Interview With Ethan Harris: Masters in Business (Audio)

that's not his formal title. Uh. He is really an institutional guy whose clients are primarily big hedge funds, mutual funds, pension funds, institutions, as well as the high net worth group at Merrill Lynch, which remains one of the largest asset management firms UM in the world. And he's also

a Federal Reserve expert and interest rate expert. And we the talk ranged far and wide, everything from what the FED did right and wrong, what various FED chiefs focused on and and were the right FED chiefs at the right moment uh, and some of the errors made by

other Fed chiefs. And we also had a conversation about the state of the global economy, which I thought was very thoughtful and interesting UM and without going off into the weeds, without getting excessively wonky, it was very accessible if you're at all interested in interest rates, monetary policy, economics, and the state of the global economy. I think you're gonna find this a very interesting and informative um. Dare I say fascinating? Uh? Conversation. So, without any further ado

my conversation with Ethan Harris. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My special guest this week is Ethan Harris. He is the chief economist of Bank America Merrill Lynch, co head of the Global Economics Research. To a quick overview of his CV, I can't do the full one because it will take the whole show. UM. Ethan regularly ranks in the top of investor polls and forecasters surveys. He helps to coordinate the global economic forecast

and manages the Developed Markets economics team. Before coming to Mary Lynch, Harris was the chief U S economist at Lehman Brothers. Previous to that, he worked as an economist at Barclays and JP Morrigan. He began his career spending nine years at the Federal Reserve Bank of New York. He has a PhD in economics from Columbia, where he is also a university fellow. Ethan Harris, Welcome to Bloomberk. Thank you. It's great to be here. So I also left out you're the author of Ben Bernanke's Fed the

Federal Reserve after Great Span. We're gonna spend a lot of time talking about the FED later, but but let's just start basically. What what attracted you to economics? So I was a history buff as a kid with the name Ethan Harris growing up in in Massachusetts. Of course everyone talked about Ethan Allen in the Green Mountain were interviewing today, said aren't you Yeah, no, no, no, not now.

So I was very interested in history. But what got me going into economics was that my older brother came back from the University of Chicago and economics major, and he said he started talking about economics with me. I then said, hey, you know, this sounds pretty interesting, you know because remember economics as a combination of history and and math, and so it really fit my skill set. And I was a pretty nerdy kid in high school.

So I decided to spend the summer reading Samuelson's Introductory Economics textbook, and that hooked me in an economics. So I was an economics major the day I arrived in college. So your brother um is out of Chicago, you're out of Colombia. I'm gonna ask a question. I'm gonna pull it forward from another segment. Several economists, most notably Paul Krugman, has divided the University of Economists into freshwater and saltwater economists or coastal economists. And do you think that economy

holds any any accuracy? Is there something to the multiple schools? I think there is, But there's also, as in a lot of academia, there's a lot of debate about pretty fine points. I mean, I think there is a broad consensus among macroeconomists about some fairly general things, the idea of the importance of free markets, the idea that you do need a central bank that will manage the economy to some degree. There are people whould argue that we don't need to fed. Aren't those in in opposition? We

we want free markets. But at the same time this was always the conundrum with Alan Greenspan, a true free market mine Rand's acolyte, who was constantly accused of manipulating mart How do you find a balance? Well, I think I think we that's where the compromise comes. And so that you've got the extreme view of no no intervention at all, and then you've got the very aggressive intervention.

I think the reality is. And certainly what I learned at the FED, which is obviously an interventionist institution, was you know, you nudge the markets and the economy along, you don't try to to micromanage it. And so that's where the agreement I think is. Now. Of course there's going to be debates, but I think that macre economics is not nearly as fractured as it sometimes looks like from the outside. So so let's go back to the New York FED. Where was that your first job out

of Columbia? So who was the president at the time? So so, so my career started basically Jerry Corrigan, of course, and I ended up working closely with him. At one point I was the assistant corporate secretary, which doesn't sound very prestigious, but it put me in the president and first Vice president's office, doing you know, work, system wide type work as opposed to just the local bank work. And so I I learned a lot in the experience

game to the FED right out of grad school. The great thing about working at the FED coming out of grad school is in grad school you learn a lot of math and statistics. Uh, what you do learn at the FED is how to apply it in a practical way to real questions of the day. And so the New York FED, with a lot of other young economists, there was really a great place to kind of make a transition out of academia into more practical use of economics.

And if I recall correctly, Jerry Corrigan was really a major player UM in in if you read the history of the seven Crash, and my favorite book on the subject is Black Monday by Tim Metz, Corrigan is really a major behind the scenes actor working to keep the whole system together when it looks like it's falling apot well. And that's that's the role of the New York FED.

And so we have a history of that. Obviously with every time there's a big financial crisis, the president of the New York Fed is absolutely critical because that's the person who can talk to all the leaders of Wall Street UM and kind of get people's heads around the problem, get people working together. And so we've had multiple instances where UM in a crisis moment, the New York President has kind of really taken the lead and kind of

saved the financial system. I'm thinking of longtime capital management. In the late nineties, there was a private sector rescue deal put together, but that was really shepherd along by the New York FED. And if memory serves, that deal might have even been done in the hallways from New York Fed. Absolutely, and and the you know, the idea there was. I mean, actually, if you go back in history, you go back all the way back to JP Morgan, back and before the FED existed, that's what he would do.

He would gather together their bankers and in a financial crisis, which remember the original purpose of the FED was to prevent financial crisis, not to manage monetary policy, but prevent financial crisis. And so that role is now kind of moved into the New York FED, obviously working closely with the with the chairman. But that was one of the exciting things about working in the New York FED, right in the heart of Wall Street and then in the

heart of the financial system. You're listening to Masters in Business on Bloomberg Radio. My special guest this week is Ethan Harris. He is the co head of Global Economics Research at Bank America, Merrill Lynch and I wanted to get into the specifics of interest rates and how they vary around the world. And I understand the academic answer

to this, but it's never really been satisfactory. So ballpark, the ten year bond in the United States is about If you go to Germany, it's under half a percent, It's about point four four as of this recording, and Japan is about point to although given the most recent activity from the Bank of Japan, who knows where that will be by the time this broadcast. These are three of the most powerful economic um countries in the world,

yet they seem to have wildly different rates. Why is it that the United States has to pay two Germany pays less than half a percent, and what maybe the most indebted developed nation, Japan at least major economic power, is paying less than a quarter percent? How do how do we reconcile? So I Bury, I think what's going on here is this is actually good news for the US.

