Richard Sylla on the Lowest Interest Rates in Recorded History

or published about. He is just simply a wealth of knowledge and has not only written long in depth books about broad topics, but also written in real time and reflected that knowledge in terms of actionable UH market activity. I found this to be not exactly a wonky conversation, but if you're at all interest did in interest rates, finance, history, central banks, things along those lines, I think you'll find this to be an absolutely fascinating chat. So, with no

further ado, my conversation with Professor Richard Silla. I'm Barry Ritolts. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Richard Silla. He is the professor emeritus of Economics and the former Henry Kaufman Professor of History, of Financial Institutions and Markets at New York University's Stern School of Business. He is the author of numerous books, including American Capital Markets, History of Interest Rates, and most recently,

Alexander Hamilton's on Finance, Credit and Debt. Professor Silla, Welcome to Bloomberg. Glad to be with you, Barry. So. I'm aware of of your your career and your contributions to the world of finance. I left out in our introduction that you are also currently chairman of the Museum of American Finance, which holds numerous events and has some really tremendous um exhibits, really fascinating exhibits. But let's start by discussing the history of markets. Why should any of us

be concerned about what took place in the past. Why should we study market history? Well, I think one of the main reasons for studying market history is that the things that happened in the past tend to repeat themselves, you know, things like financial crises. They we had one recently. It was kind of unexpected because we hadn't had one

for a long time. But then just studying the way the markets behaved in the past, their ups and downs, you can learn a bit about market cycles, and you know, I think an investor needs to know where we are sort of in a market cycle, because that's valuable information.

So can we trade on them, nation can we actually use in information to make risk reward decisions or does it just provide a framework for how we're conceptualizing market A couple of times in my career have made my own investment decisions, and then they turned out to have been right. Uh. Round two thousand, at the height of the dot com bubble, I and other people like Bob Seller thought the markets were tremendously overpriced, and I wrote

an article. I think I first gave it as a talk at the end of nine, wrote it up in two thousand. It was published in two thousand one, and I said there that, uh, when whenever the markets went up as much as they did peeking around, usually the next decade was a bad decade. And I wrote that in two thousand one, and I made a forecast just by assuming returns would be real returns with zero that

you know, what would happen to returns? And it turned out, you know, I actually drew a picture of it, and it turned out that what actually happened from two thousand to two thousand sort of mimbick pretty much what I did. Uh, then in two thousand nine, Uh, we're actually probably a year later, two thousand ten or eleven. For the same reason, after you have this big decline of a decade or so, market history told me that the next decade after that

is usually better. So I made a prediction that you know, we would have a pretty good decade from two thousand ten to two thousand twenty, and uh, that's pretty much come to pass two. So it sounds like you're not actively involved in I certainly won't call it day trading, but day to day, week the week sort of noisy market moves. You're looking at long arcs of history and decade long periods of mean regression from when stocks are

either very pricy you're very cheap. Precisely, I would say that, both in terms of interest rates and in terms of stock market returns, there are kind of longer cycles, and you know, nobody can predict exactly what's going to happen.

They aren't exactly a decade, but in my view, uh, you could tell that stocks were a bargain around two thousand nine, ten eleven, just as you could tell they were not a bargain around n and so what you want to do, since you can never predict when markets will turn, when you think stocks are not a bargain, you probably ought to raise some cash and be ready

for you have some cash when the markets fall. When a Wall Street has a sale, I like to call it, at the same time, then when everyone else is depressed like they were in two thousand nine and ten, Uh, that's when Wall Streets having a sale, that's a good time to buy that. I think this is what history

shows you. Uh. Some people call this market timing, uh, but I view it as in some sense it is in a long term since market timing, But I think market timers usually thinking much shorter terms, like you know, I'm going to ride this current wave. You're raising a fascinating issue that I'm very much enamored with. And that's when everybody is very enthusiastic about stocks and they seem to get pricey. It's not easy to avoid getting swept up in that mania. And you mentioned two thousand nine

two people were extremely negative on stocks. How do you avoid allowing the emotional state of the crowd to affect you, meaning, how can you buy when everyone hates stocks and they're cheap and lighten up when everybody loves stocks and they're very expensive. Well, it requires a certain amount of discipline, and I think that's what an investor really has to have. Discipline. Don't be swept up by the latest manias or uh

or depressions. You know that people go from being euphoric to being depressed, and usually when they're euphoric, that's the time to sell. When they're depressed, it's a good time to buy. In some sense, it's a contrarian strategy, but I think anyone who studies long term market cycles would

say it's the right strategy to have. So after the O nine bottom, for I remember, even in October of two thousand nine, I think the markets had bounced like thirty or off the lows, and we heard people saying, listen, this is too far, too fast. Markets really need some time to digest this. And I don't know, three or four years later, people were still more or less saying the same thing, This is too fast, off the lows,

this is too negative. So it's one thing when stocks were fairly inexpensive in oh nine, how do you sequester that sort of noise two or three years later, when stocks weren't terribly expensive, but they also weren't terribly cheap. I think that's where the history comes in that. I think if you realize that markets tend to trend for you know, ten or fifteen years in a certain direction, and you know, you can kind of tell where you are.

I mean you I could tell in two thousand nine and ten that the markets were at one of their low points of all of US history for two years of market has and so what I would say when the markets bounced up a little bit, well, that was an encouraging sign. I know. I give some talks to groups around two thousand ten and eleven, and I was pretty optimistic about the market, and people are shaking their heads and say, you know, you, you you seem to

be much too optimistic. We're still pessimistic. So I think it's that long term view that uh, you know, it's not day trading. It's not even trading a little jumps and ups and downs of the market. It's really taking the long term view and saying, if you buy stocks at where they were in two thousand nine, ten, eleven, ten years later, you're likely to be pretty happy. Let's talk a little bit about interest rates, and I have to bring up a quote of yours that just is

so fascinating. Quote. The rates we've had in recent years, including right now, are the lowest in history. The history of interest rates traces back to the Code of Hammurabie, babylon civilization, Greek and Roman civilization, the Middle Ages, the Redness, and the early modern history right up to the present. I can assure listeners that the rates they are experiencing right now are the lowest in human history. That's fascinating.

Are we really at thousand year lows, two thousand year lows, and in interest rates closer to three thousand year lows? That is, in all of recorded history, rates never got to be quite as low as they have been in recent years. See if the Romans knew about quantitative easing, they'd still be running the world. Perhaps that's possible. So so let's discuss interest rates um and put them into

a little bit of context. First, the obvious question, why are interest rates so far away from their traditional averages? I it just seems like this is an unprecedented era of low rates. Well, it is an unprecedented era. I would say the main reason rates have been as low as they as they've been in recent years is the financial crisis of two thousand seven to nine, I call it. It started it in two thousand seven and kind of peeked out after the Lehman failure and continued into two

thousand nine. Went unemployment. We had a great recession, you know, and intentions and unemployment. Uh. And it was the response of the monetary authorities to that, basically to buy up a lot of financial assets and uh, balance sheets of central banks doubled, tripled, quadrupled. And I think it was that these massive purchases of securities some call it quantitative easy that basically drove interest rates to very low levels. And the central banks did that because they wanted to

bring us back from the depths of the crisis. And they succeeded, But they only succeeded after keeping interest rates at very low levels for a long time, the lowest levels in human history. If I recall, after the dot com crash in two thousand and then the recession that lasted from March of o one to um October of that year, Alan Greenspan had taken rates down not quite to zero, but they were under two percent for a couple of years, and they were at one percent for

at least a year. How significant was that era of interest rates to what came afterwards? Well, you know, Barry, I wrote the last edition of the History of Interest Rates, updating it in two thousand four and five. I think it was published in two thousand five. And I was working on it in two thousand four, and at that time I thought that maybe we had reached the low event the interest rate market. And you mentioned the recession

of two thousand one. Green Spans FED responded to that by driving their policy rate down to as low as one percent. I think I've been two thousand two and two thousand, two thousand three. Uh, we had a Federal Reserve policy rate of about one percent, and uh. Then the FED began raising in two thousand four, the middle of two thousand four, and I thought, well, maybe two

thousand three, I can even give you a month. The the tenure bond got to three point three three percent in May of two thousand three, and I was updating the book a year later, and I said, well, you know, rates have come up, and now the FETE is raising, so maybe that may have two thousand three is a low. Today we laugh when we say the tenure bond at three point three three percent, we haven't seen that for

quite a while. Uh it's about two point eight percent right now, and that's up from less than two percent. Uh So I think, uh that then I thought that, well, we turned the corner. What I couldn't foresee in two thousand four and five, and I don't think anybody else foresaw it either, was that we were going to have this financial crisis starting in two thousand seven th eighty. Maybe I should have paid more attention to what was going on in the mortgage market, but I didn't foresee

the crisis. Lots of people saw parts of it. Very very few people managed to see the whole overall collapse coming, certainly not with any degree of successful time. And some people during that era were saying, well, these low rates are are a function of the cash glut we have. China has a ton of cash. That's what's driving rates down. What what's your your view on that? Well that Ben Bernankey, I think thought that there was a glut of savings in the world, and that was one of the reasons,

you know, this is before the financial crisis. Why we're rates solo. Actually, when the FED was raising starting in two thousand four, you know, from two thousand four, middle of two thousand four up to two thousand six, the Federal Reserve raised its policy rate twenty five basis points at every meeting, and so we were up from one percent where we started up to between five and six

percent a couple of years later. And uh, they were hoping that, you know, that longer term interest rates would would respond to that, but they were surprised when they raised the short term rates, but the long rates didn't really go up very much. And that's when Bernanke coined this glut of savings in the world, that there were just such a demand for safe government bonds that despite the FED raising short term interest rates, the long term

rates didn't move much at all. Greenspan called it the conundrum. Conundrum. So, I've heard the phrase recently normalizing interest rates. The FED isn't merely raising rates, but they're getting off an emergency footing and moving back towards normalization. What what are your views on that? Well, I think, you know, I think that's what they're trying to do. And from my historian's perspective, I would sort of say that, you know, people would say, well, what is a normal rate? How far do we have

to go to get to a normal rate? And when I was just a kid in the nineteen fifties, the FED was normalizing interest rates. The interest rates had become very low in World War two, partly because the FED was enlicited in the war effort and given the job of pegging government bonds. It was two and a half percent on a long term bond and three eighths of

one percent on treasury bills. And after the war, the FED maintained those that pegging for a while because the Secretary of the Treasury wanted to minimize the interest cost of the national debt. But then the FED said, if

we keep doing this, we're going to cause inflation. So in nineteen fifty one, the FED was given its freedom to normalize basically, and over the course of the nineteen fifties, those very low rates that came along with World War two raised gradually rose, and by the end of the fifties they were up where you got like four and a quarter four and a half percent on a government bond.

Maybe the late fifties early sixties, and I would say from a long term perspective, that's something like that, you know, between four and five percent on a long term government bond and maybe you know two to two to four percent on shorter term stuff. That's sort of normal rates. So that's what I'm thinking the FED is doing now, you know, maybe something like the nineteen fifties, where they'll

gradually increase rates until we get to normal. And I think normal is four to five percent on a government bond long term and maybe two to four percent on short term stuff. Let's talk a little bit about background. You have some really interesting history. You studied for a time at the Indian Statistical Institute at Calcutta. Tell us about that, well, I was that was after my undergraduate education at Harvard, and I was a fairly good student

at Harvard. What did you study undergrad I studied economics. I was one of two people in Harvard's class in nineteen sixty two who in nineteen fifty eight they wanted to say they were going to major in economics, two out of eleven hundred. By the time we graduated, something like a quarter to a third of the class major to economics. So I knew before I got to Harvard that I wanted to study economics, but that wasn't taught

so much in high school in the nineteen fifties. And so, uh you know, I and one other person at the Harvard's eleven class that we want a major in economics. And four years later, about a quarter of the class majored in economics. So you also got a master's at Harvard and a doctorate. That was after my tour of duty in India. So let's let's go back to India. What what made you say? I know, I'll go halfway

across the world. I was lucky enough to get a traveling fellowship or scholarship after I graduated from Harvard, where I could go any place in the world and study for a year. It was financing for a year. And what I did was the chose India because it was halfway around the world. And I had a class from Reinhold Neiber, the famous theologian, taught a class like an Emerging Markets when I was a senior in Harvard, and I took the class from Reverend Reinhold Neiber and he

