banks or at least don't hinder narrow Banks and it as you said earlier does it is it a big deal if for example the U.S treasury has much more short-term T barrels rather than long-term bonds and this way the financial sector the private sector doesn't have to do so much maturity transformation and it seems like the private sector is not so good in doing this material transformation why do we ask the private sector to do it it could be the treasury doing on its own knowing that the FED can be ready at any moment to help out and I think especially for the US there's no argument why the government sector cannot do the maturity transformation on its own well you see a big rollover risk if the debt is in dollar and you have the FED potentially stepping in or do is this whole over risk overplayed and I mean you touch upon this earlier that that I referenced uh earlier that I wrote with uh Greenwood and um and uh Hansen and uh Rudolph talked about uh exactly these uh these questions my general views are yes we should be enthusiastic about narrow Banks whether we should be actively discouraging other Banks I'm far from sure but we should be enthusiastic about uh narrow Banks I share your instinct uh the security but the Instinct behind uh the question on shorter term uh debt is for I put it slightly differently than uh you did even if it was a little bit riskier in terms of government rollover uh risk it is safer in terms of overall Financial system uh risk which is presumably the objective I would add the observation and in a world where long-term inflation is uncertain real borrowing costs which are presumably what the government should worry about may be more predictable with a short-term debt based strategy than with a long-term uh debt based uh a strategy and that rollover risk is ultimately a matter of confidence in the country and it's probably better to deal with it at the government level than at the banking uh level I would say my principal hesitation um and why I'm not confident completely confident where I would come down comes from the fact that there's a different set of arguments in which I've been involved over the years having to do with the use of fiscal stimulus having to do with government debt having to do with the set of issues that Olivier bonchard has stressed involving R versus uh G interest rates versus growth rates and that in general tells you that if you have an opportunity you may be able to engage prudently in more expansionary fiscal policy if you can lock in low real interest rate uh borrowing and a it was at certain points my view uh pre-pandemic that we should be having more expansionary fiscal policy and financing it uh long financing longer term and that of course goes in the opposite uh Direction I think where that argues is towards an approach that emphasizes issuing longer term indexed Securities and shorter term nominal uh Securities as part of an integrated uh debt management uh strategy and that would be where my instinct at this point would be but it's uh some of my views are like my view on monetary policy are quite strongly held and would be a recommendation to actual policy makers some of my views like the ones I just expressed are what I would be thinking about and what would be my hypothesis as a policy maker but not a judgment that I would be reaching with confidence thanks a lot let me allow me that I say that of course you introduced when you were the U.S treasury secretary the tips market so we have the tips Market because of you so that's a big lifetime achievement um so at the end let's come back to the global perspective a little bit we talked already about Europe you know how should they deal with risky bonds should they also this at par collateral uh it's more challenging there we talked about created Swiss a little bit about the dollar shortage of course is this National Bank also has a lot of dollar assets on the other side but we haven't talked about Japan yet are there any lessons uh you know what we have learned in the last week for the yield curve control how to lift the yield curve control and what are the implications for the financial sector do you think there are some lessons for the Japanese situation as well a broad principle that pegs of any pegs of any kind are a hotel that is easier to check into than it is to check out of and there's always a temptation to bring stability with pegs and confidence and the argument is well if we just beg it and we tell everybody we're going to Peg it and they believe we're going to Peg it then we won't have to actually spend money pegging it and so it's really terrific and I think there's a kind of broad lesson that those things often don't end well there's more much more experience in that regard in the exchange rate area that there is in the yield curve control area but I think there is that kind of idea in uh the yield curve control area as well so my instinct would be um that Japan needs to gingerly exit uh yield curve control to uh maximize its uh prospects for uh stability but I would emphasize uh the word uh gingerly uh in uh in that in that regard and so finally let's talk about the emerging economies and developer economies let's suppose a similar scenario would have played out in some emerging economy I mean the US is in a very good position to handle this uh hiccups and then keep it under control also because of the dominance of the dollar and it doesn't cause some you know uh payment of balance problems if you were in an emerging economy would face a similar circumstances how would it play out there differently would you say there's some different considerations to take to be taken into account more complications or you would say would do similar things or you would not be able to do these guarantees because your balance sheet is not the national balance sheet is not yeah it would be I would be quite surprised if it was a good idea for emerging market economies to have it's to be guaranteeing uh large chunks of the liabilities of the 20th largest or 25th largest or 30th largest uh institution in their uh in their country and so I would want to my instincts in the context of Europe of emerging economies would be to would be more towards National Champion uh institutions versus and then a periphery of Institutions which did not have a strong uh safety net rather than the kind of situation rather than doing the equivalent of an svb bailout uh in a emerging economy I've been involved over the years in discussions of foreign owned institutions in uh emerging uh economies this is something I had a chance to discuss over the years with Mexican policy makers who within the group of Mexican Financial Market uh policy makers there are quite different views on the health or ill health of having external ownership of uh their institutions my instincts for the reasons you say tend to run to Global diversification uh for emerging market institutions for the same way that I'm much more comfortable with federally chartered institutions in the United States that I'm comfortable with only state chartered institutions that don't have access to uh the FED discount window before we totally close did they last week's event change your opinion about anything about stable coins and crypto space also in light of the Signature Bank um I I think that uh one needs to be very very uh airful uh in that entire uh space I think that what policy makers need to think about very carefully is weather regulation encourages or discourages some of the good things there's a tendency to say there's risk there's uncertainty bad things are happening but you know I think we make a clear decision that the government does not involve itself in saying that some cigarettes are safer than other cigarettes because if it did it would be legitimating cigarettes and I think that a similar kind of thinking needs to affect how we think about uh regulatory policy uh in the uh in the crypto uh area and I do think that we need to and this is a comment about the crypto area but it's actually a kind of broader area I think the field of uh Financial regulation would benefit from more extensive considerations of the lessons of public Choice theory that over time regulation often shifts from protecting the uh rest of society from what may go on in a given industry to protecting a given industry from the uh pressures that may come on it from the rest of society and I think that's something we need to uh very carefully uh consider in the financial area given the magnitude of public resources that are put behind uh financial institutions in difficulty thanks a lot earlier this was you know as always extremely insightful and we learned a lot we typically want to end up with a positive note if you have some positive statement at the end you can make a pretty positive note if from the last week's experience or something look I think the news is uh that today in Europe a day after huge drama it and Credit Suisse the European authorities were able to carry through on their monetary policy plan uh without uh substantial uh Tremors in financial markets and that suggests that a broad approach of separating macro from uh micro is a workable uh approach and while there will be important uh lessons for all the people on this call and many others to debate and uh discuss on current facts I would be quite surprised if students in U.S history taking a U.S history course in 2035 will have cause to learn about uh this particular episode and that's how we want it to be the same could not be said of of 2008. [Music] great thanks a lot Larry and we stay in touch and thanks again thank you also to all the participants we will see each other next week again talking about the German hyperinflation in 1919 to 1923. with Emily Verona from MIT thanks see you soon

Channel: Markus' Academy

Views: 9,841

Keywords: Finance, Princeton University, Macroeconomics, Economics, Inflation, Monetary Policy, Webinar, Debt, Markus Brunnermeier, Atif Mian, Princeton, Master In Finance, Social Capital, blockchain, economic outlook, keynesian economics, princeton economics, markus academy, princeton bendheim center for finance

Id: 7b6D9exbsAc

Length: 63min 19sec (3799 seconds)

Published: Thu Mar 16 2023