We start with a wild week in the market, since stocks and bonds responded to weak jobs numbers, a shift in Japanese monetary policy, and geopolitical uncertainty. To take us through what it all means, we turn once again to our special contributor, Larry Summers of Harvard. So, Larry a lot to sort through here. What was your overall take on the terminil in the marketplace and the speculation the speculation the Fed maybe should have an emergency rate, gud.
I would say on current facts, given that there has been some recovery, given that volatility has come way down, it we're not out.
Of the woods. You can't be certain.
The FED certainly needs to be watching carefully, but I think an emergency response would be lauching, panicked, overheated, and counterproductive on current facts, Which doesn't mean that the FED
shouldn't be watching very closely. Before they have another decision to make in September, there's going to be a lot more data that's going to come in, and I think they should make clear that they're going to be watching all that data and they're going to make a decision reflecting the need to balance a concern of making sure that we have stopped inflation with the concern of maximizing employment, and I think they need to not be pressured into specificity of a kind that is impossible.
Let me pick up on one of the things you mentioned was volatility. The VICS really did spike up to I think over sixty, maybe the highest it had been since the pandemic first hit. How much attention should the FED pay to that volatility index what it might be telling you about the markets are functioning.
I actually think that the SEC and the relevant exchanges may want to pay a bit of attention. My understanding is that because there's some ill liquid instruments that go into the calculation of the VIX, the VIX had a somewhat artificial movement on Monday that if one looks at the VIX futures, which are a somewhat different instrument, they the movements were much much less dramatic. So I certainly had my attention caught by the VICS early in the
day on Monday. But as I have looked into it, I think you were learning more about issues around liquidity in the options markets than you were about some profound reassessment of the kind of economy.
And since that is so widely watched.
And indicator issues of liquidity issues around how it settles, I think should be studied by the relevant parties in the industry and the regulator, the SEC.
Larry.
We spent much of the week with various people getting advice to the FED. It included our former president Donald Trump on Thursday and a long news conference and which he addressed it, reiterating he thinks the president should have some say over monetary policy and rate setting, including saying, boy, he'd made an awful lot of money and he thinks he knows better than the chair of the FED. You had a reaction to that. I know you posted on
that question. Give us your stance about how dangerous that could be.
I guess I can't say I was surprised by ex President Trump because he had said things like that before, but.
I sure was appalled how bad an idea it was. I mean, start with the preposterous arrogance.
The Central Bank has nineteen members of the FOMC who spend more or less all their time scrutinizing every economic statistic. President's got a lot of things to do at any given moment, and is actually much less close to the economy. God knows, the skills associated with being an economic forecaster and the skills associated with being a successful real estate
operator are very very different ones. So I don't think there's any particular reason to think that a president of the United States would have a intellectual contribution to make. And the reason why countries all over the world this isn't just an American thing, but countries essentially all over the world have moved to independent central banks, is that they recognize a profound conflict of interest.
Who's ever an.
Elective or political office always is tempted to put more money lower interest. Strates hit the accelerator hard to get a boost to the economy to make people.
Feel good, But when everybody sees that.
Coming, it doesn't actually make people feel good. It just raises the expectation they have for inflation, so you get more inflation and you don't get any substantial output gain. That's what happened when President Nixon was involved in bashing FED Chair Arthur Burns around the nineteen seventy two election.
That's what's happened in.
Numerable times in Latin America, and that's why the lesson has been pretty well internalized in the vast majority of mature democracies that you keep central banks independent because having the politicians involved is a fool's game. The FED doesn't listen, so you don't cut short term interest strates, and the markets do, and so long term interest rates go up with inflation expectations, and so you end up with higher inflation and a weeker economy.
As we come toward the end of the week, one of the things that people are saying about what precipitated the market for fluctuations was what happened over in Japan with the Bank of the Japan really tightening monetary policy. They actually sort of backed off of it, saying they're not going to do any more right away given the market turmoil. You back in October on this program said they have to be careful as they move into a different direction of the monetary policy, given how much barring
they've been done in relatively cheap end. Give us your sense, do you think the Bankageman is handling this correctly? What course should it set for itself?
You know, David, when I remember when I first learned to drive a car, and I remember when I taught my kids to drive a car, that the first times they were driving a car, they tended to overseer. They turned the steering wheel too much one way, and then they have to turn it and they want to correct that, and they turn the steering wheel too much the other.
Way, and we'd sort of make a wave down the road.
I think there's a bit of a tendency for central bankers, particularly new central bankers, to do that kind of thing, and I think you saw a bit of that in Japan. I think the backing off after such a long time of such low interest rates could perhaps have been executed more gently, and then when it caused a big response, they didn't need to be quite as firm as they were about showing that they were responding to.
The markets. So I think, you.
Know, it's it's the stuff Machiavelli.
Taught leaders. You always want to look unruffled.
You want your actions to be small and then have accumulative impact, not be shouting when you already have a megaphone. And so I don't think it's ultimately going to be hugely consequential, and I think there was an adjustment that was going to need to come in Japanese monetary policy.
But to use the language of this week's Olympics.
I think i'd probably deduct a bit on style points from the Bank of Japan.
Okay, Larry, thank you so very much once again for being with us. That is our special Wall Street Week contributor. He is Larry Summers of Harvard