Surveillance: IIF Annual Meeting

You've got a special guest for us. Well, John's gonna be very interesting if you remember yesterday afternoon, and here's the headline buried in the news flow the Bank of England Governor Andrew Bailey. This is at the i F Annual Membership meeting yesterday in conversation with Tim Adams, the President and Chief Executive Officer of the Institute of International Finance. And we begin today's coverage in Washington with Mr Adams with his deep experience with the Bush administration and with

international economics, certainly Tim in time of crisis. So thank you so much for starting our day, uh strong, We've got axel Weber coming up as well. Much more on year from that. What was it like yesterday when Governor Bailey set reset the global debate. Thanks Tom, it's always a pleasure to be with you. Thanks for having me. You know, look, I think we're hearing from from Governor Bailey and others will have Krota and christ Legard today.

They're serious, they're serious about taking the punch bowl the way. It's time to reverse the policies we've seen over the past seven to eight years. It's time to move on to the new normal. And I think Andrew said he's ready to get on with it. Uh Stanley Fisher five years ago, six years ago talked of ultra accommodative. We've clearly moved through accommodative. We're trying to search for neutrality and even some of these bankers desire a restrictive state.

Does that put out the zombie companies? Is the final result of all of this movement that we eliminate the zombie companies? And indeed, I say the zombie banks of which you represent, Yeah, well I don't represent zombie banks. Banks are in good shape, but yes, the zombie company is gonna go, and they should. This is creative destruction. This is the way cycles work, and for far too long we've had cheap liquidity, an abundant amount of liquidity, and we fund a lot of firms, a lot of

sectors that probably shouldn't be in business. We need to redeploy those resources, those assets in more productive ways. You sit on the political side of this debate, serving the younger president Bush, would you suggest that politicians have power here or renewed power? With British shields out at five with yen at one six? What's the power of politicians this morning? Well, the politicians wanted both ways. They want to get rid of inflation as quickly as falsile because

they see it every day gasoline prices, for example. But they want to do it in a painless way. They want to do it in a way that doesn't create disruption. That's very difficult to do. Central bankers haven't probably the toughest job they've ever had right now, Okay, I'll go with that. But Secretary Guy in your fifteen years ago seventeen years ago would say the salute is to extend the timeline. Why are we in such a hurry to

bury the economy into a global recession? What's the race here? Yeah, I think there's a sense of catch up that they're waiting too loranded and so they want to make up. I think some of it is just bringing back to reputation of the institutions. There's a concern that maybe some the ft or other institutions have lost some of the reputation as being tough. I think Jay wants to prove a point, and I think you heard from Andrew yesterday he wants to prove a point too. Can they stop

and pause? We can. I don't know that they will. It depends on what they might see. Obviously, there's a lot of turmoil around the World War and the continent of Europe. Gasoline prices as we see from OPEC. I think they're pretty adamant about moving ahead. I must turned to banking, of course, a great mystery, and this goes back to Fortis of Belgium years ago, which is where

in Europe there were transactions and combinations across borders. That's always a challenging thing with the challenges in a selected Swiss bank. Do you look for transactions and combinations within the members of the Institute of International Finance. We do, and you know, risk assessments and an important part of what we do here. That's why we have a board of fifty institutions that comes to the world, so we

constantly talk about risk. Our board meeting tomorrow will be a conversation about where do we see weaknesses in the system and how do our institutions communicate with each other? Okay, I'll go with that, But the reality is selected regions, book values of banking, or to use the American phrase, flat on their back. What is the urgency right now to pick a region within European banking? Well, we know book to value of ratios and Europe are pretty soft.