I mean, because what we're seeing in Europe and Japan is our markets that are pricing in a world of near zero interest rates for the indefinite future, no inflation for the indefinite future. That means that investors are very pessimistic about the prospects for growth in those countries. Neither country has managed to extract itself from this kind of low,

near deflationary kind of environment. The the US, at least with two percent tenure yields, the markets are giving us some some hope that, yeah, the the US has heeled a good deal, that there is some prospect of an acceleration inflation. The Fed doesn't have to keep interest rates pegg to zero forever. So I think that the the interest rate differentials telling you something about the prospect of the US finally come out coming out of its malaise. But a lot of doubts in the markets about Japan,

UM and UH in Europe. But but that spread has been Germany has been yielding less than the US and Japan less than Germany for the better part of a couple of decades. And so I know, if I go to a textbook, it's going to say, well, look at the yield versus the real GDP net of inflation. But that's not really satisfying. What I'm hearing from you is that people in Germany and to a greater degree in Japan are flocking to bonds because they don't have confidence

in the economy. Is no, No, I think that yeah. I mean the bondmark of the tenure yield is amalgam of people's expectations were where interest rates are going over the next ten years. Um. You know, if you believe that the Fed has some chance of normalizing interest rates in the next few years, UM, you're going to demand a higher interest rate on your tenure yield because you need to cover the fact that you're you're going to

miss out on those higher rates. So um. And I think that the I mean the longer history of of super low rates in Japan. I mean Japan has had not just a lost decade of growth. I mean people talk about the nineties being a lost decade, but in effect, Japan for twenty five years has been a low growth, zero or negative inflation country. Um. And so if you're buying bonds in Japan, you don't feel you need any compensation for inflation because there is no inflation. Well, you're

really doing is parking money there. You're getting the tiniest of yield and it's a way to not be in equities, which twenty five years have not exactly been it's basically people saying, yeah, I'm not I don't have enough confidence in the economy to to put my money to work. I'm going to take the safest investment I can and

just kind of sit on it um. Of course, what's also going on in both Europe and Japan is that the Central Bank is still buying debt and the FED is stopped their their quantitative easing debt buying program, and so there's an additional gap created by the fact that they're still in an aggressive bond buying program to try and artificially lower bond yields, as in hoping to stimulate their economy. Well, the FED this kind of specked away

from that. So but I think that fundamentally that the story here is about, you know, faith in the long run growth and inflation prospects. It's not like people are bowled up about the US. It's just in you know, kind of the land of the blind. You know, the one eyed man is king, and that's that's that's where we are now. So so, although when we look at Germany, despite the issue with the refugees, despite all the other problems there, their economy seems to be running pretty strongly.

I mean, that is the strong man of Europe, isn't it. I mean they're they're um. Obviously, they're the one part of Europe that really looks healthy. And uh, it's not that Europe is collapsing, it's just the region has had a big double recession never really recovered, and so Germany is is kind of the model of strength there. But their interest rates are very tied into what other countries

are paying. Their interest rates are determined by the same central bank as every other country there, so everyone's kind of tied into this low rate environment on the assumption that the ECB is not going to be able to raise interest rates anytime soon. So so let's as long as we're talking about Europe in Germany, I would be remiss if I didn't bring up the Swiss, who have

been at times running negative interest rates. They are not on the euro, so they're affected by the central bank, but it's not like they're tied to the local currency. Why is Switzerland's getting the benefit of borrowing money at a negative rate. Here here's my money, and here's a little ACTRA to keep it safe. Yeah, well, I think

that they are um. The one way to think of it with Switzerland is they're kind of an island of stability in Europe and so and I've been for centuries, centuries, and and the crisis in Europe has caused a lot of money to flow into UH, into UH Switzerland. That's one reason they can borrow a cheap right. The other thing is that it's created it's created an extremely strong currency,

which hurts their economy. They're kind of they're they're actually in a sense there they're suffering worse from Europe's problems and than Europe itself is suffering because they end up with a very strong exchange rate, so they push interest rates into negative territory to prevent their currency from being so strong. And um, it's really a desperate battle by Switzerland to avoid importing the problems of Europe. This is

Masters in Business on Bloomberg Radio. I'm Barry Ridhalts. My special guest this week is Bank America, Mary Lynch's co head of Global Economic Research, Ethan Harris. He is a former FED researcher, former chief economist for Lehman Brothers, and author of Ben Bernanke's Fed the Federal Reserve After Greenspan And let's talk a little bit about inflation. You in some or we'll talk about flation. As as was famously said, it doesn't look like most of the world is suffering

from inflation. We're starting to see signs in the United States perhaps wages will tick up. In parts of the world we see deflation, and in other parts of the world we're seeing disinflation. For the person who may not be familiar with all these inflations, what are the differences? Yeah, so, um, you know, inflation is just a general rise in wages and prices and income. So everything's going up in value over time, but it's not increasing your ability to buy things.

It's just prices going going higher. So if your wages go up and prices go up proportionately, exactly what you know, you're just you're paying more and you're earning more, but you're kind of in place. Um, you know, deflation is when you actually have falling prices across the economy. This is very unusual. It really only happens in depression like conditions for a sustained period of time, you know, the

Great Depression of the nineteen thirties and Japan's last decade. Um, disinflation is just a slowing of inflation, so you're going from five percent to three percent. So that's the Those are the kind of words we bandy about all the time, So now we hear frequently, I see frequently discussions of deflation in commodities, deflation in China, and deflation in Japan. Is that the right way to describe it? Are we

actually seeing deflation? Well? I mean when economists think about deflation, usually they're thinking about something that's sustained over a long period of time. So I think what you're seeing in commodity markets is really a repricing where you've gone from an environment of consistently high prices to consistently low prices. And so during that interim you have very rapid deflation. I mean, coal prices have dropped U seventy percent from their peak, so um, but that's really over a year

year and it's a year and a half. Yeah, that's an amazing drop. Mean, and by the way, this isn't new. I mean, we've seen oil markets just flip and suddenly a market that had been sustaining at very high prices suddenly you have an oversupply problem. It just takes years to get rid of it, and you end up in this sustained low prices. But that's not deflation in the sense that from We're not gonna have oil. Oil prices can't drop ten dollars forever every month because they'll go

into negative territory. That's more of a one time kind of big adjustment in the market. Real deflation is when um year after year prices keep keep dropping and and really the kinds of deflation that economists worry about and not so much. You know, a few items like oil falling, but it's really broad based price declines and broad based wage decreases. That's those are signs of a sick economy. So arguably the issue with oil this cycle has been

a supply issue. We brought I Ran online, we would Iraq online, and the US has gone from a marginal producer to a significant producer. And at the same time, the Saudis, who normally would pull back are are continuing to pump NonStop. UH plus Russia could use the money, so they key, So the usual suppliers who would typically pull back aren't. So arguably this is a supply issue.

What sort of deflationary environment is a demand issue? Well, demand issue would be UH in fact, a Japanese experience of the and two thousands a classic example that where you have an economy that never really gets growing and so over time UM prices and wage growth fade into negative territory because there's not enough spending going on the economy.

And in Japan's case, I think it was a lot of it was a severely damaged banking industry, severely damage stock market and real estate market that just kind of hung over the economy for long periods of time, combined with a complete lack of confidence. I mean a lot of what the story of Japan was confidence. So those kind of when you have a big overhang of of broken markets and lack of confidence that those that's really

what happens when you have these big deflation episodes. How much of the Japan story is is one of demographics. I keep reading that there's almost no immigration. It's an aging society, and we all know your prime spending years or your forties and fifties. If you have an aging society,

what does that do to uh deflation and spending? Well, I think that if you look at the origins of their crisis, it was a mass of real estate and equity bubble that burst and left them with a crippled banking system and a failure to kind of fix all those problems quickly, and that created this ongoing overhanging the econom mean, but I think over time the challenges for for Japan have shifted, and what you're talking about with

the demographics is really the challenge going forward. It's the fact that you know, when Japan got into trouble, at first, demographic was not an important issue. But now we're in a shrink a country that's a shrinking population, very low birth rates and very little immigration, and so the new generation of workers is much smaller than the old generation retirees. That's a really serious challenge down the road for Japan. I'm Barry rid Holts. You're listening to Master's in Business

on Bloomberg Radio. My special guest this week is b of A. Merrill. Lynch is Ethan Harris. He is the co head of Global Economic Research. He began his career at the New York Fed as a researcher. And let's talk a little bit about FED policy, because you mentioned in the prior segment Japan was slow to response on to their crisis, their markets and economy peaked in ninety. Here it is twenty five years later. They're still mired in soft uh economic I don't even want to call

it an expansion. It's been a temporary blip up. What did the United States Feller Reserve do right that the Japanese Central Bank failed to do well? First of all, we should say that the FED had the benefit of Japan's experience, and you know, we know that for example, uh, Ben Bernanke spent a lot of time looking at Japan and the mistakes that they made the big difference. Didn't he do a big piece I want to say, oh three or something along those lines about here's what Japan

should have done. I mean, been a student of the Great Depression, he said, here's the lesson Japan did not learn. Yeah. So, you know, Ben Bernanke is a very gentlemanly person, and he actually went over to Tokyo and gave some very pointed advice to the government about being more aggressive policy, and they did not like it, and so he was he uh, you know, this was something that he took very much to heart. The the the importance of a

strong reaction. What the FED basically did is that they took a do whatever it takes attitude, and that was you know, if we cut interest rates and the economy doesn't respond, you cut them again. If cutting doesn't work, you promised to keep them low for a long time. If that doesn't work, you'd start buying lots of assets.

And I think that the key to this was it gave a sense to people in the markets in a very panic condition that the FED was there, that that that the FED was never going to be out of ammunition. They were always going to have another weapon to put to work. And so it was the the aggressiveness, and it was the body language around their actions that we will keep trying until it works that made FED policy

so effective. If you look recently at the European Central Bank success US under Druggy, it's he's taken a page out of the Bernanke playbook. His idea of do whatever it takes. He understands. I think that you know, when you're in a world of panic and people don't know how to value anything and um and the economy and the markets are are collapsing, uh, people want a sense that some in some way there's a support system out there.

And so I think that that was the basic key to the success was the aggressiveness and the confidence building aspects of the policy response. Is it accurate to say the US lead the train in two thousand and eight with an aggressive policy policy response. Six years later, the Bank of Japan decided to follow suit and begin what arguably is even stronger policy response, at least relative to g d P and Europe seems to be the laguatal

though they're finally seemed to be getting on board as well. Yeah, so I think that the that there has been lessons learned overseas. So the Bank of Japan was for a long time almost in denial that these policies work at all. When they first adopted quantitative easing, you know, the big

bond buying program that date to close to zero. The first time they adopted that, they when they before they announced it at the previous meeting, they basically said, we are not going to do quantitative easing because it doesn't work, okay, and then they went the next meeting they announced it. So if you think about it, it's it's really what they what they basically told the markets is were so desperate, We're going to do a policy that doesn't work. Bernanke

did the opposite. He said, we don't know whether it's going to be a super powerful weapon or not, but we're going to try as hard as we can, and we're gonna keep trying until it works. And that's been the change that we saw the Bank of Japan recently kind of taking a much more aggressive attitude um and with Draggy taking over at the c B, UM kind

of you know, learning the lesson that. Yes, you know, those central banks have been active, they've been keeping rates low, they've been um stimulating growth, but they haven't really made the effort and that that's the difference. So so we're recording this the day the Japanese Central Bank surprised investors by forcing rates to go negative. What's the thinking behind that, what's the impact of that action? Uh? And what does

that mean to the Japanese economy and potentially it's stock market? Well, I mean, looking at the bigger picture that I'm encouraged by the fact that the two central bank, the two big ones that are still easing policy, the b o J and the ECB, are taking steps in the middle of this very negative stock market we're in right now, this risk off trade and global capital markets. I think that that's helpful. It's help when people investor is there in a panic mode, you know, getting their mind on

something else is quite useful. It's kind of like a slap in the face. And so the fact that both the ECB and the b o J are now saying we're ready to act and support growth, I think has really helped a lot in in stabilizing equity markets. Now we'll see if it works on a sustained basis, but it's it's very helpful. I think what they're doing is is there. I don't think this policy of going to a small negative interest rate on reserves, which is what

they've done. They're going to actually charge banks a little bit for reserves. That's gonna help lower uh in borrowing rates in the economy broadly by a small amount. I think it's more of a symbolic gesture to tell you the truth, than anything major. UM. But I think it's important that given UH, given the fact that the Japanese economy has felt soft lately UM and their their markets are suffering the same pressure we're seeing in the US

and Europe. UM, it was important. I think that the central Bank show that it's still in the game, and I think that's basically what they're doing. So I'm always reluctant to say, well, the stock market reacted, We're up almost three hundred points, so therefore this action resulted in that, UM, because that's so fraught with danger and sometimes it's random, etcetera, etcetera.

But I can help but note that as soon as this cross the tape early early this morning, markets around the world flipped from red to green and it was a substantial positive response. What is it that stock markets like so much about such an aggressive Japanese central bank? Well, I mean, I think we have to I think we have to step back and ask ourselves, why are the

markets selling off so much to begin with? I think the global equity markets, I think at the beginning of the year got hit from every angle there, like a collapsing pocket around a quarterback. You know, you had geopolitical risk, you had weakness in China, you had currency and stock market action in China. So that's kind of been people's minds. You've had the weakness and the oil market. So the global equity market has gotten itself really uh, kind of

overwhelmed by by negative news. UM and and as I said, I think what happens when the central banks step in, as they kind of they offer this kind of sense that there is it's not all bad news, that we do have central banks that still can lower interest rates, can create a little bit of stimulus into the markets. And so just kind of getting uh, kind of changing the story. I think um is helpful to the markets. Now. Well,

we'll see going forward. I mean we um. I personally feel the global economy is okay and that this isn't the beginning of a big negative market. But um, but you know, we need to see how well the economy stands up to would have been some fairly ugly developments in the markets. So so let me ask you a completely different question. You alluded to the global economy being okay.

A lot of the things we've been talking about have been downside surprises geopolitics and collapsing commodities and weakness in China. What is required to take place for there to be a global upside surprising growth? Or or perhaps asked more more simply, what might the pessimists be missing what might not be anticipating? Well, I would turn that question around

a bit. I don't I don't think there's any big upside story actually, to tell you the truth going forward, I think that, um, the one thing you can always point to is that you have, you know, some pretty impressive new technology going on in the economy. Historically, we've had these cycles where you'll have say a ten year boom in in productivity due to a tech breakthrough. The

breakthroughs we're having now are pretty impressive. They're not they don't seem to be delivering anything on the economy, but there's always that kind of that kind of breakthrough. Um. I think that the way I would phrase it is what the markets need to do is they need to start stop hyperventilating about low oil prices and weakness in China. Right, is China really that important to the US economy? I mean, we only sell eight tenths of a percent of our

GDP to China. The Chinese equity market has been off on its own tangent for the last year and a half. It had a buge zoom up and now big collapse. We didn't pay any attention when it went up, so why do we care if it's going down? It's kind of it's it's on its own little planet. It's very much a a immature and almost purely retail market developed a structure, so and and and normally, you know, global markets pay no attention to the Chinese market for just

that reason. It's not really integrated. It's not like the close connections you get between European and US markets where investors there's a lot of cross flow of investing and people look at them as mature markets that function effectively. So we really need to investors need to kind of stop hyperventilating about China. So if anyone wants to find your research, they they can access your work at be a very Merrill Lynch. Is there other any of specific

places they can read your work? Well, I mean that's that's the thing. I don't have a blog out there anything. I write for Bank American Mary Lynch. So if you are a client of the firm in any way, you know, um, you know, you'd have access to all the stuff that we write and when. By the way, I've got a really great team that works for I am the pretty face. I have a great team, and that's why you're on radio. If you enjoy this conversation, be sure and hang around

and listen to our podcast. Extras where we keep the tape rolling and continue chatting. Be sure and check out my daily column on Bloomberg View dot com or follow me on Twitter at Ridolts. I'm Barry Ritolts. You've been listen and into Masters in Business on Bloomberg Radio. Welcome to the podcast I was mentioning earlier. My guest this week is Ethan Harris. And Ethan, thank you so much for for doing this. I know many of your colleagues, but I don't think you and I have ever met before.

Have we we have met before? It must have been much more memorable for me than for you. Was it at a dinner? Um? Where we meet? I think we met at at one of these economics get togethers, But I definitely, maybe maybe only know you through your personality as a as a great radio host. It's um, well, the personality thing. It's all an act as it has nothing h I'm not really like this in real life as as much as U. Although if this was an act it would be a tough one to maintain over

long periods of time. But um um, I'm trying to think. I'm trying to remember where we met and if it was one of those Wednesday night dinners at Bobby Vans or something like that. That's the only recollection I have UM.

But it was never a one on one thing. It was if you're in a room with eight or twelve people, it's really hard to I actually met the Pope's outside money manager at an event like that where there's fourteen people there and you want to talk to each person for a few minutes, but a two hour dinner goes by like that. It's like I wanted to ask, how is the Pope allocated? You would think he would have a long time perspective, although truth be told, church has

done pretty well on its own. No, and I don't think he's he is any errors that he needs to leave money too. So it's a whole it's a very different sort of sort of investment process. So there is a list of stuff I blew through during the broadcast portion that I that I want to come come back to before I get to my favorite UM questions. We did not talk about the book Ben Bernanke's Fed, and

I also, I know I'm gonna get hate mail. One of the questions I was going to ask, is, hey, you're describing what the FED did, right, what did the FED do wrong? So let me let me ask you that. So over the past couple of decades, what was it that the FED did wrong? Are they to blame in some degree for the eight o nine financial crisis? Well, I think when you look at the causes of the crisis, you have to kind of spread the blame pretty widely.

I mean, Um, for one thing, we all know that the regulatory structure of the US financial system was out of date and it left over patchwork of of regulatory agencies and regulations, and so it really needed reform, but it's kind of a lack of political will to do that. We also know that there is pressure from both parties to promote growth in home ownership to the point where there's kind of a loss of sight of you know, whether it really it's appropriate for people with weak credit

and low incomes to to own real estate. I mean, and so there's a bit of a political push in that direction. I've been I've been pushing back on that argument because when you do, when you do the deep dive into warehouses went bad and what sort of mortgages blew up, it wasn't necessarily I mean, we know countrywide had issues but it wasn't necessarily the City banks, Bank America, those sort of of more Wells Fargo underwriters. There was

this huge swath of private sector banks. Alan Greenspan called them the financial innovators, and they ultimately ended up going belly up. By the hundreds, there was a website called mL implode mortgage lend their implode dot com. I think by the time everything was done, it was almost five specific underwriters who had come about in order to create

more just to sell the security. And I think that one of the core problems with the way the mortgage market was regulated before the crisis was that there are competitive regulators, right, so if you were you know, you had a state and federal regulators covering different kinds of institutions that were lending into the market, and so it

was a bit of a race to the bottom. You know, whoever was the loosest lender got the business right and so m the inability to have a more integrated, clear ownership of this sector and you know, who's really regulating and what are sensible rules I think was a big part of the problem. And so I think that the the FED shared blame with every other regulator, not really aggress of the addressing what was aggressive lending practices. But it's hard to describe blame when you have a system

that was so poorly put together to begin with. Um, you know, I a portion blame to a lot of a lot of entities, both private sector and government. But I remember looking at all those private sector mortgage writers, primarily located in California, And I have friends who insist on blaming one party or the other, like two groups. It was the Democrats, it was Republicans, and really you can point to all sorts of things that each party

did wrong. And when you look in California, that was a Democratic legislature that basically said, why do we want to thwart growth? This is a booming financial sector that's giving mortgages to people who might not have otherwise had it. At the same time, you had President Bush and the Office of o c See telling state regulators, we're going to federally prompt you and eliminate your predatory lending rules

because they conflict with the federal ones. So it was the Democrats and the Republicans just growth in any cost, and we know what the cost ended up being. Yeah, And I think that I mean the lesson of all this is what is that we know that in the in the housing market, it's important that the borrow have skin in the game, that they have a real down payment, and that they have adequate ability to repay the mortgage

based on a sensible estimation their income flow. So those are two of the very basic things that got lost

along the way, and and that is the key. I mean, if you have the reason the mortgage crisis was so so virulent is because with all, because you really didn't need to lose that much money in the value of your house before you're underwater, because there's almost no down payment, in which case that distressed property becomes a sale, and in every sale creates new distress properties by creating over

supply into the market. So it's critical. I think that I think that the core lesson to me in terms of regulate the mortgage market is you need down payments and you need effective income document. Didn't we at one time require a twenty or down payment and if you didn't have it, you had to take out more pm I insurance. Yeah. The the to me, the the uh UM. In the ninety nineties, you had a fairly sensible mortgage

landing practice. When I bought my house in in uh uh the early nineties, and we put down and we really you know, had to scrape and scrim to get the money together. And uh that meant that that it would have taken a horrendous housing market for us to be underwater in our house. And so that was a

very kind of safe uh mortgage to have in play. Um. But when we went to the more exotic mortgages were almost no money down, lack of adequate income documentation, all that then that we know, we're kind of getting over our skis at that. I love that expression of our skis. I remember the first time I started reading about piggyback mortgages. We were borrowing from one bank as your primary mortgage

and from another bank as a down payment. And you would think, well, that's ridiculous, until the hundred loan to value mortgages came along. So the idea was you could borrow the whole cost of the house plus another to do renovations to make it worth that much more. How could those ever, ever, Well yeah right, yeah, And that that's the story of that period and and my my feeling in real time as is writing about as an economist, was that in the early two thousands, I felt okay

about the mortgage market. You know, it was getting more aggressive, but it hadn't reached these very extraordinary levels. In two thousand four and two thousand five, you had this very rapid escalation of exotic mortgages with with very aggressive features to them. And that's what kind of set a bell off in my own head worrying about the housing market. Of course, I don't think any one in the business

understood the extent. Well, if you understood housing, you might not have understood the whole CDs market and the how the credit to fault swaps were built on top of the securitized CDO market. You really it took a while before all those different pieces of the puzzle came into focus. Since you're a global guy, let's let's ask you about our neighbor to the north. During our housing boom and bust,

it looked like the Canadians came out pretty well. They have a very aggressive regulatory scheme and just a handful of money center thanks. But after our boom and bust, it's looked like they just kept going, what's happening in well? You know, so I mean this is again I mean the problem of course with we know that financial cycles over time is that uh, you know, people learn their lesson and they're very cautious and then they kind of

overtime unlearned the lesson. So years or so before everybody forget Yeah, and so in the case of when the U S went into its uh it's subprime mortgage problem, Canadians had learned their lesson of their past housing crisis. So, um, I don't think we're seeing anything in in Canada that that compares to what happened in the US at the peak of the crisis. Though, I think that Canada, um, you know, is has you know, has things under control there.

So if memory serves, they lowered their down payment amount that you have to have mortgage insurance. I'm doing this off the top of my head. It was twenty or twenty to fifteen percent. If you put less than fifteen percent down you needed p M I insurance. Is are you familiar to all with that? But I remember a few years ago that was a big change and people were up in arms about it, and I'm like, wait,

we don't we no longer have a mortgage. It doesn't seem we have that mortgage insurance requirement that the US used to and I'm I'm gonna have to look into look into that and see, um why that went why and when that went away. So so let me shift gears a little bit and talk to you, UM about yield curve. I know this is an area you're you're very interested in. Um. Why is the yield curve so important?

What does it mean to looking at future economic activity? Well, I mean, remember, the yield curve is telling you what people is in effect telling you what people expect to happen to interest rates over the say, if you're comparing one year yields to ten year the tenure yield is higher than the one year yield, it must mean that

investors expect interest rates to go higher. Right. One way to think about it as a rough approximation is the average one year yield every year for the next ten years should roughly equal the current tenure yield, and then that way you're getting the same investment return UM. And so the yelkurve right now is pretty steep, and so the yelkurve is telling us UM that the markets are

pretty comfortable. The idea of the FED is going to be raising interest rates that you know, ten years from now, we're gonna have an interest rate of above two percent UM and UM. Now it's not saying that they're gonna be high interest rates because we're going from zero UM, but it's a it is a it is a bit of a vote of confidence in that you know, we're not stuck forever at zero. I mean, there are people out there say the Fed, it's one and done. The

Fed can't can't hike rates. They're never going to get close to the three four percent they would hope they would get to UM and uh. I think the markets are saying, well, we we think there. We don't think we'll get all the way to that level, but we do think the Fed will be able to hike. So so there is a contingent of Fed haters out there who who some feel that there shouldn't be a federal Reserve in the first place. Others feel that if there's a FED, they should be a little handcuffed and should

only have small incremental tools. What is it that the Fed haters get wrong? Well, I mean, first of all, let's let's let's step back and see what's talking about. What what economists in general believe so. The University of Chicago has a poll they do periodically of forty top academic economists and one of the questions they asked them is whether it would be a good idea to go

back to the gold standard? Right right? And the answer they get is that they have zero of the forty advocate going back to the gold standard, and the vast majority strongly opposed the idea. And the reason is because we go back in time before the FED existed. Um, yes, we had low inflation, but we had a recession every three years, and the account and the financial markets are extremely unstable. So the FED we need some kind of

guiding hand in in monetary policy. It may you could argue about whether the FED should be more or less aggressive, but the idea of not having a central bank there, I think history suggests strongly it would be it would be a bad idea. I think the critics of the FED. UM. What I like about the FED, and in fact, why I worked there at the beginning of my career, is I really believe the leadership of the FED are technocrats.

You know, there are people who are have that job because they want to, you know, make the economy better, and I don't think that it's a remarkably non political institution um. And it's in one of the kind of you know, not only do economists almost all agree that you want um, you don't want to go back to the gold standard, but almost every commost degree you need an independent central bank. You don't want a politician the political system running your central bank. This is what has

gotten countries into serious trouble historically. I'd rather have a technocrat who might or might not be right on what that they're doing than have somebody with a political agenda running the FED. So so let's look at some of the folks who ran the FED. We could go back to Paul Volker, pretty uniformly looked at as one of the giants of the Federal Reserve. Do you share that

that belief? Well, I mean, you know, he's kind of like when you determine which presidents of the United States are the greatest presidents, it's actually the ones that were there during the war, right, It's people like people like one, well Lincoln gets both, yeah, but it's the ones who go through And Vulgar deserves credit as one of the best FED chairman ever because He stepped in at a time where it took a lot of courage for the FED to basically say, Okay, that's it. Inflations out of control.

We're going to cause a recession, but we don't care. What's what we have to do. We're not going to We're not going to admit it. But the reality is, we know that we're probably gonna be causing a recession here, and so we're gonna we're because up to that point, the FED had done half measures. Inflation was is a ratcheting process. Inflation go up, the Fed push it down a little bit, then I'll go up some more. And the FED never really got its arms around the problem.

And he came in UH in an incredibly tough political environment and and stuck to the policy and and and vanquished UH inflation. And so I think that, you know, because he was he did the right thing at an incredibly difficult time, you have to rank him as one of the top ever. And And so let's fast forward. How is Jenney yelling yelling doing what is she now barely two years in the job, not even yeah, well

you know, you look at it again. So you have to give high marks to her predecessor because because he you think about the the modern history of the US economy, you've got, you know, three big events that that where the central Bank had to really intervene. You had the Great Depression, where the Fed actually did a poor job and didn't really do its job of keeping a banking system going. Then you had the fighting of the inflation

by vulcar A a successful war there. And then you had Bernankey come in and say, listen, I'm not gonna listen to the critics. I'm gonna gonna focus on getting growth in the economy back. I'm not gonna listen to people who say I'm creating inflation and hyper inflation, right, all those predictions about that, that what he's doing, and so you have to put very high marks in him. For for Janet Yellen, it's more of a she's in a in a less dramatic position, She's making less important judgments.

She hasn't been faced with a kind of challenge. But but I'm I think that she's doing a good job. I think she was a good choice. Is off. She's a stay of course, sort of not not gonna undo what Bernan She's She's very much in his mold, no

question about it. Yeah, and then I would be remiss if I did not mention um the Federal Reserve chairman formally known as the Maestro emphasis formally Alan Greenspan saw his reputation go from the man who could do no wrong to the goat of the financial christ Yeah, and so um. I in my book I wrote about Bernaki had two chapters on green Span, because you can't really talk about his his uh you know and thank you

without talking about who he's replacing. The first chapter was about what Greenspan got right, in the second was about what he got wrong, which, yeah, well that this was before the crisis had really played out, so at the time, you know, your valuation of Greenspan would have been less negative.

But what I found striking is that the the problem that what what happened green Span is that this is partly because of the development frankly of business uh television, was that this cult of personality developed a chairman and he became the the face of of of business financial markets TV and so the the the exaggerated description of his powers of you know, forecasting and all that was

was way overdone. And what happened late in his career, as he made some mistakes, you know, such to me, the big mistake was taking rates down below two and keeping him there for three years. I think they were at one percent for over a year, and that kicked off the whole inflationary spiral. And and I think, so what I felt, so I to be you know, I think to be honest about I have to talk about what I wrote in real time, because hindsight is a

little bit unfair. So what I wrote in real time was I didn't understand why he felt so obliged to raise rates so carefully, you know, the gradualist approach, because what happened, you know, as you said, he they had lowered rates to very low levels and then they took such a long time to get them back to normal. They didn't they didn't create any financial restraint. I mean, they was like they weren't even hiking because they took all the shock out of it. The bond market rallied,

the equity market rallied. You had a massive expansion in the in cheap credit in the house market. And so that the mistake he made, I thought in real time, and you know, in hindsight, I thought, obviously the mistake looks much bigger. But in real time I thought, why are you being so gentle here? Why can't what is there a law against raising interest rates fifty basis points?

And and uh. The other thing that I didn't like about him in real time again, I don't want to be because I think that the that I, you know, would I have made similar mistakes. I didn't like the way he talked about the housing market at that time he was a cheerleader for the housing market, and that he should not have been doing that. He he gave speeches that suggested that risks housing are very low and um, and I and I can point back to pieces I wrote at the time where I said, listen, you know

it's not true. You know, Greenspan gave a speech where he said, um, that you know, real estate markets are inherently local. Uh, you know, they're determined by local conditions. So and it was an argument around there being Froth and that remembers Frost speech, Frost speech in the housing market.

But the argument was trying to make was that they won't all go up and down together, so they're not that risky, right because they've got moved in separate directions but you're not going to have Miami going straight up in California going straight down. No. Well, and and that was the problem is that we knew at the time

already that the credit availability had overextended. So these markets were all joined together by by mortgage, by the mortgage mark of very generous mortgage market, and um, a lot of irrational exuberans. So so that idea that somehow we could kind of work our way through this without any any kind of problem for the FED chairman to say that I didn't think was right. What are you saying

that was not very responsible? Is that what I'm here now, I'm saying that that, you know, um, it's kind of a job where if you don't you know, don't don't you don't want to at any time kind of be viewed as a cheerleader to the markets. And I think

that he ended up sounding like that. I don't think he was intentional, I think that, but he ended up sounding like So, so what about the infamous green span put Was there really such a thing or was it just the belief by traders that every time the market throws a hissy fit, Uncle Allen is there to to rescue. Yeah, Well, I think that um, there is, you know, and if there are, there's always a put from a central bank. But the question is what's the strike price? So is it?

Is it a deep out of the money emergency put or is it or is it ant? So green Span the complaint was, Hey, it's an at the money put and every time the market negative and that and that is a problem, right, that's a problem if you and I think that central bankers debate this all the time about when do you know? When do you step in? When do you react to the markets? Um? Do you?

And And the answer is that put needs to be priced, you know, pretty out of the money, and so that people don't get this sense that the central banks always going to rescue them and that that was the so having too generous to put. I think you could argue at times that that was one of the problems. Greenspan head that that makes a lot of sense. So so we've talked about Bernanke, green Span, yelling, and volker Um.

That's a pretty interesting run of people. I think folks are not nearly as familiar with the local district, federal reserve branch presidents. Um, who are these guys and how

important are they to the system. Well, the FIT is a really uh, almost bizarre structure because remember is created way back at the beginning of the last century, a hundred years ago, and it was designed to have checks and balances in the sense of not putting all the power in Washington and spreading out these presidents across the country. So there's almost a deliberate decentralization. Um. I think that the system works. Okay, I think that you get you

get very different views. You have some sent some of these reserve banks for the presidents of traditionally a hawk and very anti inflation. You know. The the obvious one might would be the Kansas City FED, where we've had a string of very hawkish presidents. Um. And then you have others who are are very dovish, you know, the Boston FED president has has been on the dovers side,

Charlie Evans in Chicago on the dovers side. And so I think that you I think that that's a healthy debate and I and UM, I think that the the the good thing about the FED, I think in the way the policy process works is that there's a it's a respectful group, right the FED. The chairman doesn't totally dominate the committee, but there's a sense of respect and coordination among them. So even with dissents and disagreements and all that, you end up with a sensibly debated conclusion.

I mean, the advantage of having a committee decision making is that committees make fewer mistakes than individuals. In this case, the committee maybe a little bigger than it would be optimally if you look at models of optimal sized committees. But having a committee is helpful because it avoids, um, you know, somebody who kind of just gets off on the wrong track and and and doesn't listen to enough voices.

I recall, here's a little FED trivia. I recall at one point in time green Span actually had exercised the right to raise the lower interest rates on his own

between meetings, and the FED ultimately rained that in. I want to say, there was an intromeding cut that seemed to really generate a lot of pushback amongst the Yeah, and I think if you look at the when Greenspan first came in, he was faced a pretty fractious committee, and I think over time, as his reputation built and he kind of took command of the committee, you probably had things go too far in the other direction with

the chairman kind of dominating too much. And I think one of the things that Bernanki did when he came in is he deliberately I think, came in to reduce the cult of personality around the chairman. Um. I mean remembered it when when Bernanki retired, he did not have he didn't go to Jackson Hole for his last meeting there because Bernecki didn't want you know, they kind of

sending off on a carpet kind of approach. He wanted to for the chairman is is obviously the most important member of the committee, and it's important of a strong person who can gather consensus together. But you don't want to have a structure decision making process where there's a complete control by one individual. And you know, he was chairman of the prince in Economics department. I am met gin.

That's a fairly I don't know if genteel is the right word because of academic politics, but I would imagine that's a pretty good preparatory for for being a FED chairman, sort of wrangling all those cats together. There's some of that, and but I think that the the the big difference. I mean, obviously, the FED is making decisions that have to be made quickly and aggressively, and so you um, and I think that there's that sense there and that's

why you need it. You need have a reasonably strong chairman. There are times in which you really have to move. So let's transition from government to private sector to Wall Street. You were at the New York FED for nine years and then you ended up at Barclays and JP Morgan and ultimately Lehman Brothers in Meryl. What was the transition like from being on the government side to the Wall

Street private sector. Well, I mean one of the things, as you discover immediately is that everything moves at a hundred miles an hour if you work on the street, um, you know, and the the the in at the FED. You know, I would do briefings before the fom C meeting. So I would brief our local president in New York before you got down to Washington to vote a monetary policy. I'd have a three or four weeks to get my presentation together right, and that would be in full time

right on Wall Street. You know, if something's happening you you you know, you got you know, two days to put it together. Not you know, if you're lucky and you have But the point is that, um, it's uh, it's the pacing of everything. It's the fact that you know you have to if you're gonna be successful on Wall Street is so especially on the South Side, you have to be um, we willing to change gears like that.

You know, something comes up, you're writing something, and suddenly you know it's interesting, but it's not really what everyone's focused on. Throw that out and start over again, because this is the question of the day and people want that need fast answers, and that that kind of ability to kind of first of all cover multiple topics and many different kinds of clients and switch gears quickly is

extremely important. So you went from a number of cell side shops um and institutional shops to a big bank America Merrill Lynch is a giant really more of a retail firm. What was that transition? Well, I think that the the I don't think it's a huge difference. Remember when I when I worked at at Lehman Brothers, who was working in the Obviously it's an investment bank and a lot of my time spent dealing with the trading

floors and with institutions and const institutional customers. Um, I'm primarily focused on the investment bank at b of A Merrill Lynch. The new part, which in some ways is fun, is the retail business. Right, So you do need to be able to go and give a dinner speech to high net worth individuals, you know, the big clients of our wealth management business. Um, you need to know how to de jargonize and kind of and have to two different speeches. You're giving one friendly one and a more

technical one. So, um, that ability to kind of switch gears, I think is the one kind of new challenge of moving to a place where you have a big retail business. And you were at Lehman Brothers for a good number of years. When when did you start with them? So I was there from uh from nine to the sinking of the ships, so for twelve years. Um, how did how did the company change over that period? Well, you had to have like a front row sea eat for one of the most fascinating in hindsight at the time.

It had to be absolutely well. Well, I mean so I god, you know, I've had the fortune and misfortune of being in front row for a number of wonderful things, pretty awful things. Well the nine eleven Um, you know, watching the planes fly into the building there, you know, so but um and uh and then being in the front row watching Lehman go under. Right. So Lehman was had been an investment bank, had had problems over the years.

When fold took over, Uh, it was a company that that was work in progress, kind of reviving itself, and he did a tryanus job of getting the firm back. Uh. There's some early scares around the long term capital jarred where you know, funding markets were really tell you two

very tight markets for a while there. But he kind of built this was his company that he built, and so you know, the bank went the Lehman went from being i would say, kind of a second tier to right up there just below the golden sacks of the world. So and so that was a tremendous accomplishment. And then of course I think that Lehman fell victim to something that all the investment banks were victim to. We just happened to be kind of at the wrong wrong place,

at the wrong tunel. Mortgage back bonds was them and bear Stearns. We were sectors. So you were right in the soup. We were in the soup, and you could argue that, you know, I'm sure their mistakes made all right, that could have avoided some of the pain. Uh. Well, the big one was turning Warren Buffett down, which I

think a lot of people forget. Buffett came along and made an offer to fund Lehman at terms that turned out to be more generous than what he gave Goldman later on when everything was much much for and Fold turned him down. And that was really, if you want to pick a fatal that might have snatched a defeat from the Joseph victory. Yeah, I mean I wonder whether you know, he just didn't want You know, this is kind of like a parent who doesn't want to admit

their kids not getting into Harvard, you know. I mean it's you know, the firm had big problems, as he said it, because of not just the residential but commercial real estate that was there and so and so the idea of cutting a deal where you sell assets at a huge discount probably was too much for him to stomach, But in hindsight it was a massive mistake. He also

strikes Now, I've never met the man. I've only read and seen what he said, but he strikes me as a guy that doesn't like to be told no. And I can't imagine his inner circle where it was coming up to him with papers and saying, hey, Dick, this is a mess. You have to do something about this. He doesn't doesn't strike me of having the temperament that he wants to be told, Hey, you have a real problem here, fix it. Yeah, I don't. I don't know what happened in meetings in there, but uh, you know,

Dick Fold was definitely a tough dude. And you know, and I'd say there are two things that stood out about one it was a tough dude, and the other was he you know, lived and breathed you know, Lehman Brothers. And that was he was in love with his company. This was his baby. And so of all the things you can say about him, it certainly, uh that that stood out, um, when you were there. Last question on Lehman, because I really don't want to re revisit this over

and over again. A year or so before everything hit the fan, were there any internal signs of anything or was it just hey, listen, the whole sector is emptying entering a challenging period and we just have to fight a way through this. I think that, UM, I mean the lead up to the crisis, it was pretty obvious, I think two people in the business that there was a domino effect going clearly when bear Stones went down, everybody looked around and said, who's most similar to bare

only answer was Lehman. Yeah, and so uh, anyway, you know, if you were if you were tuned into it, uh, you knew that every end of quarter earnings announcement was dangerous for all the investment banks and UM and it was a domino thing. It was like all of the investment banks had big problems. UM. But you know it's kind of like where was the market focus at the time, and so Lehman was in the crosshairs and um and UM.

So you could feel it. Um that the weekend before Lehman went under, UM, I was sitting down with my boss at the time. I was the chief he was economist and he was the global chiefs named Paul Shared and uh, Paulson had just announced that uh that there would be no government money for Paul Yeah, yeah, for Lehman, and so so uh, you know, m Paul says to me, well that they you know, they can't let Lehman go

under the financial markets collapse. And I said, but Paul, you know we may not be in our office on Monday. And uh in sure enough. I mean, um, it was. You could feel, you could feel the the the the how dangerous it was in real time. It was not at all surprised when the the the over the weekend, if they didn't have a deal, they were done. They were done. Yeah, that's amazing. So you mentioned, um, Paul, who was your bosson Lehman. Let me shift gears completely

and go to some of my favorite questions. Who were some of your early mentors? Yeah, I mean the people who kind of influenced me. I picked three names. You know, I read your questions ahead of time, so I've I've had to think through it. I think my oldest brother, because he's the guy in Chicago. I mean he and you know he he's uh, he's a He really embraced and loved economics. He was inspired by some of the

best professors ever. You know, people like Milton Friedman were there and stuff that was a seven Yankees at they did. And you look at all the Nobel Prizes that came out there. That was a great department. What did he end up doing well? He want to ended up getting an m b A and being uh in the in the hospital Finanza business so so he but he said didn't continue in economics. UM. My thesis advisor was a guy named Phil Keagan. Coincidentally, he's also a Chicago guy.

And the thing I like with Kagan is that he was at at a time where I, you know, a lot of professors didn't seem to kind of want to put out for their graduate student. He was there at Columbia kind of a guy who was quite willing to work with you. He was also somebody who kind of had a very sober, unbiased way of looking at at issues and things. So he was quite an inspiration. But the guy who really was what I find the most interesting is the guy who I think was best for

my career. It was a history professor I had in college. This history. He's a Russian history professor, and he hated the writing he was getting out of his students. Um and he so he decides to teach a writing class. UM and I took the writing class, and that class, i'd say of any I've never had a class that that did just made such a big difference in my

ability to do I learned to write. It was a practical it's a practical hands on every day, somebody gets their paper ripped apart in class, right down to the gory details. And you you know, it's kind of like you know you either you know you either you know you either survive you know. If you what doesn't kill you makes you strong kind of world. And so I came out of that knowing how to write, and that that I think is a very important part of what

we do. It's amazing what a significant skill set it is, and how often I encounter people who have either developed that skill or or have not. It could not agree more how significant that is. But it's it's one of the hardest things to teach. You know, it's really hard to teach because I mean and and uh, there's no way around it except to get It's kind of like the language immersion. You know, you can't learn a foreign language unless you immerse yourself from taking it once a

week doesn't work. I learned a long time ago. If you want to be a good writer, there are two things you have to do one right every day and to read really good writing, and that's you. It's just a it's a ground war. You have to grind it out and that's the only way to get I agree with that. Um. So let's talk about some investors. What investors may have influenced your thinking about the relationship between

the economy and markets. Well, I mean it's not I'm not really a guy who gets an instormation from from it gets his inspiration from investors. I mean they're there. What I have done over the years is that I find that, Um. It turns out in this job that being a macro economist is only part of it. You have to understand financial markets and how they work. And so over the years kind of working really closely with

people who cover credit, uh, the equity analysts. Um. Even today, you know we we in my own work work now we collaborate all the time with the analysts and the other parts of research. Um, because there's always some an angle that you didn't get. And uh So it's not

so much it's it's that part. It's it's kind of combining the strategy because you know, being in one of the things you that's I think very important to clients is they don't want economists that where the there's this kind of strict boundary line where you you make your FED call, your inflation calling, your growth call, but you never make the next step into what is So you need to be able to do that and that and and so there needs to actually be some overlap between

what the economists is doing, what the strategists are doing. Otherwise the clients not getting a full story. So that that that's what I have been very important. I've heard the same thing from Byron Ween and from Ed Hyman, all of whom said the classic mistake is that he was in an economic thesis but no applicability to markets. Yeah, and and what you write about and what you the questions you address, they have to be dictated by what

the market cares about at the moment. They can't be This is an interesting topic and I'd like to write about It has to be all driven by. What I want to do is say that clients or have a wrong idea about X. They're all obsessed about it. That's wrong. I'm going to explain why that's what I want to write about makes sense. Um, let's talk about books. I find myself fascinated by the reading list of people you know, our business. What what are some of your favorite fiction

or nonfiction? Finance or nonfinance. I don't care well for me. One of the things is that well written history I love. I mean, I just write, wrote, I just wrote. I just read um Lawrence in Arabia, hum and um a couple of years. No, No, this is the recent recent who's the author, actually, I can't remember at the top of my head. Lawrence in Arabia, not Lawrence of Arabia.

And the reason he calls it Lawrence and Arabias because you know, he's an how Sider coming into Um and the book is fascinating because it gives you this sense of the the underlying history of the Middle East and you start to understand, um, why the region is such a mess, right because he came in there in the middle of this it's a tribal place and the end and the and some of the things that the the

imperial powers did there were quite bad. You know. The title is Lawrence in Arabia, Ward, Deceit, Imperial Folly and the Making of the Modern Middle East by Scott Anderson. Scott Anderson was really interesting. It's a good book. The book I'm familiar with in that space is uh, Seven Pillars of Wisdom, Right, that's you know College, that's way way back when, right that I think that was what he wrote was what his version of events, which is interesting to kind of see the uh see the way

the Anderson kind of evaluates that. But so I love history. Uh, I've been reading since I was a kid. And give me another title? What else? What else stands out? Um? So I'm really terrible at remember your authors. So Atkinson's uh trilogy book on World War Two, the US in in Europe Um, Army at Don um um. Quite a

quite a powerful story. It's it tells you a lot about how what a what a mess, Uh, it was when the US entered Europe and you had a bunch of amateur generals basically trying to fight the West point history of World War Two. No, it would be Army at Don did Jolly Roger guns at night? What what are the other ones? The day of battle? The Door in Sicily and Italy. Yeah, that's one of the three

the greats who changed the course of British history. Oh, here it is the Liberation Trilogy triogy and then there's also UM, oh no, that's just isn't he just did the intro. I'll take a look at that. People always ask, uh, your guests mentioned a book, but I can't find it. So I always wanna always want to track that down. UM. The last couple of questions we have, so you've been in this industry for a good couple of years. What has most notably changed since you began in this kind

in this field? Um? I I would I would say that the big changes has been the regulation of financial markets and so it's been for remember that in reaction to a lot of scandals in the business, UM back in two thousand and all the stuff with the people writing emails that that did contradicted with their official publication.

On the show, talked quite bluntly and openly about Yeah, that all that stuff has uh turned it into a very heavily regulated business and uh um and uh you know, the good news is that you know it's working, um, and you don't get that kind of behavior. The bad news is that it's the level of paperwork and and that you have to go through is tremendous. And so from a day to day point of view, that's been a big change. I don't think that the business of

being an economists changed. It's always been in my mind, what I do is always about new questions come up and just being flexible about the way you address them and being ready to find new angles. It's not that I a particular model that I used for years it's not working. I've had to change my models. What's what's happened is you always have to change your models because

the models are never adequate. There's always something going on that that requires a more a more judgmental and subtle analysis than just putting a bunch of equations on a paper. So so, speaking of economics and an economists, if you had a millennial or someone coming right out of college now with an economics background and they came to you and said, I'm interesting in in I'm interested in pursuing a career in as an economist on Wall Street, what

sort of advice would you give that person? Well, I mean, first of all, you there, you did you have to be a cautionary note about the this is a shrinking business rank frankly, right, so you've had count going down and yeah, and and um you know kind of uh, you know, just a cost conscious world that we live in. Uh. Um And so it's a tough road. Um. And I think one thing I would say to people who've had economics training is that there are a lot of things

you can do with it. You don't have to become what I am, which is an economist working in an economics team. You could be a strategist, you can be portfolio manager. There are many things you can do economic. The great thing about economics is it's a discipline of the way you think about the world that makes it applicable to many things. So I when I tell people,

I often have UM. Uh, you know, kids send me emails asking advice about you know, who are coming out of college and stuff, and I always give them that advice. If if you if you are absolutely in love with economics, go get a PhD. Suffer through that. Um. If you're not absolutely in love with it, though PhD is a tough road to go, UM, then you probably want to, you know, to take more of a business school approach or something n unless you love economics. NBA is a better,

better round. I think it's a better route. I think it's more flexible. UM. But I think that um, you know, there's a lot of things you can do with an economics degree. I I've always wanted to just be an economist, and so to me, that was never an option. I major in economics, and I got to college, I went straight to my PhD program. I Uh, you know, UM went straight into working at the FED. There's never any

kind of I mean, I'm pretty boring personal, let's face it. Uh, I wouldn't say that, but you knew what you wanted to do, and I did. That's you know, there are lots of people who come out of college and say, now what you know? You never had that issue now and I And I'm pretty lucky too, because I think that the share I mean, when I arrived at college, you had about three hundred premed majors and two hundred

pre law mages. And of course by the end of college there are a lot fewer premed and pre law people because that was the easy path, was what you did when you didn't know what you want. Alright, I'm gonna go to law school and right, and and so I think that there's a lot of a lot of people had a big learning process, and you know, when you find a lot of kids come out of couege. You're not sure what they do. So a lot of people don't realize that to get a gig in radio

you actually need a legal degree. So that's why I want that route. Um. Our last question, and I asked this of everybody, and the answer is very dramatically. What is it that you know today about markets, about investing, about the economy that you wish you knew when you began thirty years or so ago. M hmm, that's a that's a yeah, I thought, will pauses, he freezes up. Um,

what what have I learned that I wish? It's not just what you learned, it's what would have been of huge help at the start of your career that ten or twenty years later you said, if only I knew twenty years ago. I think that the the I think that what you learn is about learning to kind of work in very high levels of uncertainty about exactly what you're looking at and knowing it's it's okay to be kind of lost for periods of time and to figure

it out. Um. I've always felt that what happens in the in the economy is that something you get, you get an event you figure out the right angle. And if you get it right, if you figure out what's really the issue and how it's going to play out, your forecast just follows and you become smart for a year. And so it's that finding that it's finding the right angle in things that to me was the thing that that makes you a good economist. And the other thing

is knowing when to capitulate. Oh, I didn't get the right admitting error and I got and and and the and maybe the lesson is that that I did learn was admitting errors is fine, sticking to wrong views in the face of the evidence that is wrong. But in minting airs, people respect that, especially if you're open and honest about it. You don't need to be right all the time. We all know that it's an art more than a science, and we get a lot of bad forecasts.

So it's it's knowing when to capitulate is another kind of key life lesson there even thank you so much for being so generous with your time. This is this has really been quite fascinating, and I'm really glad we had a chance to uh sit down and go over the stuff. We'll have to drag you to another one

of those dinners with less people, um this time. If you enjoyed this conversation, be sure and look up an Inch or down an inch on it tunes and you could see the full run of previous conversations we've had. Or or go to the blog and and click podcasts and you'll see the full run of all. I think we're up to eighty two or so of of these conversations.

I would be remiss if I did not thank my head of research, Mike Batnick, and my producer, uh Charlie Bohmer, and uh Taylor Riggs, my booker, and today Charlie is also my engineer. UH So thanks everybody for for helping put this together. I'm Barry Ridholts. You've been listening to Masters in Business on Bloomberg Radio.