got me interested in India. Uh So, the combination of being awarded this fellowship and having learned something about India made me choose India to spend my year away. This is xtree nineteen sixty two sixty three. That's when I was at the Indian Statistical Institute in Calcutta. So what was Calcutta like in the early sixties, because even today it's a fairly is frenetic the right word, A fairly frenetic country with enormous challenges facing it, but some tremendous

um assets as well. What was cal cuttle like in nineteen sixty two? It was very interesting for a young man, I thought it was. It was an eye opener in

a way. You know. They would say, and I saw this, they would say that a hundred thousand people just slept on the pavement every night, and that was the poor man's air conditioning, because India can be kind of hot, but the pavement is kind of cool, and so people would, you know, get away from the heat by just getting down and bedding down on the concrete because it was

a little cooler than the air around them. Literally, a hundred thousand people on the streets and Calcutta of course had millions of people, but you know, Basically, India is a country that's like one third the size of the United States, but has about four times as many people. So that that put those two together, you've got a country that's about twelve times the density of population that we have in the United States. Wow. So, so you're

studying at the Indian Statistical Institute. What did you learn? Well, I studied, uh, you know, economics and uh finance and these people were statistical institute, So I got some econometric training there. Uh. I don't remember the details of what I study, but I do remember meeting a famous British scientist named JBS Haldane who had kind of gotten fed up with Britain and moved to India and war Indian clothes,

you know, a dote and all that. You know. He was one of the great scientists of the first half of the twentieth century. So I got to know him and that was kind of a lot of fun to get his perspectives on the world. So did you know back then you wanted to go into academia. And to put a little context for this, you've been at n y U for just about thirty years. Since before that,

you you taught at a few other schools. How how conscious so were you of the lure of academia back then, Well, I think I was kind of Remember the late fifties and early sixties were a great time to be in an American university because we were worried about the Russians and Sputnik and so the government was putting a lot

of money into financing higher education. And so any young person in the late fifties early sixties thinking about a career academia would look pretty good because of all this, uh interests of the government and beefing up our intellectual talents and so. But so I, as I mentioned, I wanted to major in economics before I got to Harvard, and I was My interest in economics was kindled even

more at Harvard. And after taking this year off, or even before I went out to India, I thought, I want to come back and get a PhD. The only question was where, And Harvard let me in. And uh, you know, there's always a family thing to My wife wanted to study the She was one year after me in college, but she wanted to go to grad school in the history of science, and Harvard was really good in that. So your wife is studying the history of science.

Did that influence you to move from economics to the history of finance? Not so much. I think the how did I go from being an economist to becoming an economic and financial historian? And that's where a particular influential mentor comes in. Harvard at that time had an economic historian named Alexander Gershenkron who was a born in Russia. But he, you know, he was like the first half

of the twentieth century. His father was a capitalist, so he had to leave Russia when he was a teenager in nineteen seventeen and they went to Austria, and so he his formative views were in Austria. But then Hitler came to power, so he had to leave Europe and came to America. UH. People knew that he was a great scholar, so he got a job teaching at night at Berkeley. UH. In the daytime, he worked in the

shipyards building liberty ships. And he knew twenty different languages, and so people got to you know, said to anybody with that talent, we need him to come to Washington and the war and help us translate documents. So he went to Washington and the Washington. He met Harvard professors who said, this guy is really smart and a good economic historian. So pretty soon by the late nineteen forties he come to Harvard as the professor of economic history,

and I had him. I sat in on his graduate class as an undergrad, but then I had to take the class as a graduate student because every Harvard PhD had to study economic history in those days. Unfortunately that's not true anymore. But he was such a you know, interesting lecturer and had this wealth of knowledge. And what he persuaded me is that you can study all the economics you want. You can be a money in banking economists,

you can be a public finance economists. Those were the fields I was thinking of, but you can apply them to history. And I decided that that was really interesting, to apply the tools of economics to understand history better. So he's the one that made me, uh, move into economic and financial history. Fascinating. Let's talk a little bit

about your most recent book. You've You've written a previous book on Alexander Hamilton's, The Illustrated Alexander Hamilton's, But this month you have a new book out called alexand Uder Hamilton's on finance, credit and debt. What can Hamilton's teach us today on such weighty topics as credit and debt. Well, Hamilton's faced many of the issues we face today, you know, a large national debt that has to be managed. In his case, it was the debt that was left over

from the American Revolution. And uh, it'll seems strange to Americans today, but after the American Revolution, the national government, which was just Congress, did not have its own revenues. It had to ask the states for revenues, sort of like a United Fund approach to finance. Let's let's break that down a little bit. So at the time, there's no federal Reserve Bank, there's no power of taxation with

the federal government. So hat in hand they go to the thirteen former colonies now states and say, hey, we need to pay for our revolutionary war, right and the states basically said, uh, we have our own problems. We can't really contribute very much the federal government. So in the seventeen eighties, after the revolution is over and Britain has recognized America's independence, the national government did not have the money it needed to pay the interest on its debt,

much less the principle. Basically, the United States was like a country in default on its debts. It borrowed a lot of money and could not pay the interest from who who who? Obviously not Japan and China back then who were the creditors to the US while we were throwing Britain. The largest part of the debt was financed by Americans. You know, the bonds were sold to lots of merchants bought the debt, and in some cases the debt was issued as io used to soldiers and suppliers.

You know that that the government didn't really have the revenue well while the war was going on to pay for what it needed, and so it would take things actually confiscate goods but give people a receipt saying, you know, when when Congress gets around to it, you'll be paid this. So some of the debt was uh, not exactly arm's length transaction. It was, you know, the the situation of the American army was so desperate that they just sometimes just had to confiscate goods from Americans to leave a

note behind those notes that were left behind. But in some cases they sold bonds to people. So the great majority of the debt was Americans were financing it themselves, but about twelve million dollars, which was about maybe a fifth of the debt, was borrowed from people overseas. French, the French government, the King of France basically lent Americans a lot. We we should remember and these some of those loans, were absolutely crucial to find getting supplies that

our armies needed to win our independence. The the enemy of my enemy is my friend, essentially exactly. That's a point that Hamilton's had to teach Jefferson. Jefferson thought, because France had lent us money, they were really nice people, and since the Brits had fought against us, they were bad people. And Hamilton's had to persuade him, No, France didn't lend us money because they're nice people. It was in their interest to do it because Britain was their

great rival. So in the new book on on Hamilton's, let's let's get into some more details. What what is the Hamiltonian perspective on on the ability to tax the population and the ability for a government to um developed

credit and issued debt in order to fund its ongoing operations. Well, one of the key aspects of the United States Constitution, which Hamilton's was one of the spearheads for in the seventeen eighties, you know, he was a delegate to the convention, was to get the national government, the new federal government, to have its own revenue, and the constitution allowed that. And then Hamilton is appointed the first Treasury Secretary, and he wants to restore or really established the public credit

of the United States. So he basically restructures the U s national debt into the modern treasury bond market with you know, three different new securities, and then he uses the revenues that are coming in, mostly from customs duty, to pay the interest on that debt, and very quickly in the early seventeen nineties, he turns the sort of junk bonds of the seventeen eighties into prime government bonds that are but purchased not only by Americans but by

foreign investors as well. So Hamilton's basically established his public credit. But of course he did a lot more. He found at the first Central Bank, he defined the US dollar in terms of gold and silver. And part of his plan I think was, you know, if he creates these new securities, government bonds and stock in the bank in the United States. Uh, capital markets will be established to

trade these securities. The New York Stock Exchange, we know, is established under the Buttonwood Tree in May seventeen ninety two. That's because the brokers needed a better trading system because of all the new securities that were being traded. So the securities markets are a result of Hamilton's policies and the states. You know, he establishes the Bank of the United States and says, the US government's going to earn

a profit by investing in it. Uh. State governments then say, well, we can start a lot of banks too, and maybe take a position in them and earn some money. So we then have a banking system. Uh. And the Bank in the United States was a very large corporation for its time, and so that encouraged the state governments to establish more American corporations. And in my career, I've studied a lot of these things in terms of the numbers, and you you just see that, you know, the number

of corporations rises rapidly in the seventeen nineties. The states are establishing more banks. Uh. This is Hamilton's basically modernized our finances. And I think the biographers of Hamilton's in general don't recognize this as perhaps as greatest achievement establishing

our modern financial system. So so we have financial markets that trace back to Hamilton's um the Federal Reserve, even though the Federal Reserve we know today dates back to is that nineteen bill was past the nineteen thirteen and the banks open in late nineteen fourteen. How does the current Federal reserve um relate to what Hamilton's conception of a central bank, uh could be or should be for that matter. Well, I called the Federal Reserve with my

historical perspective, the third Bank of the United States. That's because Hamilton's established the first bank of the United States in sevente and uh it lasted only for twenty years American politics got involved. Is it correct? That? And I'm vaguely remembering the research I did about a decade ago. The first two Federal reserve banks or central banks that were Federal reserve, like, they were each formed with a finite lifespan. It wasn't an in perpetuity. Is that? Is

that more or less right? Yeah? That is true that they were chartered for twenty years, and in general that was true of most corporations at that time. Even the Bank of England had a limitation on its charter. It had to come in and reapply to have its charter renewed every twenty years or some twenty thirty. It differed a little bit. But the banks of the United States were, you know, in keeping with the times when con has chartered them. That banking was kind of new in the

United States. They didn't know how it would work out. They just had this fellow Hamilton's saying it was going to work out well, and we really needed this. They weren't sure, so they put a twenty year limit on it, and that converted this into a political issue in eighteen eleven, uh, for variously political reasons. Basically, the bank was good economically,

but it had a tough time politically. Uh. Basically, the state banking interests wanted to get rid of it, and so they were successful by just one vote, you know, the vice President the United States had to say no to break the tie, and so the first bank went out of existence. Right. This was were they were. They competing with the state banks. Is that why there was um opposition to it or was it more of a

state's rights? There were there were. The Bank in the United States was much bigger than any of the state banks and had branches all over the country. One thing Hamilton's gave us right at the start was interstate banking, which we got away from later but we've brought back now. But basically, the Bank in the United States differed from the FED, and this sense it uh competed with the other banks. In other words, it was a private corporation

or owned by the government by private investors. It made loans just like any other bank did, so it was a competitor. And this may have been one of the problems that the state banks were much more numerous by eighteen eleven than they were in seventeen ninety one when

there were only three or four. And by eighteen eleven they said, gee, if we got rid of the Bank of the United States, we would get rid of a regulator, we would get rid of a competitor, and we would probably then have to take over the government's banking business.

So it was like a win win win situation. So the Bank in the United first bank the United States disappeared, But then we got into the War of eighteen twelve, when the bank might have really helped US, and it wasn't there, and so the bank's worst enemies in eighteen eleven, by eighteen fifteen and sixteen said we really needed a central bank, so they brought in the Second Bank of the United States, but it ran into twenty years later. It ran into too problem with the President Andrew Jackson,

who didn't like banks. And I think it was the same sort of politics as in eighteen eleven. Some people saw it in their interest to get rid of the second Bank in the United States. So we had two central banks early in our history, and we got rid of both of them. For seventy years, from say, eighteen thirty six to nineteen fourteen, we didn't have a central bank. But we had a big financial crisis in nineteen o seven, and it's just like the War of eighteen twelve persuaded

people that central banks might be good. The financial panic of nineteen o seven, by which time the US is the biggest economy in the world, is sort of embarrassing. And one way to get away from these panics is to start a new central bank. That's how we got the Federal Reserve. So so let's let's stay with this idea of the nineteen o seven panic, if if memory serves, and again I'm going to rely on you to correct me. We had the great earthquake in San Francisco in nineteen

o six, April nineteen o six. The huge amount of insurance money comes over to the US from Lloyd's of London and everywhere else in Europe that were also East Coast US too. There are a lot of big insurance companies in the East Coast US that I had to pay off for the San Francisco damage. So so all this money comes in and then the Bank of England raises rates in order to track capital back, and we're sort of unarmed. We don't have a central bank that has the ability to do that. Is that Is that

a fair descriptor? I think you're showing a good knowledge of financial history, Barry. It's a little dusty, it's a little but the idea that the San Francisco earthquake of April nineteen o six might have something to do with the financial panic in nineteen o seven was, you know,

a fairly recent finding of financial historians. And the mechanism was through the insurance payments, what the insurance claims for to fix up San Francisco led to a drain of gold out of England because a lot of those buildings were insured in England. It also led to a drain of gold out of the Eastern United States financial centers because they had insurance companies there too. Most of our big insurance companies were in the East coast, you know, Connecticut,

in York. And this movement of gold or money to the West coast US sort of tighten financial conditions in the US money markets and also the English money market. And then the Bank of England, you know, said well, you know, the gold is leaving, so we better raise interest rates. And so that's the kind of backdrop for money is tight in nineteen o seven, and then of course there's always a trigger to a panic. There was some wild speculation going on in copper stocks, and the

shadow banks at that time were called trust companies. The trust companies were involved and as shadow banks and financing some of the speculation and copper stocks. One of the copper speculators failed and that trigger to run on the trust companies. But it was the backdrop of it was financial conditions were tight anyway, and then you had a sort of bankruptcy and uh implication of trust companies as being involved, so people rushed on the trust companies and

took their money out. And that's what the fining panic. Last financial panic question. Go back the decades before the formation in the Federal Reserve and the nineteen o seven panic, the half century before that, lots of panics and booms and bus It seems that the pre fed era was not exactly the most financially stable in the banking system.

All right, Well, we got rid of the Second Bank in the United States and eighteen thirty six there there hadn't been many financial crises in the US before that. Then right after the Second Bank disappeared in eighteen thirty six, we had the financial panic of eighteen thirty seven. Are related, one in eighteen thirty nine, we had one in eighteen fifty seven, one in eighteen seventy three, one in eighteen

eighty four, one eighteen ninety three, seven. Right. Uh. I've actually done some research on this, and what I can say is that financial panics were at least twice as frequent when we did not have a central bank as they have been when we had a central bank. Can you stick around a little bit, We'll keep the tape rolling and continue you chatting about all things uh financial panic.

I love to talk about this stuff. Certainly. We have been speaking with Professor Richard Silla of n y U Stern, author of numerous books, most recently Hambleton's on Debt, credit and Finance. If you enjoy this conversation, be sure and stick around for the podcast extras. Will we keep the tape rolling and continue discussing all things uh panic worthy? Be sure and check out my daily column. You can find that on Bloomberg View dot com. Follow me on

Twitter at rich Halts. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. I'm Barry Rihults. If you're listening to Masters in Business from Bloomberg Radio, welcome to the podcast. Professor. Thank you so much for doing this. I'm fascinated by the subjects you cover, and I'm just totally enamored in financial history. And you know, it couldn't be more true. Those who don't learn from history are um doomed to

repeat its mistakes. Uh. There's a great New Yorker cartoon about well. But those of us who do learn from history, we just get to be frustrated by everybody else who doesn't and and it's really true. Before we get to some of our favorite questions, I just have to ask you a few more things about UM market history and

central banks and interest rates, because they are so fascinating. Oh, there was a lot of criticism of the Federal Reserve following the financial crisis UM, some of which might have been deserved, some of which might have been a little over overwrought. We heard we heard complaints about here comes yper inflation, here comes the collapse of the dollar, none of which proved true in the decade that followed the crisis. What are we to make about the changing role of

the central bank? Do they have too much power? Have they broadened their mandate too much? Or are they more or less doing what they're supposed to be doing well. I think they have a considerable amount of power. And you know, central banking history, the checkered history of central banking in the U S shows that people get suspicious of concentrated financial power. So the Fed has to tend its political fences. But I think that they especially now

that we're in a fiat currency world. We're not the money isn't backed by gold and silver anymore. Uh. That increases the power of the central banks because they can create money with the stroke of a pen. And they decided to fight the financial crisis by creating a lot of new money, or maybe we should say a lot of new bank research, because you know, when you create a lot of money, people are going to think inflation

is right around the corner. But in fact, what happened the Federal Reserve created a lot of what we call high powered money or base money. Uh. But the banks didn't magnify that into a rapid growth of the money stock. They held the uh, the new money, the new the new base money basically as excess reserves. And so excess reserves went from bank reserves went from very low levels in the two thousand seven to extremely high levels in two thousand and twelve thirteen fourteen, And we didn't see

that really circulate through the velocity. Money didn't take up. It kind of sat there. More or less, we would have had the inflations on people forecast. Had the banks, you know, used the new base money the Federal Reserve gave them, they could have made a lot more loans, but they didn't do it. They held these reserves, and the FED was paying interest on them, so it was a kind of safe thing, risk free return. And uh so I think that this Why did the banks do

that well? I think the nineteen thirties the same thing happened in the nineteen thirties that a lot of new base money was created in the nineteen thirties, but the banks were sort of shell shocked from the experience of three, so they held a lot of excess reserves for a whole decade after the banking crisis of nine. Doesn't doesn't the pendulum always swing from They were way too loose in the early two thousand's, meaning the banks they would give here, can you fog amer a grade? Here's a

mortgage too. After the crisis, you have a good credit score, you have a decent income, you have good work history, and they still made people jump through all sorts of hoops to take to get credit sure. I had a personal experience of that. I bought a condo on Roosevelt Island here in New York in two thousand seven, and it was really easy in two thousand seven to get the financing for me to buy my condo on Roosevelt Island.

In two thousand nine or ten when I refinanced, I had to jump through all kinds of hoops to just get it refinanced, even though I had a good history of paying my mortgage payments by that time. So you're right, I mean two thousand and six and seven, it was very easy to get him argags along. Two thousand nine ten, it was much more difficult to refinance the same loan.

I had the exact same experience. We did a REFI I want to say, it was oh five, and I'll never forget this guy pulling into the driveway, flinging open the door, running into the house. My wife and I were sitting at the dining room table, sign signed initial initial here's a check for thirty thou hours. I apologize, I have a closing down the street, and he disappeared. If he was in the house for five minutes, and I want to say, it was like a three thousand

all mortgage. If it was he was there for five minutes, it was a long time. And I very vividly recall turned to my wife and saying, this can't be good. This was just a crazy It was like a giant red flag. We buy a house in could not have been further opposite from that experience where every month, as we're waiting to the closing, the bank is saying, what's this deposit. You've asked me this every month for six months. That's my direct deposit from the from work. It shows up,

here's the bank, it comes from. Here it is we We've discussed this every single month. It would ask I assume you had similar craziness when you bought the condo. After the Yes, you had to send in tax records, you had to send in new paycheck stubbs, you know, the one you sent three months earlier. Was that's right? And I think they had a checklist of things they had to do after the crisis, and it just meant

that it was much harder to get a loan. Uh. And of course the opposite side of that was when the Federal Reserve was giving the banks a lot of liquidity, the banks weren't making those loans, making it harder to get those loans, so they they access liquidity just stayed on the balance sheets of the banks as access reserves, and we didn't have the inflation some people forecast. So

what about the modern era of central bank transparency? Are I remember When I started as a trader a hundred years ago, you would find out what the central bank had done because interest rates would tick up or down and people would say, oh, the central bank must be buying or selling paper, and that was um what affected it. You had interpret what actually took place in the market via price action. Today, it seems every single step is telegraphed long in advance. Is that transparency a good thing

or a bad thing? Um? I think it's probably a good thing because the markets sort of get an advanced warning of what the FED is likely to do. And I think that that then you have more time. You know, you're not shocked when the Federal Reserve raises its policy rate and when you didn't expect it. So now they telegraph that they're probably going to have some rate increases, and I think then the markets are just more easily. So I think the transparency is probably a good thing.

Does the FED lose the ability or or lose the capability to shock markets or surprise markets, which is also a tool in their uh in their toolbox. Well, they I think they can still shock markets. They have the power to do that, like if they have an increase in rates or reduction in rates when it wasn't expected that. That's the whole thing that what what are people expecting? Uh?

You know, for example, expectations really matter. I think when uh, we're actually right around the tenth anniversary of bear Stearns failure, Uh, the government, the February Reserve came in, made a deal to transfer a lot of the assets to JP Morgan Chase, and I think then people said, well, okay, the FED is going to do that for bear Sterns. We don't have to worry about other banks like Lehman, because Lehman

was bigger than bear Sterns. So the markets expected that if Lehman got into trouble, the same thing would happen. The reason the crisis became so bad in two thousand eight after the Lehman failure is that the markets didn't expect it. So that was a big shock. So I think that the FED can still, you know, have an ability to change its rates or do something when the markets weren't expecting it, and then you would have this.

But I think the Fed, you know, you might have an adverse reaction, but I think the Fed sort of things, we really don't want to do that unless it's you know, absolutely necessary, let's telegraph what we're thinking. I've always wondered what the thinking was like with the FED taking a pass on Lehman Brothers and not rescuing them. And three things come up all the time, or at least when

you look at the details. You have the moral hazard argument, Well, if we rescue them, then bear Stearns is still a one off rescue Lehman. Hey, aren't we telegraphing to everybody else that if you run into trouble, we'll rescue you. Also. Uh. The second issue is um their books were just a mess between REPO one oh five and everything else, and they were really it was really hard to figure out what Lehman was genuinely worse. But the thing I always fantasize about I wish I would have been a fly

on the wall during that meeting. And a lot of people are unaware of this. Buffett Warren Buffett at Berkshire Hathaway offered five billion dollars fairly early in the process to Dick Fuld Lehman Brothers, and Fold thought Buffett was trying to steal Lehman and rejected him. Buffett got a much better deal, paying for a chunk of Goldman Sachs at much more distressed prices. But I always imagined that conversation amongst the Federal Reserve. Wait, he turned down Warren Buffett,

and now he's hat in hands is coming to us. Yeah, No, we're gonna we're gonna pass on this. You guys are gonna have to, uh, you're gonna have to hit the sidewalk on your own and just just leave us out of it. That that was how I always imagined that.

I think that's a fair statement that I think. You know, of course, the authorities, Hank Paulson, who was the set Treasury Secretary and Ben Bernankey was the head of the FETE at that time, claimed they didn't really have the authority to uh bail out Lehman, and yet they saved a I G. Which isn't even a bank. It's interess, right. I think they did have the authority, but uh, for

some reason they thought they didn't. Uh. But the moral hazard problem was there, and I think Hank Paulson actually made the decision not to help Lehman because it would send the proper moral hazard lesson. It turned out that he was probably wrong. That you know that triggered this tremendous crisis, and the FED had to mop up afterwards. Uh,

and the Treasury did too. UM. But yeah, I think that you know, you can there's moral hazard, and you know, if you really worried about moral hazard, you might shut down the insurance industry. The question that I always debate people with people about is UM was Lehman Brothers the trigger for the crisis or were they merely the first um mobile home in the park that the tornado happened

to take. They were certainly much bigger than bear Stunes they were, and I think you mentioned that their balance sheet was hard to figure out. I remember on the Friday before Lehman shutdown. On Monday, Lehman announced that there was no problem and that it you know, it had twenty or twenty billion of you know, capital after it paid its liabilities. But that was only because they overvalued some of the securities they had, and that was the

real problem. David Ironhorn of Hedge fun Guy in New York had predicted all year long that Lehman was in bad shape, and it turned out he was right. Yeah. He he had done a deep dive into the books and said they've wildly overstated their value and Barclay's, if memory serves, Barclay Capital went in, looked at the books, said we we can't do this now because we can't figure out with you liabilities are. We're happy to buy you out of bankruptcy after you file so we have

no liability. And ultimately that's what they ended up doing. Yeah, and you mentioned dick Fold too, who was a stern school graduate. I believe dick Fold he had a lot of his ego tied up and Lehman dollars and there was a deal that was on the you know, rumored that some Korean investors were gonna take over Lehman before the failure, and apparently they asked for, you know, conditions that dick Fold didn't want to accept because it would wouldn't have left him running the company. And so he

his own ego got involved there. And that's that's kind of what happens in the books you've written on Alexander Hamilton's. One of one of Hamilton's beliefs about currency and having a central bank was that currency should be backed by gold or silver. That ended forty years ago when Nixon took the US off of the gold standard. What was Hamilton's justification for that belief system and how do you

think he would look at the current state of the economy. Well, I think Hamilton's was a student of economic and financial history. That when you read his writings, which I do quite a lot, you see that he knew a lot of financial history when he was operating, and so one of the things he knew was that England had a strong currency anchored in gold, the Dutch Republic had a strong currency anchored in silver, and uh. So you know, Hamilton's

called gold and silver the monies of the world. And I think he wanted the US, which didn't have its own currency unit um uh, to be like the other countries of the world, and therefore we that would ease international trade and eliminate a lot of currency risk and things like that. So in his time, he was trying to bring the US up to the standard of that time.

What do you think he would look at carn currencies that aren't necessarily backed by by hard medals like that, Well, he would he would be skeptical of it in the sense that you know, he wrote that it's very easy to stamp numbers on paper and call it money. It's easy to see the stamping of paper. He said, it is very easy, and it offers a temptation to governments.

Uh he didn't. You know the banks of the United States were private corporations for the most part, because Hamilton's worried that if Congress controlled the Central Bank, it would just be printing money for Congress. That would never Yeah, but I think what Hamilton's probably, even though his policies led to it, Hamilton's couldn't possibly have foreseen the tremendous

economic growth of the last two less centuries. And when he digested the growth of the last two centuries, he might say, you know, really, gold and silver are fairly expensive ways to back money. Uh, you know, you work very hard to dig the gold and silver on the ground, refined it into bars and bury the guard bars back in the ground. And Lord Keynes made fun of that.

And I think Hamilton's would be a little more modern and say, if you can control what the central bank is going to do, it's a lot cheaper not to base your money on gold and silver. Makes sense. Let's jump to our favorite podcast questions. These are are the questions we ask all of our guests. Um you're a fairly well known person. Tell us something that most people don't know about your background. What most people don't know

about my background? Well, I think I had one great financial triumph around nine that most people don't know about. And here's the situation. I'm in North Carolina at the time, and my wife take me off to our church. Uh. So I'm attending this church and the church decides around ninety one to sell the parsonage and just pay a rent supplement to the minister. Uh. That gave him a bunch of capital to invest. And since I'm an economist from MC State going to church with my wife, they

asked me, what should you buy? You know what? What how should they invest that money? So in nineteen eighty one, Uh, this is a church. I advised them to put all the money into long term US government bonds, which were then yielding about fourteen or fifteen percent interest. And so they did that, and not only did they for fifteen or twenty years after that get this fifteen percent return on their money, but during the nineteen eighties, interest rates

came down and the bonds about doubled in value. So they were getting a tremendous return on this investment. They thought I was a genius, even though uh it was just an I was lucky with the timing. But here's what people don't know. They were so happy about what I had done and thought I was a genius that they made me the chairman of the board of trustees

of the church. And so most people don't know that one of my greatest triumphs in life was being the chairman of the board of trustees of a church of which I was not a member. That's very, very funny. Tell us about some of your early mentors. You mentioned one at Harvard. Who who were the people who affected your view of economics? Well, I got interested in economics and high school and economics was not a subject in the late nineteen fifties that was typically taught in high school.

So I have to give a shout out to my high school economics teacher. His name was Ralph Schmidt. I used to keep up with him, but I haven't been in touch with him in recent years, and I'm not even sure he's still alive. I hope. So Ralph Schmidt was taught a really college like course in economics while I was a senior in high school, and that just got me. We read things like Robert Heilbrouner's Worldly Philosopherers

and but a real good economic textbook as well. And I knew all about Paul Samuelson and Milton Friedman and people like that while I was in high school. So there was that high school teacher that kindled my interest in economics. And it's never left, you know, now it's sixty seventy years later. I'm still interested in it. Then and I mentioned, uh, well, I should talk about college because Gershon Crime, my PhD advisor, h came later, but in while I was in college that Harvard had a

couple of professors named Otto Eckstein and Seymour Harris. Otto Eckstein later on founded Data Resources, you know, which became a big data firm. Uh. And he was a young, very bright economist, and I knew all the things going on in Washington. He was a public finance economist, so I liked him. And Seymour Harris was an old Harvard professor, been there many years, and he was my senior thesis advisor, and he took a liking to me, and I took

a liking to him. He was a very prolific writer, not that wasn't so much original, but he wrote a lot of stuff about policy. And so those two professors, you know, we're not only mentors but sort of friends. And then Gershon Kron was my mentor as a grad student, but he was also a friend. You know, he lived near where I lived in the summer when he was wife was gone. We'd invite him over for dinner and all that. So he was a friend of the family.

Uh And they you know, those four bral Schmidt in high school, Otto Eckstein and Seymour, Harrison College, and then Gershon Kron and grad school. I think those were my mentors that mattered to me in my life. So holding them mentors aside, what what investors affected the way you

look at the world of markets and investing. Well, in the nineteen fifties, when I was still in high school, I read something like it might have been the third edition of Benjamin Graham's The Intelligent Investor, and I learned a lot from that because there was a lot of wisdom in Benjamin Graham's work. My friend Jason Saga's, you know, half a century later, has brought out a new edition

of it. Uh So that's a book that influenced me when I was young about value investing and uh, you know, just a lot of wisdom that Ben Graham had, so that influenced me a lot. Uh. And uh. Then you know, some some books sort of combined economic history, financial history with investment advice. Um. And one of those that I remember, a book from the late nineteen fifties was Bray Hammond.

He was the secretary of the Federal Reserve Board. Bray Hammond wrote a book called Banks and Politics in America from the Revolution to the Civil War. And it's just a wonderful book. It's well worth reading half a century later because it captures the spirit of America. You know, the country was built by steam and credit, you know, and fraudsters were there and all that. You know, he'd go into financial frauds, how they took place, and at the end of it he would say, thus did America

grow great? You know it was sarcastic, but you know, you by studying history you could sort of spot things in finance that to avoid and to latch onto. Any other books you want to mention, this is always everybody's favorite question. Uh. Well, when I was in grad school, my first year of grad school was nineteen sixty three, and one of the great books that of economic history that came out in was Milton Friedman and Anna Schwartz,

A Monetary History of the United States. At that time, especially at Harvard, not at Chicago, obviously most people were Keynesians, and Milton Friedman made this powerful historical Uh. I wouldn't say it's an attack on Keynesianism, but there was something that the Keynesians hadn't paid much attention to, namely monetarism, and Milton Friedman's books sort of showed that there was a lot to monetarism, and so then people began to rethink Keynesianism, and later on economists of course came up

with rational expectations and other things. Uh. But I think Friedman and Schwartz The Monetary History of the United States was one of those books. I happened to be lucky enough to read it when I was twenty three years old, and it influenced my career a great deal because it's

really such a wonderful book. Any of the books you want to mention before we move on, well, I should mention that I happen to own the twenty seven volumes of the papers of Alexander Hamilton's and the five volumes of the Law Practice of Alexander Hamilton's And I go in to read those a lot, because that that's just fascinating to take up about ten feet on my bookshelves volume and this is interesting for a man who only

lived forty seven years. Wow, that's impressive. Um. So, we we've been talking about central banks, we've been talking about interest rates. What do you see as the next shift that's going to take place in either how the central bank conducts itself or interest rate policies. Well, I my historical perspective makes me think that the Federal Reserve now is kind of in the situation of the Federal Reserve around the early nineteen fifties. It had kept interest rates

very low for a long time. It realized that those rates were probably too low, they weren't normal, So they want to normalize. And I think that the uh, the goal of the Federal Reserve over the next few years will be to gradually increase our interest rates back to more of a normal level. Now, there could be some problems with this that I foresee. Number One, the fiscal policy. Fiscal policy was basically non existence during and after the crisis.

Obama had a little bit of stimulus, not enough in two thousand nine, but since then the gridlock in Washington prevented any sort of fiscal policy designed to help the economy until the most recent tax reforms that the President Trump is changing that. So we gotta We got a tax cut in UH late two thousand seventeen, and then there's a deal between the Republicans and the Democrats where each one gets a little more spending that came up just in January two thou eighteen, and then Trump is

talking about an infrastructure program. So what I see right now, and it bothers me a little bit, is that the sort of fiscal stimulus we should have had in two thousand eight nine ten is taking place when the unemployment was you know, in two thousand nine it was ten percent. Now it's four point one percent, basically full employment or close to it, And we're getting the fiscal stimulus we should have had when unemployment was ten percent when we're

sort of fully employed. So what the Federal Reserve may have trouble containing inflationary pressures, and it may have to raise interest rates faster than UH it did in the nineteen fifties when they could just move up gradually over a decade, and I think that bode zeal for you know, probably overvalued stock markets and things like that. So I'm a little bit wary, wary about the outlook for the next year or two. Tell us about a time you

failed and what you learned from the experience. The time I failed, and what I learned from the experience, well, I think in the History of interest Rates, I did make a bad forecast and in the last edition of it, which was the two thousand five edition, in two thousand four, I thought we'd hit the low and interest rates and

may have two thousand three, Uh mentioned that earlier. That's pre crisis thinking, yes, right, and you know those those rates in two thousand two and three and early two thousand four were really the lowest ones on record up to that time. And so we turned up and you know, after a year and a half of rates moving up, I said, Okay, probably we've hit the low in two thousand three, uh, And you'll you'll read that in the last edition of the book, and so um, I think

that was an obvious mistake. And what I learned from that is that forecasting is uh is a tough business. You know. I became an economic historian because it's a lot easier to forecast the past. We know what happened, we don't know exactly how it happened. But when you're there, people want to know right now what's going to happen in the next month or year. Uh. That's very tough to forecast. And so I couldn't see in two thousand four and five that we would have this great financial

crisis starting in two thousand seven. So if a millennial or a college student came up to you and said they were thinking about going into either economics or financial history, what sort of advice might you give them? Well, I would say that it's a very rewarding thing to study. Uh. I somehow think that economic and financial history, if you

can make contributions there, they kind of last longer. In straight economics, you're often trying to tweak the last paper you saw in the journal, put another tweak on it, and then get a journal article which shows that you're on the cutting edge. Uh. But then somebody else tweaks you, and pretty soon your article isn't that important. If you write a really good book in economic history, like Milton Friedman and Anna Schwartz did in their Monetary History, or

Bray Hammond did in his Banks and Politics book. Those books last a long time and you can read him half a century later. So I would say that going into economic and financial history may give you more long term rewards than just being an ordinary garden variety economist. Uh.

So that's what I would advise scholars. But of course, you know there's you know, there's other advice I'd give that you know, read Bend Graham's book If You're a million, uh, the new edition of it, and then mostly, you know, save, save money and invest it. The power of compound interest is so great, but we don't realize it because it

happened slowly. So for any millennial, not just one who might want to be a professor, I would say, you may not have a lot of money, but make sure to, you know, save ten percent of it, like John D. Rockefeller did. And our final question, what is it that you know about investing today that you wish you knew fifty years ago when you were starting out of out of grad school. Well, I wish I had known fifty years ago. Uh. What what these long term market cycles

were like both in interest rates and stock returns. Now, we didn't have a lot of the data, and I myself have worked on creating some of these data. But I think that if I had known fifty years ago how stock markets bounce up and down, they really magnify the ups and downs of the economy by quite a bit.

We can call it pe ratios increasing and decreasing. Uh. If I had known that fifty years ago, that there were these long cycles that have been going on for two hundred years, I probably would have paid more attention to where we were in the market cycles then. And

the same thing with interest rates. If I knew that there were like twenty thirty year movements of interest rates, I would try to see where we were in that cycle and then not make the mistake of, you know, investing all a lot of money and interest rates when they're very low, because when they go up, you lose capital basically. Uh. We have been speaking with Professor Richard Silla of n y U Stern School of Business, author of numerous books, most recently Alexander Hamilton's on Finance, credit

and debt. Thank you so much for doing this. This has been absolutely fascinating. If you enjoy this conversation, be sure and look up an Intra down an Inch on Apple iTunes and you can see any of the other, let's call it hundred and nineties such conversations we've had previously. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. I would be remiss if I did not thank my crack staff

that helps to put together this podcast each week. Mendina Parwana is our audio engineer, slash producer, Taylor Riggs is our booker producer, and Michael bat Nick is our head of research. I'm Barry Results. You've been listening to Masters in Business on Bloomberg Radio