But Europe needs something different than just monetary policy. They need consolidation and four thousand institutions across exactly, and so we need consolidation, and well, you need Brussels and capitals to act. We need a consolidate capital market, which benefits US firms. Here we have the largest capital market in the US, which helps the JP Morgans and Americas, which we'll hear from today and tomorrow here. But you're at

needs banking consolidation in the capital market Union. You were steeped in Washington and in the politics of a traditional Republican party, which some people would say has gone the way of the fossil UH and that what does the Biden administration need to do to solidify American leadership other than to generate a strong dollar. Well, we need to deal with energy, and I think they've tried it both ways. And what is to talk about a climate transition, which

we should. But in the near term, we've got to find ways to produce more oil and get it to pipe to the place it needs to be. We need to address the near term security and affordability concerns. Are you gonna make headlines today like you did with Governor Bailey yesterdays that are reduct here with Legard? Come on, we are indeed stut a very big day to Madams.

Thank you so much with the Institute of International Finance, John, and I'll tell you if he can do back to back, uh John with Christine Lagard what he did with Andrew Bailey yesterday. John, our jobs are a threat. T K. Thank you a great word. Dan in Washington. Don't my favorite guest this someone who used to be a central bank it but isn't any more because they cannot tell you what they think. And all of them come out really harshly and say you're all making a terrible mistake.

Why are they going more aggressively. They're just so much more open about their feelings about the situation. Tom Keane, I think you've got the perfect guests to do just that. Oh, I'm my interview of this meetings of the International Monetary Fund, and it's here at the Institute of International Finance. Axel Webber is the force of the ii F, the chairman, but I must say, far more importantly, the former president of the Bundesbank. His service to u b S is

noted as well. We begin on one hour conversation. We're gonna have to cram one hour axcel into the moment. And you taught a course at Boost School Chicago central bank theories. In fact, what is the fact right now? For J. Powell? I think the fact is that central banks are in a really bad situation. They have started late in raising rates. You could see already some break into some trend break in the price level. In late two thousand. They focused on the inflation rate very early.

Also X some elements that have been going up strongly, and now the central banks are doing big steps to catch up with reality, and there is some risk in that. So I now look at monetary policy as an independent risk factor. Uh, And I think monetary policy has a way to go. I don't believe that the current inflation rates will come down as easily as is predicted still by most of the central bank models. So the tough work is ahead. I got so many ways to go here and just squeeze us in the time. Do we

need to abandon a two percent level? Something Bundesbank is comfortable with, something I'm gonna say traditional economics is comfortable with. But as part of the solution to move away from a two percent level of inflation towards a three percent level as appropriate, I think that would completely blow the

credibility of all central banks. If they were to do that, Uh, they would be dead on arrival because if you what you need to do is to re establish the credibility of the two percent target at a rage running just below ten percent, that's a very difficult task. So central banks would, in my view, be completely misguided if they were to question the target. Now, the point is, let's get back to target and that will take them, you know, at least two years. What we're gonna do now, folks,

is divingto some theory. And we can do this with Professor Weber. I'm going to work off of a wonderful piece Byambo's Evans Pritchard and the Telegraph. You can look at a theoretical construct like the Phillips curve London School of Economics the fifties, or the beverage curve. Wage cruitment talks about from even farther back as well. Central banking is hinging on a linkage between inflation an employment. Should they do that or do they need to squeeze right

down to a more Germanic focus on inflation? Well, I think they're They're long term. What really matters is the amount of debt in the in the economy and how it's accommodated by central banks. So I'm still a firm believer that in the long run the balance sheet of the Fed and monetary policy matter, and in the long run inflation is largely driven by factors like how accommodative

our central banks for government debt. Of course, in conducting monetary policies through the business idea, they need to look at the link between output growth, employment and inflation. It's a natural because their setting is within the economic in the economy. But long run, I think they haven't looked at the impact of this ultra easy monetary policy on inflation that was about to come. How naive are we

about qt? Original? Unfounded? Rubini among others make jokes about it, q E QT How original is it in that we don't know really what's going to happen. I think the central banks have amassed a massive balance sheet, all center banks in the world, and if you look at the last ten years, the fiscal expansion of roughly to the tune of g d P globally has been accommodated by an expansion of central banks balance sheet roughly of the same amount. So this additional government debt didn't have to

be held in the market. It ended up in another government balance sheet by the central bank. And we haven't seen the interest impact and the long term inflation impact of that liquidity having to come from the market as opposed to come from another source of government funding. And I think long run central banks need to bring their balance sheet down. That will put pressure on debt and

governments to consolidate. And I think long run we cannot continue to run deficits that are you know, mid single digits and debt that is around under present Your history is you are death. I'm sure term a medium turn, long term analysis, there's a responsibility a character out of bundes Bank that speaks for itself is the short term path here to just extend things out, to ease up on the raising of interest rates at an appropriate point and use time to heal the wounds of the pandemic.

And this that expansion, well, I think you need to start doing the U turn. You know this is a change in times. Are we near the U turn? I think central banks have started to raise rates late, but in my view they started. And now what is important is what j Pal said at the Jackson All speech. You've got to keep at it to the job's done. And the job is not done. And so central banks have to raise interest rates and at the same time

they have to produce a balance sheet. How constrained is e c B. How how many degrees of freedom is Madame Leguard lost here with the war plus the overlay we've been talking quite If you of the e c d s in a worse position than to fit, their economy is likely to take a much bigger hit. Their monetary policy has weakened the euro and that is increased price pressures for European citizens were much closer to the war, and we're much more dependent on China in our exports,

and China is not doing well at the moment. Is it true when you were in booth school teaching that you gave out no ways and no bees. Were you that tougher greater? No, I wasn't. I did have some azing bees, but they were clustered around people that understood the long term. Let me remind you that was in two thousand eleven. There wasn't a textbook from which you could teach the financial crisis because those textbooks was still to be written seconds. Is there a textbook? Now we're

a good textbooks? Now they are good textbooks now excellent Ember. There was some insurance here, of course. The chairman of the Institute of International and Financia, former leader of the Bund despect John. You and I would have gotten quality ds in that course. I'm not sure how would've done that wild song. Hey, Tom, do you think Tim Adams who wants to be an anchor on Pluybock surveillance when you're out, he's He's smooth, There's no question about it.

The gentleman from Kentucky can absolutely get it done. And for that matter, John, I thought axel Weber was smooth as well. Your thoughts, John Farrell on what we heard from the leader of the bund spank him. I think a lot of what we're experiencing right now is some of the stuff he want about more than ten years ago. That once you go down this path, it's very difficult to get back out of it. From the ultra accommodative to where we are right now, it is indeed his historic.

What I've heard this morning, folks is this is a once in forty even fifty year moment for all within finance and Global Wall Street. If you're part of Global Wall Street, this is must listen. It is rare that you speak to anyone in economics who actually read chapter twenty three of a textbook which is on finance and bonds. Klaus Canoe is a governor of the Dutch Central Bank and is truly expert linking in economics to the fixed

income space, including British yields at five percent. Governor, thank you so much for joining Bloomberg today. I've got to first go to the ECB questions, can you explain to me how the e c B can become more restrictive rate rate seventy five basis points with the nominal g dB construction of the continent. Where do they have the animal spirit to withstand ever higher interest rates? Well, I think to answer that question, you first have to sort of look at where we are in terms of the

starting point. We're still way below neutral, so policy is still accommodative. So I think it is no regret that we have to end this accommodative phase of policy. And I mean your question of how deep should we go into a restrictive territory once we get there, well, the course that bridge when we get there, it is original

right now you're in accommodated or auto accommodative. However you want to phrase it as well, what happens next after the presumed rate increase of the next meeting, Well, I mean our president has stated very clearly that we are currently in the phase of normalizing interest rates. That means

taking them to neutral. Unfortunately nobody knows with any level of precision, but neutral is But I've been saying that we need at least two more significant hikes before we sort of enter the range of plausible estimates for for neutral that will take us into next year. And I hope that with the current uncertainty in the markets and the bolt market fragility, I hope you don't mind that I don't have my calendar cut out for three already.

I don't know I don't have my calendar cut out for two, even even with some of my staff would say that I don't know where the calendars for this year as well. I stood at the ECB mowning with atmar Issing long ago and far away, and it was a core let's call it, Germanic Netherlands constituency wrapped around another ECB in this crisis. Right now? Is the e c be more unified than it was in two thousand

and eight? We are unified, so I think if you look back over the last few years since the pandemic, all decisions have been taken with a high degree of unanimity. So we are very clear about our mandate. Inflation is way too high scent in the Netherlands, ten percent in the Euro Area, and even more important, underlying inflation trends

are pointing in the wrong direction. Core inflation almost five percent, so we are determined to bring inflation back to target, and we do understand that this will require some further efforts from our site. This problem is not going to go away with a little bit of slowdown of the economy.

It will require continued effort from our side, and the Council is unanimous on that entire I have to go with you to your bond expertise, linking it into a greater economic system and the idea of yields coming up, prices coming down. With the United Kingdom being in the headlines this morning, it'll be another country next. These are nonlinear functions. How close are we to a second derivative,

to a convexity and acceleration where people like you lose control. Well, I think that need not be the case because that is dependent I think on responsible policy. As long as policy makers keep on doing the responsible things, then I do think bond markets can be in control. But it does put a premium on responsible behavior. Bond markets have become much much more sensitive to death sustainability issues, so that puts a burden on our fiscal authorities to also

continue to pursue responsible fiscal policies. With the medium term orientation and with death sustainability being front and center of their concerns. Is there a textbook and qut when you're growing again? Was there anything about QUEI and QT? No, you're making it up as we go, right, Well, we're making out of as we go. Yes, of course we learned from the experiences of all the central banks. I think the way the FAT is dealing with QT, that's clearly also going to be an example for us. They

managed to move it into the background very quickly. I think a process like QT, it should be predictable, it should be gradual, it should be even a little bit boring, right I mean Janet Yellen once quipped it's like watching paint dry, and that's a little bit. I think how you want to shape such a program. I think the FAT has been fairly successful in that and if we can take that queue as well, I would be more than happy to do so. It has not been boring

for Governor Bailey. He's making it up as he goes. Literally in the last twenty four hours, What are the lessons you've learned from the the nexus of Bank of England and politics in England? What have you learned about when the first of all that monitoring and fiscal policy being at crossroads with at cross purposes with each other. That's a very dangerous cocktail for for bond markets. That's

the first lesson that I would say. And secondly, the UK is a little bit in a special position because the bonds they bought are extremely long dated, so they actively have to sell. We in the Euro Area like in the US, and we have bonds over the full maturity, and we think we can do qut by just rolling off existing bonds by less than full reinvestment, which is naturally a smoother process than having to actively sell. By colleague John Faroll Adores Vermier, you're having the mother of

all lifetime Vermier shows in the Netherlands next year. Can you see our show in Amsterdam and support of the vermir show? Yes, of course, I mean if you want to support it by all means. I think it's a unique opportunity to see all the Vermier's that are everywhere in the world in a different museum, in the reichs Museum in Amsterdam. Absolutely, we would love to have you and Mr Ruder show you and enjoy Claud to the Dutch Central Bank suggesting we need to be an Amsterdam

next year. It was his suggestion some I'm buying that. Let's head back down to Washington, d C. Tom Keane with another fantastic interview. A nice update there, Lisa. And it's really important, folks. Off pp I is how important tomorrow's United States CPI numbers will be for these meetings of the World Bank, the i F and the International Monetary Fund. Tomorrow will come from from the offices of

the International Monetary Fund with some important interviews. Right now we go all American and we can do that if you go to the Art Institute of Chicago and go to the very back of the Art Institute, pass to Chical there is the old trading room of the Chicago Commodity Exchange. It's really something to see from another time and place. That is the CFTC associated where our Midwest, but much more with what to do with derivative instruments.

Kristen Johnson is c f TC Commissioner. Have you wonderful to have you here with us today. Have you ever visited that ritual room in the back of the Art Institute. I have not, and I look forward to this newly minted commissioner. You must go to the Art Institute and go to the back and there is part of my family's past. Wow, I've headed to Chicago November. Have to see it. Let's add to your list. Now the discussion

everybody wants to have, which is bitcoin? And I refuse to believe this is a soft more turf war between Kristin Johnson and my good friend Gary Gainsler. How can you two get along on what to do with bitcoin and not make it as silly turf four? Oh, this is a great question, and not just a great one,

a necessary one to be honest. In the current crypto onset of the current crypto winner, uh two trillion dollar assets sell off, what comes sharply into focus from my perspective is institutional investors and retail investors starting with the ladder. In fact, what we could think carefully about is the reality that retail investors have suffered significant losses in light

of the onset of the crypto winner. Something else ide share is um If we coupled this thinking with the Bank of New York's announcement yesterday, this is Alexander Hamilton's bank, founded as one of the oldest in the history of our nation, now acknowledging that it will on its platform service not only conventional financial products but cryptocurrencies, suggesting and signaling that in the near and not so distant future, institutional investors will be investing in this space as well.

What's good about this, folks, is they kept from Commissioner Johnson my thoughts on bitcoin and we're not going there right now. There's a guy used to work at JP Morgan and there's this guy up on the one floor named Diamond who's going both ways on bitcoin. He's saying, this is a fraud and excuse me, Jamie, but something like that. And the other thing is we need to

learn about this and do about it. How can see if TC do better than SEC at helping banks on this is a fraud versus This is what we need to do to move forward. Let me explain what the CFTC is already doing in our remit. We are enforcing to the fullest extent of our authority to ensure against fraud, market manipulation, any types of abuse to retail customers who are heavily engaged as I mentioned in this market. So that includes first of their kind lawsuits for pump and

dump schemes. Over the last several months, first of their kind uh UM bitcoin or cryptocurrency Asset management fund uh scams against retail investors, and very very recently a first of its kind that suit against a deep precentralized autonomus going to be so important. Yeah, the bitcoin sixty down to twenty thousand is well the little guy, and I've seen this. Folks generational. They fervently believe in bitcoin. Are they believing in a derivative instrument the province of the CFTC?

Are they believing maybe in a financial asset under SEC thirty four and thirty six? I think is that an SEC province thing or is it a derivative thing of CFTC. Your question about whether or not the Securities Act section to a one definition of a security can drop Let's continue a section. So essentially, what we're asking is what qualifies as a security? And in fact, there are two bipartisan bills currently pending in Congress that are working diligently.

Senate Staffer is working diligently to capture an answer to this question. It's a wonderful question that's rich and reflective of the history of financial markets regulation in our nation. Why can't you two get interrupt? Why can't you two get along? Why can't the SEC and the CFTC both work on this which I dubious thing sixty. I'm going to say we better get along for the sake of those investors that I referenced earlier. There is a path,

and we've walked that path before. We recently, I I have had the great opportunity to engage with his office, with him, with other commissioners at the SEC. I think we are all in agreement and on one accord that we want to protect market integrity and protect the customers who are engaged in invest twenty people so typical as CFTC.

And someone your Honora said, don't ask her about the politicians, So let's talk about the policies they in the back seat of all the rich guys doing bitcoin, these gazillions. They used to have forty gazillion dollars and now they have eight gazillion dollars. The eight gazillionaires that are doing bitcoin, are they buying off the American politicians? I can only tell you what I know, which is Chairwoman of the Senate Ad Committee, Debbie samin Ow. I'm a native Michigander,

so we are neighbors. In many respects. I believe that she is deeply engaged in expanding the remit of the CFTC over spot market transactions for the purpose of ensuring that a regulatory gap that exists right now is closed. I got thirty seconds. What happens to the retail investors at bitcoin breaks support nineteen thousand and goes down to sixteen or fifteen or twelve? What's the ramifications of that?

The ramifications are significant because those investors are the most critical, in my humble opinion, in our markets, and our most sacred task is to ensure the protection of those investors and the integrity of our markets. So I am diligently committed whatever we have to do. Commissioner think I'm exhausted, Lisa, Commissioner, Thank you so much. Kristen Johnson of the CCC. There on section twelve, item to A one one Lisa Tom wonderful interview, Thank you so much, and great recitation there

of the different provisions and the different subsets. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television. Each day from six to nine am for in type from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg