Special: The Next Financial Crisis

and weren't wonderful. Uh. And I'm not going to go through all their bios because that will take precious time. And Richards is with us. She has a wonderful concision in her analysis of finance and investment. I call her the mathematician. We enjoy so much having her with us on Bloomberg Surveillance. And I just I was just thrilled and Ann could find the time to be with us today. Jess Staley runs a bank. Uh. He said, the most intelligent thing I've heard up the valley so far, which

just it feels like two thousand six. We get to that in a moment. Uh. We have another banker, whether it's Mr Corbett. Now I've got it out of the way. All I wanted to know from Mr Corbett, who's a real football But there's guys I played football. He was like the real deal. So all we talked about was Patriots Eagles, which I think has lost to translation at Davos, but we got that out of the way. We are honored to have find seeing High with us from China.

Thank you so much for attending today with your work in Shanghai over the years, and now of course in Beijing. Uh, David rubensteins with us and Ken Rogoff who were with me last year, and thank you so much for again being with us. With different views. I always would start with Enriched, but because of his acclaim on financial crisis, may start with Dr Roga. First. Uh, your your book which was my book of the year last year, The Curse of Cash. I hear a new edition The Curse

of Bitcoin. Well that well that move sales. Who it's the last quarter of the book. Actually, yeah it was. And this is an important note because it was my most courageous book ever and that can receives serious uh criticism and threat from his book. It's not just about the beginning of the book. It's about negative interest rates and it's about all the upward Mabel wells as if we have another financial crisis, there really isn't a plan, a even of what central banks would do. So I

think it's something we need to talk about. Let's talk right now about the acclaim of your work with Karmen Ryner. This time is different? Do you feel that now that this time is different? I mean I don't. I feel we're still coming out of the last financial crisis at deep is Slamic. Financial crisis like we experience has a long afterlife, and taking eight to ten years to fully

recover is not unusual. And I must say a lot of the talk about secular stagnation things will never be good again conflates genuine issues like demographics, productivity with UH the financial crisis, And so I'm actually I'm not going to tell you there's not going to be another financial crisis. Sales of my book would collapse. But I'm kind of optimistic going forward about you know, where the world economy

is at the moment. We can talk about could there be a financial crisis, of course, could there be a recession, absolutely, But I actually think we're at the tail end of the last one. UH. In a typical pretty typic culture jectory. What was the number one lesson we learned coming out of this crisis? Oh boy, I'd leave it to I'm gonna ask them to I only got like three questions today.

But but from where you sit, I mean, in the middle of your book, you go into this whole thing on Spanish Spinisher amount of the collapse, saying and it was longer than ten years. Yeah, I mean, certainly the theme this time, as different as people convinced themselves, is different that everything is going to go to the moon forever and it never does, And particularly when you see debt rising at an aggressive pace, you should look out

for that. And in the current environment, interest rates are really low, and so you can say debt levels are high around the world, but not compared to the interest rates that we have. So I'd actually throw out that the biggest risk to the global economies that we're probably in an inflection point where the you know, tightening of labor market, statement of demand could get inflation, could get investment, which we haven't had, and then if something pushed up

real interest rates. It's not my baseline case, sure, everyone, but we don't really know why they went down so much. They're phenomenals. And if they went up the places that weren't enjoying as much growth and had a lot of debt Italy, Japan, for example, some emerging markets, they could have a lot of problems. I certainly see China as a place where they're at an earlier stage of this. They didn't have the financial crisis. They did a great job, but they do have a lot of the characteristics of

a typical financial crisis. Building up some of the themes to speak to our panels about. And I thought you had a very important perspective in the in the in the room about our collective memories, in the number of people in the financial business that really have not enjoyed how you get into a crisis. What would you say to the young crew who haven't enjoyed two thousand seven

or some of the moments of two thousand eight and nine. Well, I think I think what kind of said is absolutely right, and it's not even a plan A. So we have we have far fewer tools to deal with any event that happens. And by the way, it will happen somewhere where none of us are looking. It never happens where you're looking at always happens somewhere else. And I think if you look at what's changed, what's shifted over the last ten years, we really have had ten years without

any form of credit cycle. So we've now got a whole bunch of people who have never gone through a default cycle. And financial crisis are pretty simple. They always start with somebody borrowing, short lending, long been leverage in there, and a default, so you know, absolutely, so you know, we know that the elements will be there, we just

don't know what the triggers are. And when you look at some of the new structures that haven't been through that tried and tested pro process around, for example, structured leverage dtfs or peer to peer lending, new things which are good developments in many senses, but they have not been through the rigor in the way a bank two or three d year old bank has it's kind of figured out how it manages a credit cycle through that period.

We've got a lot of things that are now big operators in the market that we don't really know how we'll respond to the next one. So you know, I think you've got to look for where the kernels are for what will happen when eventually we go over the top and we start to go down the other side. It's in those sorts of things that would be the unexpected places that have not been through this stuff before. Did you figure out who do you go to the next?

Among two major banks? And Mr Corbett and Mr Staley, I'm just gonna be polite and go b is before see is that just Daley? So many of the things

as well. I'll go with the bank names today. When you look at the resurrection of Barclays that you're trying to manage right now, and if you look at how you're trying to steal the bank for the future, You've mentioned to me that you do see the asset size James McIntosh and the Journal today has a fabulous start chart on the non correlation of stocks and bonds as well. How do you look at the markets and tie that into where we are now? Is we get ready for

whatever the crisis is down the road? But I do feel it's a little bit like two thousand and six when we're all talking about whether we've solved the riddle of economic crisises. It take some comfort in Kin saying he doesn't see it emminally on the edge. But you know, given given asset valuations, given that we've got four percent global economic growth, Uh, it seems like we're in a

pretty good place right now economically. But we've got a monetary policy which is still seems like it's in the remnants of a depression era, and I think we have all very little capacity and the capital markets to do with the real move in in interest rates. What I would also say is, I do think that the banks are in such a different position than they were in

two thousand and six, two thousand and seven. If there is going to be another financial crisis, my bet is, you know, most crisises are are where where we run into something that was totally obvious, but we all missed it. So two thousand and eight was strip as securities or cash need no capital that I think that got wrong. Thousand nine was a Eurozone bar whereas the units are in credit. We sort of got that one wrong. Uh,

there's something out there in the capital markets. Um, given where you know, equity markets are at a whole time high and and volatilities that at all time low, that's not a sustainable proposition. I don't think it's going to come from the banks uh. And I guess the final thing for me is, uh, we just got done with our stress test with the Bank of England, and you know, uh, Mike goes to the same process with process with the FED.

When I look at the stress test, um and and what we clearly focused on is how does Barkley's do coming out of that? The really issue take the stress that our regulators are putting these banks through and apply that stress to the rest of the economy. And uh. And I think given where debt levels are, given our exposure to low interest rates, if we do have another economic cycle, which I would argue we will, I think

the capital markets will be tested. Michael Spencer wrote an essay seven years ago, I think on type one and type two regulation and almost you can't see what you're supposed to see, but you can see things that you could that are a distraction. It was not that it was confusing, but Jess goes right to it. We have stress tests. Do you believe in stress tests? Distress tests

keep you from a financial crisis? Really a gimmick. I think we've done a lot actually with the conventional banking system, but that pushes a lot of the problems into the shadow banking system, and you know that that that could be where we see the next problem come from stress us. We're a good idea, but that they're not perfect. And you know that, Michael Corbett. When you look at banks, there are a different kind of bank than they were

at the beginning of the last UH financial crisis. You speak of resiliency, but you mentioned to me a word which I'm hearing. It's almost maybe my phrase for Davos this year. Maybe it's Davos scales up. We need scale. Michael Nathanson in media with Moffatt Nathanson the other day told me we are going to have scale and media like we have with Fox and Disney, and we can maybe address that later on. David Rubinstein tell us about scale in banking to try to avoid the agony of

the next financial crisis. If you think about where are some of the lessons that came out of the last crisis, And one of the challenges was that we had a global banking business model where everyone or most big banks were seeking or trying to execute against similar plans be

everything to everybody, the financial supermarket. You remember, oh six oh seven, that was the talk that was the rage I think what's different today is coming out of the crisis, what you've seen banks do in many ways is go back to their basics, or go back to the areas that they believe they've got a competitive advantage, and that competitive advantage is oftentimes steeped in scale. And we think of scale and whether scales in your markets business, or

your banking business, or your lending business. In today's age of slower growth and more regulation, if you don't have scale, the odds are you can't buy it. Right. You're not seeing big banks get bigger through quisition. You've got to build it, and in slower growth, that's tougher to do. And so what we've seen is the industry in many ways pull back to areas of strength, areas of scale, and you've ended up with very different business models, which

in itself is far more resilient. So we can use different examples of firms out there in terms of how they change. But when we look at City as an example, I can tell you the things that we're not today. We're not an insurance company, we're not an asset manager, we're not a hedge fund, were not any of those things. Were simply a bank and a bank that operates globally,

and that's the scale that we've pulled back to. And as you can go around and look at Justice Bank and look at other banks, and you can see the divergence of business models. And I think that's that's quite powerful in terms of what it means for resiliency for the system. Do you day to day having better knowledge of your global bank? How do you keep track within the scale? How do you coordinate your global bank if you're bigger and bigger scale? I mean the aniless conference

calls doesn't do it, endless travel doesn't do it. How are the communications going to exist within a given institution if we all decide to scale up. If you think in many ways of what's going on in the world, and in particular on the institutional side, and a business and others are great examples of it, is they're scaling as well. So it's not that we're necessarily covering more clients. We're not. We're actually covering less. It's not that we're

entering more countries or doing more things. We're just doing more with what we have and using the benefits of scale against that. So we're not adding complexity. In fact, we've taken complexity out of the out of the bank and out of the system. I want to turn a little bit of politics here, and I think this is so important thing. You and I were talking and you brilliantly said that you would like to respond to what is clearly part of the Western zeitgeist in this January

of two eighteen. And it's not that it's about China or it's China's fault, but that China is a number one risk we enjoyed with Bloomberg Surveillance working with Ian Bremer, and you raise your group early in the year and they did place China is the number one risk of the number that they had uh through their annual review. You take a real issue in that, why is China

not a risk? Um? Well, before I answered your question, let me say, since I'm the only regulator here, I think as regulator you have to always stay alert on any financial risk that's coming up. And although the economy is doing quite well globally, but we cannot be complacent. And in terms of financial risk, I think every christ it is almost seemed to be associated with some kind of asset bubble, right, it could be that could be accurate it could be something else. And so this is

the sign that we should look around. Are there any asset bubbles in any major economies? And if you find some, you know, the emerging asset bubble, then as a regulator, we've got to do something about it. So this is my opening statement. But to answer your question, um, since the Chinese economy is so large, right, so if something bad happens to the Chinese economy, the rest of the world will be affected. So it's you know, the concern

about China in that sense, it's justified. We realize that we have some problems quite some years ago, and the problem is mainly with a lot of that and we have too much that in our system macro what we use you know, this macro UH in that in this ratio whatever uses a non financial sector that divided by GDP has been a rising all the time. It's now So we realized that, you know, some time ago, and

we began to take actions two years ago. And the good news at this point is that that ratio for the first time platoid in the last quarter of last year UH, it did not rise. UH. And furthermore, M two divided by GDP is also not rising and M to The growth rate of M two in China last year was only eight two, which is almost two percentage lower than nominal GDP growth rate. So you can see

the effect of taking these UH tightening actions. UH Now, since the macro that level is so high, So people will still be worried about the consequences of something happens to the to the financial system. And I can tell you know, in the Chinese system, if something bad happens to UH certain small financial institutions, right, what we will do, and this is the lesson we learned from the US

financial crisis. What we will do is that we will move very swiftly to contain that risk, to make sure that whatever panics caused by this you know, small institution does not spread into the entire system quickly. And if you can contain that risk and make sure the planic does not spread, then the entire financial system will be okay. And the way that we move swiftly in China is that, you know, I'm almost sure that if something like that happens,

the Central Bank in China will coming immediately. Some of the larger healthy financial institutions will be brought in to take care of that small institution immediately so that the inter bank lending does not phreeze, right and the system can still function right now. This is something that the Chinese government always does value well, right because you know,

our system can function really quickly. But of course, if you know the larger problem is so big, then even if you can move swiftly, you will not be able to deal with the impast system. You know, the bigger system in the rest is bigger risk in the system. So that is why moving earlier to contain the scale of the of the empire system, the risk of the empire system is so important. And as I said, you

know we've made some progress in that as well. One thing I noticed her and I left David Rubinstein for left last, because I think he can provide us with a terrific perspective of not only finance and economics and investment, but bring it over to our geopolitics as well. I was thunderstruck by Richard Edelman's Trust Barometer released yesterday. Every year it's different. I think it's an incredibly important document and the fracture is the word of the moment here.

We're fractured. Craig Gibbs article today in the Journal. We're fractured within our nations, and it really shows, as you mentioned to me earlier, the geo political mix that we're in as we speak to bankers and managers of money, and of course in a steamed academic that speaks to me, David Rubinstein, of exogenous shocks out there that get us to the next crisis. Well, um, the most exogenous shock I'm worried about the moment is these lights. They're very hot.

So we do the surveillance, Dad, I hope they're getting you know, vitamin D into me at least something. I'll get something out of this. Stop. But if anybody thinks that's what it is, these lights are very very hot. Okay, So global warming is coming here? Um, he's say, such a TV story. Just get right to thank you so much for your program. Thank you very much for the plug. So right now, the biggest concern I have is that most people think there's no problem of a likely recession

this year and maybe even early next year. Generally, when people are very happy and confident, something wrong happens, um, as you know from your own research. So I am nervous that the conventional wisdom is that we have no recession problems around the world. Everybody's doing quite well. As John Kenneth Galbraith, the former Harvard faculty member, famously said, the conventional wisdom is usually wrong, and it might be in this case. So what would produce a recession this year?

I'm not saying what happened, but what is the thing that I most worry about? Well, I do worry that government's uh, maybe having a little bit too much debt, and maybe they have too much entitlement programs that they're not holdingly going to be able to honor. And at some point people will wake up and say, the US government has twenty trillion dollars of debt and funded liabilities

that are hard to fathom about. They're being actually paid but leaving it out of side, and people don't worry about their while I worry about geopolitical things that we can't anticipate, the so called Black Swans so um an unanticipated nine eleven type events. Somewhere in the Western world. A dirty bomb goes off somewhere, Russia decides have invade someplace. The Middle East gets hot again in certain parts that are not yet hot. Maybe there's some more hot disputes

between Saudi Arabia and Iran. We don't know, maybe something between China and Japan. So you never know what's going to happen, or it could be a pandemic. So I think when everybody's complacing, that's usually when you have to be nervous. Now that your earlier question, what was the lesson of the last recession by your own debt back at a discount? Um, Those people that bought their own

debt back and the discount made great fortunes. And if you can't buy your own debt back and the discount, hold on, hold on, hold on, don't give back the keys to the banks, because eventually the economy will come back, and if you hold on, you'll make a lot of money. And the people that made the most money out of the last recession in private equit least. But people that bought their own debt back or managed to keep the banks away and hold held onto the assets until the

economy came back. That's what happened. Great fortunes were made and great reputations were made by holding onto assets or buying your own debt back at a discount. So when the economy starts going this way, you know, don't run for the fences, be there, and you know, hang around the hoop because you're gonna buy some things a great discounts within this. And again we welcome all of you were streaming with the World Economic Forum website and the

top link as well. And again I thank Bloomberg for their commitment to this event on Bloomberg Radio and television worldwide. So we've gone around UH once and I can go eight or any different ways. Jess, I want you to lead it off here with a more open discussion about things on your mind. I want to keep this open as we look at the crisis that Ken Rogo wrote about, Jess,

expand further. Please look. And I think as we've also of talked about um UM, it all seemed so erosy at four percent global economic growth and UM, I think we saw the economic calamity when we missed the last financial crisis and the and the damage that was done globally. And I do think one thing that is different this time that we need to utilize UM is I think the the connectivity and the collaboration between regulators and academics

and and and private ectory firms and investment firms. And banks is at a whole another level than than it was pre crisis. Uh. You go back to two thousand and five, thousand and six, a bank would meet with the Fed maybe once every quarter. UH. Today we have you know, the Bank of England in the p r A and the f c A. They're in the bank every day. Do the British do this better? Do they they have a more focus? I'm gonna call it simple.

I think I think in both sides of the Atlantic, the degree of integration or or or work between the regulators and the banking community not only to fix what happened last time, but now I think as most of the corrections through bank regulation have occurred, it really is we need to work collaborately with our regulators to avoid

the next crisis. You know, on one level, pre two thousand and UH and and and and two thousand and nine, the regulators were there just to bear witness and if something went wrong they would use their abilities to bring the big bank in or to do something in order to try to uh course correct the economy UH real time. Today, the the political body have told the regulators, I want you to regulate the systems through stress tests or whatnot,

so you avoid the next financial crisis. You know, my some almost fourty years career in finance, we've never avoided the next financial crisis. And so and so what I think is incumbent upon banks and acidatial firms and academics is to work collaboratly with regulators in tour to try to avoid the next financial crisis. Because rightly so, the political costs that the banks have endured because of what happened uh ten ten years ago, it's been very high.

And uh so I do think we all need to sit down in forums like this and even though it's all rosy and whatnot, and say, what what you know, what could we be missing? What could be happening in the non banking financial market, whether it's levels of debt, whether it's uh you know how you know how much short interest is there in uh in volatility? How much are we building structure notes around the world that are basically trying to enhance yield by selling volatility, which at

this level is a very smart thing to do. If this thing turns hold on your are you worried about that? Are you not worried about the present? Absolutely, You're not worried about this right a bank. I mean when if you look at if you if you look at the damp and volatility that's out there and everybody's planning to play, is it is very easy looking. You have to pay attention to it again, you know, you think of where

we are today. We went through a government shutdown over the weekend and the market shup, you know, So you go through these events, you've got to ask the question and the challenges I think from the asset management or from the the investing side is along the way, you sold Brexit, you brought it back high. If you sold President Trump's election, you bought it back higher. And so I think people stopped selling. And so there's a numbness

out there. There's a uh an ambivalence out there. That's concerning because when the next turn comes, and it will come, it's likely to be more violent than it would otherwise be if we let some pressure off along the way. If you as you mentioned the new bank, if you will with the media, with all we do about FICK and worrying about trading and jobs, did you see a new trading process in banks as we go to the

next financial crisis? Is FICK is uh fixed? Income, currency commands is going to be something different for the bank than is now or certainly different than what it was in two thousands. But one of the things time we've stopped talking about because the central banks have largely taken the role of being the significant liquidity provider. But bank balance sheets today around the globe are much smaller in terms of their dedicated capital UH and risk taking tolerance

to pre crisis. So when the Great Science Fair project ends around Queue and we're talking potentially maybe can I steal that I've never used that. I love that the Science Fair and we see and we see maybe the Bank of England start to pull liquidity to titan maybe sometime early next year we see the Bank of Japan and things start to change. What's liquidity gonna look and feel like? We don't know because it hasn't really been tested? Postcript your of course this spring at Harvard is Science

Fair four oh one something like that. How's all this gonna end? This? This wonderful banking experience? A Chairman Powell as a some challenges as this governor think the four thing it's Josh said of interest rates rise faster than the markets expecting because inflation could come on US suddenly. I think US inflation will exceed two percent this here, and we may start seeing it elsewhere. We may already

be singing in China. I don't know. And if they start tightening faster than markets expect, how our capital market's going to take it. I want to mention something about what David said about geopolitical risk. I normally say, when we're reaching to try to think of what could go wrong, and we're pointing to geopolitical risk, things are pretty good. Because you're really racking your brains to try to think

of what's wrong. I have to say, we haven't had President Trump before, and so you know that sort of uh, I think introduces a certain randomness that you have got. Thirty two minutes into the panel before we mentioned the tours. We don't we don't, we don't have to dwell on it. But I mean I I'd sort of torn between a crisis and China and an artificial crisis in the United States, as you know, being being the biggest US uh SO

and and the stock market. By the way, I don't think an equity market collapse is nearly as bad as a dead crisis. It's not pleasant but it's not clearly as bad as a dead crisis. But I have to say it is not hard to imagine a stock price collapse. I think the stock prices are built on the high growth, but very much the low interest rates, and I don't know how everything from art and bitcoin to stock prices will react as interest rates go up. You've been listening

to this discussion. I'm sorry if I've ignored you. And you're the one that has to sit and actually make investment decisions and choose around these mix of issues. How have you? How is your decision making changed MG as

we've come out of this crisis. So I think the listening to all of that conversation the if we're talking really about a financial crisis rather than just an equity market correction, which could be quite a severe correction, then I think you have to look at what is systemic, what is actually a systemic problem, And I think listening to this conversation, there's one thing which is potential systemic risk,

which hasn't been mentioned at all. I don't really buy the due political arguments because geopolitical stuff happens all the time. It has to be something which happens which fundamentally changes the way people react to events rather than the event itself. So it's got to change the animal spirit in some way, and the evidence points the fact that there's a relatively few to be seldom out the geopolitical stuff. We've not talked about technology. We've not talked about the systemic risk

potentially from the cloud. We've not talked about the fact that we all have businesses which are absolutely reliant on a very small number of people who provide the pipes that effective what we all put our businesses through. So if you want to ask me what could happen it's systemic out there, I'd say there's a technology thing out there that we're all somewhat blind to, which will be kind of interesting to think how markets would respond to that if none of us could actually trade for one

or two or three days or so. I think the other thing which has changed fundamentally this time around, the point about the banks being smaller and less systemically risky, I think, is it's absolutely right terms of the balance sheet. But the thing that has become more connected is, as you say, regulation, and there is a certain systemic risk from regulation. If all regulators are effectively looking at the

same sorts of things in their stress tests. If all big insurance companies are sort of regulated by the same rules likewise banks, the one thing you can be sure of is that the scenario which tips up isn't one of the ones that featured on anybody's stress test, because it never happens like that. So I think there are systemic challenges out there that maybe none of us are looking at the right place for it. So what do you do when you try and make investment decisions against that?

You try and look right through to the fundamentals, and you find stuff that behaves differently through the cycle. But even if at the more distress it might all behave in this thing I want to come back to, damn it. Have geoclitical events, they can't affect the economy. So when Saddam Hussein invaded Kuwait, it had a serious effect from the U s economy. When nine eleven occurred the United States,

it has a serious effect the economy. So I think it's unfair to say if you have a major geopolitical event that's unanticipated, the economy will just move on as if nothing happened. So we can't anticipate these events I hope none of these things happen, but I think you can't and you can't prepare for it. But when they happen, you should expect that the economy will act differently because people won't spend as much. People will be nervous, and right now people are in the mood of saying, well,

something is going to happen. I don't know what it is gonna happen, what is going to be And so if something bad were to happen in the geopolitical sense, I think it will frighten people a bit and they will pull back from the capital expenditures or other kinds of things. We just don't know what it will be. I do think that the it's harder, though, to figure out what's going to cause the recession than to figure

out how to make money from it. And people who are good investors, and presently people are watching us, are trying to figure out how to take advantage of this. The best way to take advantage of this is wait for things to settle down a bit and then probably by not necessary to Trying to hit the bottom is never possible. But when you recognize that there are fundamental strength in an economy, and you do make investments along those lines, the geopolitical events will ultimately go away and

the economy will come back. And economy has always come back. So again, the people that made the greatest fortunes in the last recession and other recessions were people who bought things near the bottom and rode them to the top. And I suspect that's what's gonna happen again. Last year we had President she's speaking here and I literally, I've said this many times on air. Literally, this valley came

to us. Stop. Professor Rogof mentions our guests coming Thursday and Friday, the President of the United States, You serve, President Carter, what will you anticipate from President Trump within the new international relations that is upon this valley? And the idea here is the Washington Consensus? Where is it? For read Zakaria is post American world? Where is it? Do you see a regime that the president can address?

In international relations that the president can address? And when it was announced the President Trump was coming, I think jaws dropped because this wasn't seen as his crowd um. This is the center of the globalization movement, and he hasn't been seen as the biggest supporter of globalization. So he's coming here, I think, either to do one of two things. Either to say he was right and globalization isn't such a great thing and we have to accommodate

his views and change our views. Or he's going to say he's been misinterpreted a bit, and he actually believes in some of the things that people here believe in, and that he may have not communicated adequately, But actually he believes in many of the things here. I don't know which message he's going to have, but I suspect it's a massive message has been carefully thought through, and he wouldn't have come without some message that he wants to give that presumably makes a fair amount of sense.

What is the mess message of China? One year on from the historic moment with President z last year? It is so interesting to see the different themes you know, in my in my world that we see every day at Bloomberg. But but what is this? What not the simple message, but what is the theme you see day to day from your home in Shanghai and working now

in Beijing? Um, you know, I mean, China obviously needs a global trading system for its only economy, and China also realizes that realizes that as its economy grows bigger and a bigger China needs to open up more to the international competition. And that's what President she said last year here that China would do, and that's something China

is doing. So, for example, in the financial service sector, when President Trump visited China last November, we announced that definancial sector would be opened up in a very big way and the details are coming out very soon. Uh So we continue to see globalization uh and worldwide trading. The investment system is good for China, and it's a

system that China wants to help strengthens from America. If we have an administration and a president so distrustful of China, we talked about and we see this with Mr mccrawl the most, without question, the most quoted dame I've seen in the first two days of Davos has been Mr mccawn and as many travels of recently. But what does China need from the United States? From where you sit as part of the government, we want, we just want a normal relation with the United States. Um, good luck.

We think the professor said that, not me in that regard. Let me say, I think that President Trump and not part of his administration. I'm not speaking really, but I suspect that he saw when she g Ping came here last year, he was widely seen as having made a very impressive speech talking of out imports of globalization, and for a communist leader to come and kind of capture

the World Economic Forum was quite impressive. I think Trump recognizes that if he comes here and makes an articulate speech, he can reassert the US presidency is being perhaps the most important position in the world. Right now, you have two people who are vuying to be the most important

persons in the world. President China, President United States. I think the President States would like to regain some of the luster that maybe he lost a bit in the first year in in the perception of the people around the world, and by speaking here, I think he feels he can probably regain that luster. How did politics plain to your research within within the many papers, the steamed papers that you and Carmen Reyner did, did did this discussion fold into it or you removed from the geopolitics

that David speaks of. Well, I mean a lot of it's in human nature, not so much geopolitics, and it doesn't necessarily matter the left or the right. You can have financial crisis either way. But after a financial crisis, this fracturing is very typical the polarization. Their papers on that economists and political scientists. Maybe it will ameliorate get less after a while if growth continues. There are other factors. So I mean that's something. I think that's partly because

of the financial process. Two are two bankers, and I say this is a great cheer. I believe we had legislation, UH tax cut legislation, and the I m F clearly says it is a cyclical plus plus and may it'll be longer. How will you adapt and adjust micro corpetted an American bank to this legislation. Is it a one off it benefits off with growth to keep us away from a financial crisis, or can it really have a long term structural benefit that truly changes banking and changes

your business. I think it has the ability. We don't know yet. We don't know yet. We don't know yet. And when you think about the the U. S economy and the demographics of the economy, seventeen eighteen trillion dollar economy, two thirds consumer, and we can look at the consumer in the US. We can look at the consumer most places, but the consumer in US is very important. And when we look in employment, when we look at housing, when we look at savings, all those in pretty good shape.

Yet we had an economy that was growing to point one, So what's the catalyst? And I would say not just as you travel in the U. S. But you travel around the world and you have conversation with business. You said, tell me about your business, what's your business feel like? And time and time again, we're kind of eking it out on top line, managing the heck out of expenses, were being tough on capex and hiring and investment. And

maybe this is the catalyst. It's what we call maybe it's a catalyst that takes us from optimism to confidence. That's just daily number one. Well, please God, you have an observation. So Barkley's is a British bank whose strategy is to be a translantic consumer and wholesale bank, basically anchored in New York and London. And I think this tax cut aligned with another of other measures taken by the U. S. Treasury into a certain extent by the

Fed as a as a global Bank. We want to have a regulatory and environment and a tax environment that

is as equalized as we can. I think certainly one of the one of the good things that the G twenty did post financial crisis is as they reregulated the financial industry, they basically kept it the regulatory environment equivalent whether you were in Brussels or London, or New York or or Beijing, um, recognizing that a functioning global capital markets without barriers to flows the capital is the best for well. I think we have preserved the the regulatory

equivalency broadly speaking around the world. I think there's a question of whether that covenant, if you will, between countries is holding right now. Um um uh. And there are positive and minds to us. You know, the United States has made a very bold move of dramatically decreasing its quote the taxes. That has a real economic impact of the benefit of Barkley shareholders and the cities UH shareholders.

What does it mean competitively with other countries and UH and how all other Jurisdicans respond to a dramatic drop in corporate texts. I think what you're likely to see is other companies saying countries saying well, if the US can have this big tax cut, maybe we'll have one

as well, and kind of a race to the bottom. Now, one of the things people may not realize is when we have these tax cuts United States, they're based on ten year projections of what revenues are going to be or or costs are going to be, and we really don't know. So what you often do is you say, this is going to give you a very good benefit in years one, two, and three, and we'll make up

for it in years seven eight nine. But year seven eight nine don't really come along anytime soon, So we really don't know what the impact is going to be. But I think and right now, that companies are going to um I think provide bigger dividends, they're gonna do stock buybacks, they're gonna make more m and A acquisitions, and I think the amount of cash United States will probably inflate the economy of bit. David Herbinstein, do you

believe in trickle down economics? That's all great for the halves? Do you believe in trickle down economics? Needing interction like that You hit your no, no, but you come on, you grew up, You grew up in Baltimore, the son of a postal worker. You grew up basic. Do you believe in trickle down economic I want to say I believe. I do not want to say believe in trickle down economics.

I do believe that UM, when you have a tax cut of this amount, and many of it much of a ghost in the middle class as well, it will have some beneficial effect. I don't think it's only a trickle down effect. Jess, you mentioned you're a British bank. My number one observation for a week in London is wow, continue change and continued enthusiasm in London, and the message I heard interview after interview, including Jim O'Neill, was just

beginning to really diffuse across the United Kingdom. Do you see that at Barclay's coming out of the unique financial crisis of the United Kingdom, Northern Rock and the rest of it, and how all of you had to adapt, Is it a better United Kingdom even with the soap

opera known as Brexit going on? Well again, I I do think that the Bank of England UM has done quite a good job managing the transformation of the financial industry posts the financial crisis and UH and uh, we've seen reasonably strong economic growth, somewhat weaker recently, but I you know, like all these countries a little bit. Going back to what and I'm talking about visa the technology. One of the things that I think is playing well to the United Kingdom right now is technology. I've said

this in a in a couple of forms. Perhaps the biggest economic event immediately post Brexit was a decision of Google to make London the their second largest center for technology development. But seven thousand engineers in the middle of of London and the UK has gotta as an outstanding, uh academic base. Um, I think it's in the forefront of a lot of what's happening in technology. And there's not a business or an industry in the world now

that's not deeply impacted by technology. And so if we can keep the borders open to the best and the brightest and use that academic footprint to allow a Barkleys to be in the forefront of mobile banking and digital safety and whatnot, that's a good thing for the UK. Is the biggest story of two thousand and seventeen in terms of the economy Europe, many people thought was dead and gone. Years ago, and was going to be really

a weak sister compared to the United States. And when you had Brexit that made people think even more so that would be the case. And despite Brexit, the problems in Spain, the problem is in the week in German weaker in German government, a new French government. Europe is not quite well. Economic prices a little bit lower, and so it's a very attractive place to invest. Just get a third runway. He's wrong. I just want to echo second, what ants? How about technology? Let's face it, we don't

understand it, and it's grown and importance. That's you know, in few off all our lives, and the idea that something could happen that had a systemic effect of first systemic technology crisis not you know, not that far. And what's interesting here is Professor Rogoff told that to me in a radio boost. I remember this conversation pushing fifteen years ago, fourteen years ago. And yet and as you mentioned, technology has become so many different things and so embedded

in our life. I remember at Davos, at these meetings, the uproar over cell phones. Well wait, we can't have these in the building. We can't And then of course the next year every executive was had had them going in and three assistance to tell them what to do with it. By when we say technology in two thousand, in two thousand twenty, what do you mean? But it's

all about it's the interconnectivity. So the amount of stuff that we all put, the amount of data, the amount of transactions and processing, the amount of stuff that we put into a shared space, for example, in the cloud. It's just kind of interesting and all of our businesses would stop if for some reason that most of us don't understand, because we don't really understand what the cloud is. You're not talking here about one or two days, or

five days or six days. You're talking about something more systemic. I'm just posing the question, right what could potentially cause a systemic risk? The answer is if for whatever reason, we had the inability to access Wi Fi based systems, cloud based systems, just really simple stuff like that, hypothecating And the answer is nobody really knows the answer to that question. How would our businesses all work in a world where suddenly the cell phones went down simultaneously? How

would your disaster recovery procedures work? If you'll wait your satellite phones tucked back at your hotel room. Maybe you do, but it's an interesting hypothesis. No. I I think every year there seems to be a change at these meetings. I want to again and say welcome to all of the top link at the World Economic Forum. And of course we're streaming across the World Economic Form site. We're thrilled of that. And thanks to Bloomberg for their commitment

on Bloomberg Radio and television today to this panel. I'm gonna go for five more minutes and go to find there if I could. Uh. And then we'll open the questions and I will say Dr Frankel, you get the first question, so you better be ready as we'll take a francl with us, and we'll leave with this question here in a moment house Bitcoin. You're in the heart of it, aren't you? In China? China? And if we look at China, if we look at Korea, and we look at nineteen can Ken told me Tom go along

at nine. Uh. But when you look at bitcoin, you have had to live it as a regulator in China. Well, in China, it's the central bank that has the deal with bitcoin. It's not the security give us some experiences. Our attitude is that this is something that uh that is uh, you know, whose little value to the economy

still has to be proven. So in that sense, we do not want them to get to kind of big you know, too widely traded in China, and that is why the central Bank has actually ordered the closure of trading a big coin in China, which I support. Who had today, Uh, let me just add one thing. Mr. Movements then talked about how to make money in the financial crisis. I want to say something, you know, to the clouds, maybe here over the internet, you know, who

had that to shoot on China? If they bet that China would somehow have a financial collapse and doing the class it's going to happen. People have been predicting it for ten years, and every year they've been wrong. And that's some part because the Chinese government can move much more quickly. The US government is so diffused it can't really get it back together. I don't really think that's

uh something to worry about. The biggest thing I worry about increasingly is something that we haven't talked about, and it's not global warming. It's a phenomenon that I've noticed recently, it's the increase in gravity. As I've gotten older, I've noticed that things sag more, and I noticed that my ability to jump for basketball is less. I think the gravity and the Earth is getting much stronger, and that's something we should worry about. Parting people my age, you

should worry much more about gravity than anything else. This would you like to speak about gravity? And three years working on gravitational waves and she's found them around you, David. But this is this brings up on a point we're going to, Professor. If we go back to Newtonian mechanics, F equals g MM over are squared? Does the math work or did you learn as Olivier Blanchard study that

