Hello, and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway and I'm Joe Wisenthal. Joe, we are still here at Jackson Hole. We are coming to the end of our sort of discussion series, however, and I think one of the themes that has emerged from a lot of the people that we've been talking to at this event is this idea of living with high levels of public debt and high inflation all while having basically a global financial system that is built on bonds, things
that are supposed to be boring. They're not supposed to see their yields kind of swing wildly, and yet that's been what's happening.
Two things. One is to your point on yields, I mean, it's the story of the last year, but it's really also like the story of the last month, sure, which is that you know, you think things have mellowed out and suddenly you get a new spike mortgage rates at the high since two thousand and ten year or thirty year year old's highest lease since like two thousand and seven.
The other thing is, can I just say one fun thing about Jackson The whole is running into possible odled guests on a hiking trail, Yes, which is a really fun aspect of here. You notice, like when we're back in New York, we have to do all this work to try to find guests. You know, here you just like, oh hey, it's you.
You just pick them off in the wilderness. Yeah, like creditors you.
Want to come on the show? Yeah, all right.
Well, one person we did actually run into while hiking is one of our favorite all blots guests. We're going to be speaking to Hyun Sung Shin. He is, of course economic advisor and head of research at the Bank for International Settlements, and we're going to try to synthesize a lot of the discussion points we've been having for the past day or so, right.
And to your point, you know, I do think that and this was sort of part of the interesting thing we talked about with Darryl Duffy, which is that we came out of two thousand and eight very focused or two thousand and eight two thousand and nine like very focused on credit risk, like downside risk, etcetera. And I think by and large policy makers, we probably did a good job of de risking the system from the perspective
of credit. Right then we got Silicon, we got this rate spike, we got the highest inflation in at least four decades, we got Silicon Valley Bank, and suddenly like, oh, there's other risks. It's not just credit risk.
Well, we reduced credit risk at the expense of interest rate risk, it feels like, and we sort of buy design made bonds really fundamental to the way that, again the financial system works. So we need to dig into these financial stability risks as they are now. So without further ado, let's bring in Hun Hun. Thank you so much for coming back on. I think this must be your fourth or fifth opposite something like that, but.
Our first person, which yeah, absolutely, I mean I was going to say, it's such a pleasure to do this in person, Tracy, and it's a great topic, of course, and I think you've had other people on during the day that have explored bits of this. But maybe the thing to the point to stop this is just to take a step back and have an overview of the way that the structure of intermediation has changed since the GFC. As you say, Joe, the GFC very much was around
the banking sector and in particular credit risk. The idea is that you need capital there to absorb losses on the assets because they're risky assets, and that's the way that you protect the depositives and other claimholders. I think what we saw in March twenty twenty with the stress episode in the treasury market is that even safe securities, it can be at the center of a financial stress event. I think the UK guilt episode last year. Again, these are safe assets, but they were very much at the
center of financial stress. And I think what that does point to is the shifting nature of risks, the different propagation mechanisms, and you know, the different set of players out there. So we're going from banks to non bank players. In the jargon they're called MBFI, it's non bank financial intermediaries. But it's not just the intermediaries. I mean, it's also the way that infrastructures, you know, CCPs, exchanges, they've also
become very important as well. So this is I think a very very important topic for us to touch on.
Well, talk to.
Us more about who those non bank financial intermediaries are, because I think people often hear the term, the more colloquial term shadow banking, and it sounds kind of nefarious. But there are all these different flavors of non bank investors, So talk to us about who they are and what's happened to them in the years since two thousand and eight.
Well, you can draw a kind of flow chart here. You've seen those in those New York Fed charts where you have ultimate creditors on one side and ultimate borrowers on the other side, and money flows from right to left following the balance sheet direction. We can think of something like that in this case as well. We have fewer of these bank based intermediaries, although we of course still have them, but they've shrunk in size and the
heft if you like, within the system. Instead, what we have are many non leverage players in asset managers of various stripes, life insurance companies, pension funds. But I think a very very important class of players are the other
hedge funds as well. There are non regulated market intermediaries there, and a very important part of the infrastructure here would be the new sexual counterparties other exchanges where rather than having intermediation go through a dealer balance sheet, you have clearing. You have the central counterparties that actually act as creditors and debtors to a wide range of participants.
So you mentioned March twenty twenty, you mentioned the guilt episode. There's also, of course March twenty twenty three with Silicon Valley Bank. I guess we have had this run up in yields over the last month again, but I don't think, you know, nothings.
Floated, nothing's broken yet.
Nothing's broken just yet. But it feels like we might be in for multiple years of a very different direction. Whereas the twenty tens were all about you think great checking to go up.
And they go back down.
Do you think finally you're breaking out, they go back down. It will be in the other direction where we think rates and inflation are settling down, but it turns out they gather steam. We don't know, but maybe that is How do you think about that in terms of like systemic risk, financial risk? How is it different than a period of like credit risk and slow growth.
It's worth thinking about the journey that we've been on for the last ten years or so, well maybe ten twelve years. You know, we've had a very long period of loaf of long interest rates and of course central bank acid purchases that has really compressed the Yel curve, and what that's meant is that borrowers have taken advantage of that and they've turned out you know, their borrowing. And we see it in the corporate sector. They've really turned out the bondissuance. We see it in the household
sector as well. But I think especially important would be the government bond market. There's been an increased duration of the bond's outstanding. Not surprising really because government that managers would also be taking advantage of the low long term rate. So just to give you a number in the Biathaniel Economic Report this summer, we had a small discussion on this. If you look at the duration in aggregate of advanced economic government bonds, it was around seven years at the
end of twenty ten. That's now nine plus years. So we've had a tremendous lengthening of duration, and so as central banks of race rates in response to inflation, what that's meant is that the price impact has been that much larger. So if you're not marking to market, if you're using ultimaturity accounting, we call that interest rate risk on the banking book, and this is what happened with SVB. You don't mark the market until you have too. If
you're marking to market, then it's duration risk. So as long term rates go up, the price of your assets will go down accordingly. And the longer the duration, the bigger the impact. And I think in that sense there is a broad continuum here between what we saw in SVB the UK guilt episode. But also I think just in terms of emerging market bonds that I think we'll
also talk about during the course of this conference. So I think that's if you like looking through the sector to the underlying exposures, and if we do that, I mean, that's what's out there. What's different, of course, is that inflation is high and so monetary policy has to respond, and after a very very long period of low for long we are seeing, if you like, the consequences of raising rates once the exposure has lengthened.
So I mentioned this in the intro, and you just gave a very good outline of duration risk and this idea of additional sensitivity to interest rate moves. But I mentioned in the intro that a lot of this is by design. We have actively encouraged a lot of investors to buy more bonds, and maybe that wasn't an issue in the lower for longer era, as you just pointed out, but it seems to be problematic in an era of
high inflation. If not bonds, what do you use as the sort of safety net for a lot of these entities.
Well, I think you know, before we go there, Tracy, I think we have to point out that lengthening duration has.
Also a lot of advantages.
One thing that is very good with very long duration exposures is that with very long duration liabilities is that you're not facing the rollover risk that you used to if you were borrowing short So you know, for example, if you go back to the Asian financial crisis, there you have the combination of currency mis as well as in maturity mismatch, and if your liability is very short term and your creditors want their money back, then that's
actually going to lead to a much sharper episode of stress. So lengthening duration has also a lot of advantages for financial stability, for mitigating financial stability risks.
This would be one reason why we perhaps haven't seen as many bankruptcies as were expected as the FED raisers rates, because everyone spent the past two years terming out their debt.
Absolutely, and that's especially true for those homeowners who actually refinance their mortgage. I think that's a very very good example. And what we also see is that in the household sector mortgage duration has also lengthened as well, not just in the US, and US is special because of its of its institution of a thirty year fixed rate, but it's also true in other economies that there's been this
shifting out. I think on balance, I would say that the lengthening of the liabilities is a good thing on balance, but every you know, silver lining as a cloud, and here, you know, we have exactly this problem that it's not a free lunch. You have to pay for the additional risk that comes from greater duration.
And what about the if not bonds, what question? Because this is what I struggle with, What is the next safe asset? Basically, well, I.
Think the safest asset is just money, and I think this is where the money, in the sense of the high powered money that is issued by the central bank. So when a central bank conducts QE, what happens is the central bank takes out duration by purchasing the bonds, but then pays for it by creating reserves that are held by the sellers of those bonds, typically commercial banks, who then would pass that on to the sellers, you know,
their customers. What that means, though, is that as interest rates rise, the assets that the central banks hold will also be subject to losses, and this is why we're seeing the spate of losses on set bank balance sheet. The important thing about central bank liabilities, though, is that
they're not subject to redemption. The central bank doesn't have to repay the dollar with another dollar, because that is the ultimate that is the ultimate liability, and as we argue in a BIS bulletin recently, we should not be so concerned about central bank losses in the same way that we are concerned about losses suffered by a private sector entity who are subject to those redemptions. But it
doesn't mean that there are no limits. I mean, clearly there are limits, and we see those limits especially in very fragile, emerging and developing economies that don't have the same credibility in the value of money as with the FED or with an advanced economy with other advant economy central.
Bank, this is a good time to ask you a question, and I also pose this to very Eike and Green and earlier conversation balance sheet policy. I mean, I think we typically associate FED, QEY, Etceteram. Central banks are building out that capacity, and it seems like in the post, in the sort of COVID era, we are seeing more central central banks having some credibility or capacity enough to like be a buyer of last resort for their own government bond markets in a way that we didn't have
in the past. Is that fair? Is that an accurate character?
I think, Joe, what I would say is, if we look at the events of last year, if anything, it's been the emerging markets that have done better in some respects than the advanced economies. And let me explain what I mean by that. So you know, good comparison is between the events of last year with the earliest stress
episode for emerging markets in twenty fifteen twenty sixteen. So back then, what we saw was a very strong dollar coupled with very low commodity prices capital outflows for emerging markets. We saw a sharp steepening of yeld curves. That combination of stresses are very typical of emerging market stress episodes that were familiar from the textbooks. What we saw last year was actually quite different. What we saw was the
nature of the shocks were different. We had a war and a pandemic, and what that meant was when commodity prices rose, emerging markets that were commodity exporters actually did very well relative to historical experience. If you look at the Mexican peso or the Brazilian reality, it actually appreciated last year, and that's very different from later the Euro, the yen, even all the other advanced economy currencies. We see quite a resilient picture and so they didn't even
need to enter the market like that. Now, Joe, your question raises very important issue, which is when can a central bank come into the market, intervene and play the role of a buyer of last resort. I think this
is a very very important policy, Sue. Maybe we can get back to some of the discussions that's happening in the official world, But when we look at the emerging markets, in particular emerging market central banks policy makers generally are very reluctant to wade into markets in those stressed circumstances, and for good reason, because when you go into the market, you have to buy the bonds and you're creating reserves as the byproduct of that that's going to be held
by some of the domestic participants. You're creating money, so liquidity injection. That has many, many good aspects, But what it means is you're also going to put pressure on exchange rate. So if you're pushing a lot of liquidity into the system and you're a central bank that doesn't have the credibility of a central bank like the FED, then that's going to lead to a very sharp depreciation of exchange rate that could in fact do more harm
than good. So I think the short answer to your question, Joe, is that last year we saw a very different set of circumstances. Emerging markets actually did pretty well. I would say the major emerging markets did very very well. I mean, they are clearly more stressed developing economies that still have to borrow in dollars and so on, but emerging markets
did particularly well. But I think there is a very important lesson here on what are the circumstances that mean that you can enter the market with impunity and you know, when can you enter the market and get away with it?
Well, why don't we go back to central banks that can create reserves without putting necessarily downward pressure on their own currencies. I wanted to talk to you about leverage and bonds because I think we're used to talking about leverage in the context of credit, and everyone remembers credit derivatives from their starring role in the two thousand and
eight financial crisis. But I guess what's perhaps underappreciated, although it feels like more people are becoming aware of it now, is that there's also a lot of leverage attached to the bond market, and we've seen sort of flashes of it emerge, most notably in the March twenty twenty treasury event. But how are you thinking about that issue and how do you see leverage emerging in the world of bonds.
I think that's a very important question, Tracy, and I think it goes to the point made at the outset, how is it possible that a safe asset can still be at the center of a stress event? And I think I think here we have to think about the possible reasons for perverse demand responses, and I will sort of make it more concrete shortly. By a perverse demand response, what I mean is when a price falls, we typically would think, well, that means that it's more attractive to buy,
and so people would come into the market. So when the price falls, you expect people to come in and pick up the cheap assage. But in these stress episodes, which you typically find is that a price decline actually generates more sales and that actually, of course leads to further price declines and you can have this loop. Now why would you have this perverse demand response. Well, leverage is one way that you can have that. So if
you're leveraged. If you're levered and the price of your assets fall, well, your creditors want their money back, you need to meet margin calls, and you have to sell, right.
This is something we spoke with Daryl Duffy about that typically the thing you sell first is your safest, most liquid asset, which would usually be a bond, probably a US Treasury of so.
Absolutely, and so this is how a safe asset can still be at the center of a stress event. But it doesn't have to be leverage as such. It could be leverage like behavior. And what I mean by that is what other ways can you have where a price decline would beget more sales. I think a typical and a very very classical example, and it's in the mortgage market. Actually, a well known historical episode is what happened in nineteen ninety four when you have this rapid steepening of the
Yelk curve. The way that the embedded option in the mortgage market, in mortgages means that you know when you hedge, so when rates go up, the duration increases. Actually because people stop refinancing.
This was the big convexity.
This was the convexity issue. Now there's something similar also in I mean, something similar can happen even in very boring sectors like you know, pension funds or life insurance. So if you're trying to match duration, and you know you have liabilities to your policy holders which are let's say, you know, thirty years, but you have assets that are ten years, liabilities are much longer duration than your assets. Now, when rates rise, the duration comes in both on your
assets and your liabilities. But because your liabilities are much longer duration than your assets, liability duration comes in much faster. So what ends up happening is that you find that you've got too much duration on the asset side, so you have to sell. So what's just happened, you know, race rows, but you're ending up selling. That's another example of level.
This is this is the UK story, right, I mean, this is similar. This is what happened. I think the UK.
It's a combination of both leverage and this story because there was the LDI fund aspect, which actually gave it a further amplification boost. But the underlying exposures I think, are you know, really all the same. Depending on exactly how it will play out depends on you know, who are the main players, but the principles are very similar. So even very conventional, very supposedly boring sectors can still be the source of these kinds of you know, perverse.
That's a fun thought.
Forgive me if like this is like too big picture or too meta of a question, but like for a sort of market capitalist system, like someone's got to hold the risk people need anycome, you know, it seems to me. I don't know, maybe there's not even a question here, but it seems to me it's like you know, two thousand and eight, Okay, if there's too much credit risk and too much bad lending to households and German banks somehow financed construction in the sun Belt in some way.
And then now we're talking about like pretty boring in boring bonds. Treasury is going up boring sort of simple life insurance companies, pension companies not particularly exotic. Is this our fate that for the rest of our careers is just every ten years we just have to like pinpoint a new area. I mean, because it's not like risk can ever go away. Someone's got to hold the sse that someone's got to make the income to pay the savers.
I think the key here is that we have a diversity of investors. Okay, so whatever we do, we have to make sure that when someone is selling, someone is actually willing to come in and buy. And the diversity of the market participants is absolutely key for this. And this is all about finding the right price, and finding the right price means that you know, we have buyers as well as sellers. The reason why these financial stability channels of propagation can be so corrosive is because sometimes
one part of the market just becomes too big. They grew without our knowing it, without our really noticing it, and then when something happens, this is when all these dynamics take hold. I don't think we need to worry, you know, in every ten years that something big will happen. It's just a case of making sure that we have a diversity of buyers and sellers, of participants in the market. And there are some rules of thumb that we should use both in the regulation but also for the private
sector institutions themselves in the risk management. So what are some of the potential kind of decision rules that might be baked in given the kinds of leverage and other exposures out there. Relative value hedge funds I think were very important in March twenty twenty that was very much about leverage using futures and the cash bonds. Futures implied yields a little bit lower because it doesn't take up balance sheet, and so you're selling the futures and buying
the bonds. But then if margins go up, you know, you have to either come up with additional equity from somewhere. That's very difficult and stressed episode, so you typically end up selling. And so this is another case where say FACET can still be at the center of this kind of episode. So as market observers, as observers from the official sector. We just have to be very careful to be on the lookout for where these stress episodes might arise.
I mean, there are some rules of thumb we can use, and I think one of the interesting things is that for the relative value hedge funds, we're seeing again the short positions in futures growing, not in the thirty year horizon that we saw into it to twenty, but more in the five year horizon, more in the belly of the curve this time. But it seems that that's something that has come back. It's much smaller than it was
before the March twenty twenty episode. But these are the things that you know, it's not a precise science, but these are the things that we can look out for.
So maybe we could talk a little bit about potential solutions to some of these issues. And again we touched on this with Darryl Duffy, and he was advocating for possibly all to all trading, where you would allow investors to trade bonds with each other so that you would have to your pointhand a more vibrant, diverse body of participants in times of crisis. And the other thing he was talking about is central clearing the idea being that you create a central entity that can then net positions
and sort of offset the risk. But a classic critique of central clearing is that you are in effect concentrating the risk.
In one big entity.
And I'm curious you were in the room with all the policymakers at Jackson Hall. What were some of the debates around these proposals and what are your own views?
Well, actually I was sitting next to darryl oh Okay, and so we had a great discussion on this. I mean, and we've had some very good discussions on this over the years. I think the plumbing is important. I think whenever the plumbing can be improved to improve if you like the day to day functioning of markets, that's something that we should see. And in fact, the analysis in Daryl's paper is really excellent, I think on the policy prescription that comes from that, I think that can be
some diversity views should we say. I mean, you mentioned the diversity of the market participants, but that's a necessary condition, if you like, for the ol to old trading or for central clearing itself to bring to channel that diversity into the market. But that is a necessary condition. We have to be quite sure that there will be a large enough body of buyers out there who will actually
come into the market. Now, if we don't have that diversity sufficiently, and we still have this, you know, one way type of market, then simply changing the infrastructure is not going to do that. I think the way that the policy debate, the policy discussion has gone is to look for, if you like a happy mean, some kind of balance between how much should we make sure that the leverage and other perverse type of demand behavior that
could arise can be mitigated from the outset? How much do we need the Central Bank or other authorities to play a kind of backstop role, And in this connection, you know, I would just point to your listeners to a very important BIS Market's Committee report that we put out earlier this year. It was actually from a working group that was chaired by Laurie Logan when she was at the New York Fed and Andrew Houser at the
Bank of England. It was very much motivated by the March twenty twenty episode, and it turned out that it was also know very well timed for the guilt stress as well. To kind of long story short, the story there is we have to strike a strike a balance. In the end, the central bank has to be a backstop. So if no one else is there to really pick up the pieces, the central bank has to be there to cushion that shot, because otherwise the consequences of not
doing so would be very, very large. But it should not be a first resort to the extent possible, So whenever possible, it should be a market determined outcome. The central bank shouldn't weighed in that the drop of a hat, and if you like, influence market outcomes that way. The other important point is that there's a very important issue
here of incentives. If it becomes generally known that the central bank's threshold for pain is here and therefore they will enter, what that could do is to shift the if you like, the incentives in the portfolio decision of the private sector market participants. What you're doing by doing that, by having a kind of you know, a rule to enter the market, would be to lop off the left tail of the outcome distribution. Means that it becomes less
risky to one layer of leverage. And so I think it's so if you're looking for a simple answer, there isn't one okay, and I think this is where we are. The central bank has a very important role to play as a backstop, but it should be a backstop rather than a intervener of the first result.
Let me ask this question, but from a very non plumbing standpoint, how much would it be beneficial for financial stability if fiscal authorities were to play You know, right now we've sort of tasked the central banks with fighting and there's a lot of spending, and there's a lot of stimulus, particularly in the US, and it's sort of the central bank's job maybe to counteract that and figure out a way to get back to two percent inflation.
Would it be good for financial stability if the central bank didn't have to work row cross purposes with fiscal authorities as much and didn't weren't facing so much pressure.
From that, Actually, Joe, in our Annual Economic Report this year, our chapter two, it's great that you asked this question. You know, we have a whole chapter on this point.
What we argue is fiscal policy has to row in the same direction as monetary policy, not only for Phillip's curve reasoning or aggregate demand, but the for the kinds of arguments that we raised earlier about if the central bank has to enter the market, intervene in the way, and you're going to inject liquid it in a situation that might actually undermine financial stability through a very sharp depreciation of the exchange rate, you could actually end up
doing more harm than good. What we call is we need to be at the region of stability. So we need to make sure that monetary policy and fiscal policy are working in concert rather than at cross purposes.
So how do you actually do that? Because you know, we were speaking with Adam Posen earlier and he was talking about how there's a lot of uncertain around how central bankers should react to fiscal A lot of them are completely separated from fiscal for very obvious reasons, and it can be awkward for them to even start to talk or consider this issue, at least publicly. So how do you actually get there?
I think this is why talking about fiscal policy is actually a very important function of the central bank. And it's true that when central banks talk about fiscal policy it can sort of raise eyebrows, But I think we have to make it very clear that monetary policy and fiscal policy are not separate policy functions. They're actually very closely interrelated, and so in order to perform monetary policy well,
fiscal policy also has to play its part. Now there is the whole issue of the Filipsko of reasoning, what is aggregate demand? When mandatary policy is tightening, should fiscal policy play more of a role. If the economy is depressed even with very low rates, should fiscal policy take up the slack and stimulate the economy more? Those are very very important debates, and you know, I think that's something that is more more conducive to these formal economic modeling.
But when muntary policy physical policy are joined up because of the balance sheet interconnections, then I think it's much more difficult. And I think, you know, these kinds of issues are more or less second nature in emerging markets, because in emerging markets and developing economies that have really a painful history of a financial crises, the debate is on much firmer footing. There's a lot more consensus. I would say. The difficulty, I think is more when that
recognition is not so strong. It's a bit of an uphill struggle to put that on the agenda. But I think that's really why we at the BIS are here. I mean, this is one of our jobs to actually, you know, put these things on the table.
Just to take it back to I think maybe the first part of this conversation. How much has the turning out or the fixed nature of debt in the US and maybe elsewhere contributed to the fact that we've had this extraordinary rapid rate of nominal rate hikes, particularly the short end, without a ton of evidence that it's done a whole lot. I mean, inflation is down, but there is some question about why, and there hasn't been much
economic slowing. How much would you attribute it to that simple fact that there is not a lot of floating rate debt here?
This is actually a very important part of the debate right now, discussion and the research at central banks, and it goes to the channel of monetary policy. So when the central bank raises rates, what are the levers that it's pulling to actually slow the economy down? You know, one channel is the classic credit channel, where you know, when you raise rates, and there's plenty of evidence both from Yeah, so let me just finish the sentence and explain.
So when you raise rates, banks tend to lend less and the lending standards tend to become higher, and that channel I think is very well established. It is less strong in the data this time around. I think there is an interesting set of questions as to why not. You're pointing to another interesting channel, which is if the debt has been termed out, how much does raising the short rate due to slow spending when liabilities are so
long term. If homeowners have refinanced their mortgage at very low rates, then they're sitting on very big gains and raising short rates will have limited impact. I think empirically these things still need to be worked out. I mentioned earlier that this turning out is not just the US phenomenon.
It's pretty global.
I would say countries like the UK used to be more or less completely floating rate. Now we have mortgages that are actually between two and five years. That's quite typical, and I think debate is what has been the impact of that turning out. But I think there is a bigger puzzle that we're all wrestling with, which is why did we have the inflation in the first place, and how have we managed to get the disinflation without triggering a recession. And I think that's a good puzzle to have.
What's the answer here, you're here to tell us it's I mean, if you look at the standard textbook models for how the Phillips go would work, I mean, we should not have had that inflation outbreak, at least not the persistent inflation.
Or clearly there were supply chains the flare up with the used cast prices and so on that you've covered extremely extensively on this podcast, but we should not have had the persistent inflation cropping up because I think the excess demand, if you like, was I mean, it was clearly there. It had a very important role to play, but it wasn't way off the charts, and yet we still had this very persistent inflation taking hold. And by the same score, we are very happy to see the disinflation,
and the disinflation has come and it's confounded. Some of the pessimists have said that, look, we have to have a very deep recession in order to bring the inflation down, and that logic is completely watertight if you look at the Philips curve. If you look at the Phillips curve, you do need activity to slow very substantially to bring inflation down. But we are very happy to see that inflation has come down. So there are still many things
that we don't understand fully. I think having gone through the pandemic and the shocks, especially the Russian invasion of Ukraine, shocks the commodity prices, food and energy, these were very unusual shocks that subjected the global economy to really unprecedented a really unprecedented combination of sharks, and so I think we have to be modest here. But I think one thing is for sure, which is that if we knew exactly what the channels of monetary policy transmission were, then
we were a little bit too over confident. We were over confident there, and in that respect, I think one of the candidates that we have to look at is to what extent has determined out of debt meant that short term rates are having less purchase on the real economy.
So to sum it all up, the risks are safe assets can be the locusts for instability. There's still hidden leverage in the system. Monetary policy might not be as effective as we think because of the shift from banks to bonds and the terming out of debt. And finally, we're not clear how any of this works. These are sobering thoughts.
You know, I wouldn't put it in those terms, sure, and I think you probably overplayed at somebody's points, but it's definitely. I mean, it's it's true of economics pore generally and policymating especially. We just have to be very humble. We're always learning, and I think what the last three years has taught us is that we need to be
extremely open minded on what the channels are. And it's very very fortunate that it seems that we're now we've opened the door to a soft landing, it seems where we haven't had the very deep recession to bring inflation down.
All right, Well, I think that's a great place to leave our Jackson Hale series of Odd Loots discussions with the note of very reasonable humility that you just described to you. And thank you so much for coming back on Odd Lots and walking through these issues with us.
Yeah, that was great, Thank you so much, and so great.
To Yeah, finally finally.
Do this in person. This great.
Thanks for the invitation, Thank you so much.
So Joe, always a treat to catch up with you, and I'm so glad that we caught him while he was how hiking and managed to drag him back for a podcast recording.
I feel like it's a good thing. Humility is sort of like maybe the latch.
Word humility should be the theme of the content.
I feel like humility has been the theme and it's come up over and over again. And I don't think anybody could look at the last three years and come away with anything but some people, you know, maybe a better intuition than others or whatever, but with it like everyone needs a dose.
Of humility, absolutely, And I did think his point about how you want to avoid the central Bank becoming the first lender of last resort or the lender of first resort makes a lot of sense. I remember after the FED announced the corporate bond buying program, there were some analysts that came out with notes and basically said, the FED has changed the corporate bond market forever because now we know that this backstop will come out if things
get bad enough. So you did see that moral hazard sort of creeping into the market.
You know, and made the point you just talk about in the ideal world, which never happens. You know, the Central Bank and the fiscal authorities work together on some level, and we saw it. We saw the breakdown in the twenty tens. I'm always going back to this idea of
like how twenty twenties like the Bizarro twenty tens. In the twenty tens, fiscal was probably too tight and we expected central banks to do everything to get the economy back going, and it was a long slow process and many people were disappointed by the pace of the recovery. It feels like in the twenty twenties, we're once again the entire burden of the inflation adjustment, this time is
being put on the central banks. Actual they do seem to be working cross purposes with fiscal authorities, and b it does seem like that contributes to financial stability risks when the only move really is higher and higher rates. And then you get SVB like its situations very well.
Put, Joe, you basically just summed up what five hours of All Blots episode.
There we go?
All right, shall we leave it there?
Let's leave it there?
Okay, this has been another episode of the All Bloughts podcast.
Away.
You can follow me at Tracy Alloway.
I'm Joe Wisenthal. You can follow me at the Stalwart. You can follow our guest Hunan Sungtion at Hun Sung Shin. Follow our producers Carmen Rodriguez at Carman Arman, dash Ol Bennett at dashbod, and our special Jackson Hole producer, Sebastian Escobar under dicibass. Follow all of the Bloomberg podcasts under the handle at podcasts, and for more Oddlots content, go to Bloomberg dot com slash odd Lots, where we have
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