the I M F that the models didn't work? Richard Claire, does D S G E. Are you still a believer in in ops Felt Rogoff for Krugman Rogoff or is there a new math involved as we go to the next crisis? Well, I think the models failed miserably, not just in predicting the crisis, which we don't really think we'd be good at anyway, but they failed in predicting what would happen afterwards. It was much more fruitful to

look at historical example. You know, going back to the high level of the stock market, interest rates are really low. I think it's easily half the story of why stock right there, Maybe so maybe three quarters of it. You know, if interr strates go up even modestly halfway towards their normal level, you will see a collapse in the stock market. I mean real interest rates inflation adjusted. And I don't

know what will take the thing because they're worried. I would have for the stock market is that the technology unicorns when they try to go public, if they go public at a lower valuation than their last private round, that's going to begin to make people very nervous. And we've already seen that that we're already seeing that now. Well yeah, I agree, we're begin to see it now. Would you say that will be a theme for the next twenty four months. Were ever seeing it, they can

see more of that. Interest rate is one risk to the U s Acuto market. Another risk is regulation. And when you see the President teats about every high of the stock market and takes pride in that, unavoidably, it

will have an impact on the regulators. The regulators may not move as quick as you know, adamant as they should and that can cause that's a very good point that even though the financial regulation has changed and it's better, it's enforced by people, and we've systematically seen the regulators changed and that's changed the implementation so independent. I thought, oh well, I mean that's a theory. It's I want

to go back to gravity. I stayed in a hotel in London that was the height of early maybe pseudo Edwardian banking. It was the Middle and Bank Building of nineteen twenty four, down by mansion house and down by our glorious new office, and it was built. Is a

is a monument just to what was before them? What's the monument we're doing now that we did in two thousand six, is you brilliantly stated earlier or for that matter, inn before the substantial crisis of what's the monument in financial system architecture now that you think is most monument like and we need to avoid I was gonna take it from Antice and I again, uh uh, what I

think we can't forget is that, uh the beginnings of finance. Um, what finance really did going back a couple of centuries ago and very much in the UK was really to democratize economic growth. UH. Finance was the means by which wealth could be transferred from a diverse population, not to just a family member who inherited a big farm, but rather to an innovator or an entrepreneur that had a new idea. And so finance allowed for the funding of someone who bought an idea of building a car or

building a railroad. Um. Uh. And we obviously went through a dramatic period in two thousand and eight and nine in the aftermath of the financial crisis. UM. But I think I know you know City Bank does an extraordinary job at it um. UM people like Carlisle and investments that they make. UM. We shouldn't lose sight of the value of finance and from item for global economic growth. Uh. And that it does provide a very central function UH

that benefits everybody. One of the things I think we haven't talked about is that with samuelh Anything you used to talk about the clash of civilization. Now it's a

class of technologies. The Chinese large technology companies, are they going to be able to take their technologies outside of China and and really dominate the world or the American company is going to take their technologies Facebook, Google, and so forth and dominate the World's gonna be a big fight between the Chinese technology companies the American technology companies for global supremacy outside of their core countries, and that's

where you're gonna see a big fight. What I would say, when we think of your question, what's the monument to financial services today? What I love about the monument is it's not physical, it's digital. It's not a building, it's not the infrastructure of that. But the fact that finance today is about inclusion and getting to more people in the world and making that easier. And clearly technology digital is pushing that the pain points that are coming out

of people's lives. So we talk about people's proclivity to use technology, but when you think a lot of it there, there's some that's disruptive. Most has actually been um life enhancing where you can get your balance online, you can you can spend online, you can borrow online, you can do those things that we're putting more time back in your life. And so when you think of that monument, I think it's the push towards digital. Okay, we're gonna

go to questions. I want to make clear run television worldwide and radio, and as you get up, please try to avoid diving in front of the cameras or you know, uh, making faces and hand movements. And that I am honored to have as a first question today. Jacob Frankel, who is ken rogof knows did original research in Chicago years ago and foreign exchange and economics. He served as Governor of the Bank of Israel and course holds court with

James Diamond over at JP Morgan now Dr Franklin. Observation plays in a question for a good panel, Thank you very much. Where we are celebrating quite a few anniversaries this season, the tenth anniversary of the crisis that you've been talking about, the twentieth anniversary of the Asian financial crisis, the Russian default, the thirtieth anniversary or so of the death crisis of Latin America, and the thirtieth anniversary of

my own presence here in Davos. Invariably, in all of these events, the conclusion that you started with, namely that the depth problem is a much more serious than an equity problem, is common. But are always two questions which you always tom have asked, number one, where is the risk today? And number two is it being priced properly?

Because if we know the risk and it is being priced properly, it has a very different dimension now in order to price it properly, that's where transparency comes in. That's where regular asians come in, etcetera. So you've been asking about the future, where is the risk and if we know the risk, isn't being priced probably, and that's when we would know if we need to fasten. Are we pricing particularly in the short term paper market or

do we have confidence we're pricing risk properly? Now I was addicted to libelary O I s for years and other games of measurement. Do we price risk in the short term paper market better? Are we smarter? It has to be at risk. I mean, we're in this unprecedented monetary experiment. Science fair, it's going to turn around. It's not the QWI, the low levels of interest rates as they reflight and who knows what's gonna happen. And on transparency, I mean, China's done a phenomenal job. But when I

hear you know this time is different. China is different, even though it looks the same you have to you know, wonder I've asked you this before, and I'll get to Mr Corbett. The the the idea of how much of our dead is still at a negative nominal rate and with the oddities of real rates. Do you have confidence we can unwind from a negative interest rate to something more normal nominally and real confidence. No, I'm but I'm actually more worried, not about the unwinding, but if we

did have a significant recession, it could happen. David gave reasons, uh, and gave reasons um, Jazz gave reasons. And if it did happen, there isn't a plan A. I mean they've done so much already. I mean there'd be a big fistical stimulus, there'd be more quantitative eating. I don't think either would work as well as it did last time. Jacob Frankos, Should Mario draggy X sooner? Should he do something on Thursday at the ECB meeting? Do we have a microphone? Does he need to act quicker to begin

to unwind? Is doing a great job? That was a banker's answer for this. European should take out key Man insurance on him because when he goes uh, you know a real giant will have gone because he's an incredible job. And you mentioned the European expansion that's there. Let's go back to something Ken, they's barely touched on March fourth. I believe it is the Italian election as well. Ken, I've noticed per capita growth in Italy actually finally perfectly up.

Is it all boats rising? Is the boom of of my cross France or miracles? Maybe challenge Germany? Is that lifting all boats? So it's supposed to work again. Like David Rubinstein said, Europe has been a phenomenal story this year. It's the most surprising thing of why global growth is so so good, and it's benefited Italy. But it's also true that even in the salad days of European growth, Italy didn't grow so well. When I look at their political system, which I want to claim to begin to understand,

it doesn't look like it's sorting itself out. I don't even know if we'll see Berlsconi again. And you have to worry about the arm from and they have. They do have a lot of debt. And if the rest of the world in flight its interest rates, Italy could not keep up. Did damn g. Did you capture the booming Europe and you look back with all of your strategies and analysts, did you feel like you saw Europe as a value and we're able to capture that? And then how do you recapitulate that as we are in

these good times? Look, I mean, we Europe, we were we were fortunate to be on that that trend early and and it was unexpectedly partly because the political noise dominated the headlines and neglected the fact that if you're coming off such a low base, you don't need that much of a of a percentage changed to have a meaningful difference to what's going on, because anything is better

than than nothing in in a peculiar sense. So you know, I think Europe continues to model through on the political side. So I think, but going into today and looking at annualizing the games we've made so far this year and thinking can you really believe that? And that's more generally, that's not that's not Europe particularly, Can that really carry on through all of this? Here? Clearly not? So the smart money is taking some risk off the table. It's

not taking all the risk off the table. It's taking some risk off the table. If going back to what Ken said, differ inter strates go up meaningfully over the next twelve months, there will be a bunch of people who have borrowed money from potentially people around this table or in the room, who will not be able to pay it back. There are those people are out there, and the markets are not inaggregate pricing that. So that's

a very simplicity. That doesn't mean that every company that's ever borrowed money is not going to be able to pay back, of course, not if there are some very little marketing that's four to six trillion dollars emerging market corporate debt that's dollar denominated, and if a dollar were to rise above where it is now it's actually a fairly low point, that could cause big problems for a lot of those companies paying that back because they're not going to be at earn it in their local currency.

We haven't mentioned three countries that have really surprising economies of late. One is Brazil, which has been in a five year recession, but it's coming back from the dead. And I think that you can buy very very inexpensive things now. Uh And I think it's a pretty good commy we haven't mentioned India. India has been booming at a higher rate actually growth rate than China the last

couple of years. And Modi has really done an enormous job of getting foreign capital into that country and really back from the dead as well as Russia. Russia because whale prices are coming back and gas prices are coming back. I do think that Russian economy should not be written off as much as it was. And then to circle back here in our final minutes, and David, I'll go to you again on this and please open it up

to the panel. We have a partid of the United States coming here who looks at India, I would suggest, is distant and removed from his discourse and analysis, and is focused on Russia in a completely different way than conventional world economic form manners. What do you want to hear from him? As you look at Brazil, India and

Russia doing better. He doesn't want to talk about those countries, doesn't I think what he wanted to Again, again, I don't speak for him, but what I think he wants to convey is that he's not this overre that he's been portrayed. He does want to work with other countries he wants to do check the rules a little bit different than I have been. But I don't think he's coming here to uh um, you know, canstigate people. I

don't think that's his mission. I think his mission is to come here and say I can work with you, but you've got to work somewhere. Terms. Most likely who will come here to castigate people because he's a politician. Remember, I mean he comes here to play politics, not to can you know they uh some kind of new economic agenda of his administration to the rest of the world, because there's no economic agenda there no at least no

internationalist economic agenda. But I just want to I don't think that people working on his response where working on a canstigation. This is just that bad. I just want to respond to the Professor Lagos point that is China different at this time? Actually in China don't view China is different because we openly admit that we have too much debt, right, and that is why we have a

new phrasing. China is called the gray Rhino. I mean, we all know about black Swan, right, and then China have a new phrase called Great Rhino, referring to the risk that everybody sees it, but you don't tackle it. You don't you know, you can get used to it and then the risk finally explode. So these things we have a problem. What I was trying to say is that the resolution of the problem, the manner of the resolution of the problem in China will be different from

a lot of other countries. That from your academics at Stanford and going back to high how do we clear markets? And do we clear them the same and just day least London or Michael Corbett's New York, how do you clear those markets in China? I mean it's the combination of female market clearness but itself as well as government intervention. And that's always the case in China. You cannot use the will of this government different than the recent pus.

If anything, I think the will of this government is even younger to help clear the market sooner than later. I want to follow up on something President Trump might say, as I think he's addressed this group and say, well, I understand a lot of you may not like me, but if you look at your wallets, you should love me. And the danger, I think is what Tang said is that if the stock market starts going down, Willie pressure the Federal Reserve to keep interest right slow even if

inflation is rising. Willie pressure regulators to do things to reduce the economy and turn what should be an equity market correction. If one comes into something much deeper. You might try to take some credit for the economy doing

well around the world. He would say, look what I've done the United States, and what I've done has been used as my other economies and governments, and I suspect you'll try to take some, rightly or wrongly, for what's going on with I think I would say, I do hope that the World Economic Forum this week stays focus on an issue that's been uh it focused the last couple of years, which is income inequality, and that all that's going on doesn't take our eye off of that

challenge because it still exists. Let's leave it there. It has been an interesting More again to our audience here, I want to say thank you so much across the World Economic Form, and thank you again to Bloomberg and Bloomberg Radio, Bloomberg Television for their coverage of this event. But I really want to thank and I've never done this in fourteen years, this audience for fighting through the snow. It is just extraordinary, the snow and we're all out

there today. It's some of you in some real heartship. Thank you so much for coming today. Thank you to Marjo on the World Economic Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio