Crisis Rock Stars Rate the World’s Response to Covid-19

Secretary Larry Sumrs. We have a world of economic wisdom and experience on the podcast this week courtesy of the Bloomberg New Economy Forum, which has just been held virtually over four days and multiple time zones. You'll get a sense of just how star studded it was when I tell you the head of the European Central Bank, Christine Laguard, spoke on the second day, and she was and even the headline act top of the bill was the Indian President Narindra Moody. On day three, it was the President

of the European Commission. And after that Bill Gate, I didn't talk to any of them, but I did get to talk to the Irish Prime Minister or t Shock Mihal Martin about Brexit, the future of global trade, and where Joe Biden's Irish grandparents came from. You can hear some of that later, but we're going to devote most of the program to a debate about central banks with not one, not too but three former central bank governors.

The ex Federal Reserve Chair Janet Yellen, the economist and former head of the Indian Central Bank, Ra Gram Rajan, and Lord Mervin King, governor of the Bank of England from two thousand and three until Oh yes, and Larry Summers. If you don't want to hear those four economic rock stars talk about the economic response to COVID and how central banks might do a better job of serving the whole economy, not just Wall Street. You should we really turn off now, but the rest of you sit back

and enjoy the show. I want to spend a few minutes very briefly thinking about how central banks have responded to the pandemic, what's gone right, and maybe what needs to change. Janet Yellen, well, I think central banks of the developed countries have done a very good job of responding to the crisis. There could have been a financial market meltdown there was an overwhelming rush to the safety

of cash in March. It threatened massive asset fire sales, which could have caused credit to dry up in the economy, and the FED and other central banks erected emergency liquidity and lending facilities that have really worked and kept credit of owing in the economy. Monetary policy in all the major central banks also became far more accommodative, lower policy rates, expanded asset purchases, forward guidence. In the US, both long and short term interest rates are near historic lows, and

they worked to boost intrasensitive sectors. And even here you can see stronger housing in auto sales. But monetary policy has its limits, and the notion that the FED can do all that is required at this point to support the economy um is just wrong, and the FED is really pleading for fiscal relief. I believe it's essential. Lord King, I know you've been You've echoed some of what done it yet and has said in repeatedly saying central banks

can't do everything. Do you think they've they've played the expectations game well in this in responding to the crisis, or have they set them too high? So I share much of what Janet has said, but I think to explain what's going wrong, I don't think central banks have explained clearly why expanding the money supply is the right sort of response to a shutdown of the economy created by governments different levels of governments in order to prevent

the spread of COVID nineteen. This isn't a conventional recession, and as Janets said, the most important thing for central banks to do now is to say that this is a difficulty, a challenge which needs government response, not central bank response. And I don't think it's government response in

the sense of general fiscal easy. I think it's a response that's required to support businesses until we get through this COVID nineteen episode, at which point we can then let the market econ and be discided which businesses will thrive and which will fail, which I don't think we

can do at present. And I think that although the actions taken in March were clearly very important and central banks acted very promptly, does beg the question that, since markets have now calmed down, why that very significant liquidity injection hasn't been withdrawn. And I think what's needed as a proper narrative now to explain why these circumstances merit

particular central bank responses. I think we have to get away from the idea that if anything goes wrong then central banks have to step in and throw money at the problem, right if you want to respond to what what Lord King has said. But I'm also wondering how emerging market central banks, you would say, have responded and matched that that challenge that that Mervin is outlined well.

Janet talked about the advanced country central banks have done having done a fantasty job, and I think this did help many emerging markets which were subject to the same kind of stress that you saw in the beginning of the crisis in March, and the accommodative policies of the Federal Reserve the ECP Bank of Japan helped alleviate some

of that e M stress. Also, emerging markets have adopted some of the tools from the Industrial country center bank toolkit to help their governments do the spending which has Merman said is extremely important to ensure the real economy doesn't collapse. That you you maintain the body economic by helping small and medium enterprises and helping households. That requires spending and central banks in Indonesia, Poland across the emerging

world have supported their governments. The key question now, of course, is how do you sort of ensure that that bridge which was built to the end of the virus, it actually the extents that far and there are fears in

industrial countries it may be too short. And emerging markets didn't build a pretty strong bit breach in the first place because they had very limited resources, and that means that there is far more stress which has built up within the system, which has been hidden by moratoria by payment sort of postponements, and that stress has to be

dealt with. This is not a central bank problem. There's a problem of fixing the judicial system so that it can alleviate stress, fixing the you know, debt renegotiation system. And again I landed by saying, so far it's been very good. But whenever you get into these kinds of policies, exit is often a great issue. How do we exit without tanking the system? Once again, and it's too early to start thinking about about it, but it is a

question which will face us down the line. Larice I was, let's take it just but if we take from the other three speakers, old has gone right in the major central banks response, But what would you have done differently? The big thing was preventing a financial collapse. The central banks acted definitively to do that. That's all that was ultimately historically important. The mistake is for them to vastly

exaggerate their continuing relevance. They lack, starting at the zero bound where we are, the capacity to provide meaningful impetus to their economies in any way that is consistent with any concept of central bank functioning. They do not have the capacity to meaningfully affect the degree of inequality. They

do not have the capacity to vaccinate people. They do not have the capacity to fight uh climate change, and they need to acknowledge the limitations of their influence in a clear your way, so there can be no pretending about what they're going to do, and that the authorities have the responsibilities they do. The central banks have also, in my view, not put adequate emphasis on the global

dimensions of this problem. A striking feature of the contrast between this crisis and the last crisis is that the last crisis had a major response from the I m F issue in sevesdrs, big increases in lending from the

World Bank that was driven by the global community. There has been no baldness at the global level comparable to the boldness at the national level, and that could get us in real trouble uh down the road, as ragou Uh points out, And frankly, the central bankers, because they want to curry domestic political favor in each country, have not had enough to say about that. Just to come back on Uh, you talk about a lack of boldness,

I mean there's time. As you've proposed as one of the things that could happen to support the global system, a big new issuance of IMF Special drawing rights SDRs. We have to ask you, have you persuaded incoming President Joe Biden of back yet. I'll speak for themselves. I'm optimistic that the the US will not be the kind of block on that proposal that it has been before.

And of course it's possible to do substantial things issuances of five billion dollars without congressional approval, So I'm optimistic

that we'll see progress on that. But I think that unlike the central bankers of an earlier era, you have seen much less discussion in the Central banking uh community of the global imperative, particularly the challenges necessary if emerging markets are to avoid a wave of financial crises going forward, the issues associated with debt relief, and I think that's been unfortunate, and I have to say, I think it's been because the central banks have been excessively focused with

their domestic politics, which leads them to talk about subjects like small business, like the environment, which are really not basically within their proper remit. John, Yeah, do you agree that that maybe Defense shouldn't be talking about needing to target the difference between black and white unemployment rates, for example, as it did in this summer, and shouldn't be engaging on this broader agenda's climate change. So the FIT is

always operated under a dual mandate. It's inflation and maximum employment. And in this environment of very low inflation to low inflation, there's really no conflict whatever between these two goals. And the FED is really focused on trying to create a very strong job market, and I think that they have made that clear. I'm not sure everyone in the public on main street understands that, but full employment is a goal that they order to pursue. Um I agree with

Larry that the effective lower bound. There's a big constraint. At this point, they're doing almost all they can do. They need fiscal policy to help, but UM, when they talk about inequality and the disproportionate burdens on minority workers, what they can do is to try to pursue the strongest possible job market, because when they're successful at that, as they were prior to the pandemic with unemployment, it a fifty year lower three and a half percent that

brings benefits, particularly to less skilled and minority workers. When job markets are really tight, we saw wages rising most rapidly at the bottom of the wage distribution, UM workers being pulled off to this off from the sidelines. Coming back into the labor market, firms finding it incredibly difficult to hire lowering qualifications, engaging in their own training to bring people up to speed, UM willing to hire people that with a weak labor market, their resumes would have ended,

wouldn't have been looked at it all. And the FED has recently revised its framework UM for conducting monetary policy and emphasized that full employment is a broadened inclusive goal, and they've changed their operating strategy to and because of the importance of the effective lower band to pursue that with vigor and I think that's appropriate, and I think it's the strongest contribution that central banks can make to UM trying to deal within equality. They don't have other tools.

Can I just see whether we're in agreement? I am pent in agree with the agreement with you on the absolute importance of maximizing employment in the current context when there's no real danger of getting inflation to an excessive level. I am in a hundred agreement with you that maximizing employment is the best social program of all and confers

all sorts of benefits. But don't we think that central banks really need to be careful about holding out the idea that they are relevant to sectoral issues involving differentials between one sector and another, or structural issues like environmental protection. Would you agree, for example, that any idea that the BED should make special efforts to buy green bonds is

a confusion? So UM, I don't think. I've never heard the FIT say that they're trying to target the unemployment rates or situations of any particular group in the tight labor market. The gaps I think between UM, for example, the unemployment rates of minorities and white skins to narrow. I don't think there's anything they can do on that front beyond a generally strong labor market. So it would be a mistake, I think, to say we're targeting the

unemployment rate of any particular groups. And on sustainable UM goals, I think it does make sense for in supervision to be taking the risks from climate change, both climate related risks and the risks of changes and prices um and stranded assets as countries adopt meaningful climate policy, to consider that as a risk to banking organizations, and to do

stress tests to look at that. But of course we need public policy oriented toward making a big difference on climate change, and I agree with you that is not something central banks can be asked to accomplish. Not the Kate. We remember the title of this is about main Street or Wall Street. Given what what Larry has said, do you think that central Banks or the Bank of England or other central banks have done enough to show that

they're supporting main Street not just Wall Street. Do you worry about the fact that they are perceived to be propping up asset prices as a main tool of policy at the moment. Well, I am concerned that the fact that the narrative about why monetary using has been so strong in these particular circumstances, that narrative hasn't been made clear. So it's not surprising that some people have gone away with the impression that the objective of central banks is

to support asset prices. I don't think that is their objective, but I think I can see why some people might think it. I think Chaney is very compelling in arguing that the dual mandate for the FED allows the FED to pursue strategies that will maximize employment. And it's reasonable to argue you and to explain why that strategy will have benefits, for why the constituencies in the country, not

just the aggregate, but individual groups would benefit. To Larry Summers, in the response to this great need, the popular need to show that the policy is more inclusive, that globalization could be more inclusive, and to the long list of things that you said that central banks are impotent about, could be just to say central bank's main role now is just to make large scale fiscal action affordable, just as they effectively have this year by keeping rates low,

making it possible for governments to borrow. Should they just recognize that that is their main role at this point. I wouldn't put it that way. I would put it that their main role is to support stable, non inflationary economic growth, and I think for the foreseeable future that's likely to involve keeping interest rates at very low levels.

I think the deep problem, the deep macroeconomic problem that the world has today is that savings are exceeding the natural level of private investment, putting downwards pressure on interest rates to near zero real interest rate or below UH levels and leading to sluggish growth and lack of inflation. And that is the world's fundamental problem. And it is not a problem that central banks can on their own resolve.

It is a problem that central banks can acknowledge. Is Janet certainly has in her period in the period after she left office in very strong and clear ways as the evidence has become UH clearer. But they need to point up this as a problem, recognize that it has important implications for fiscal policy, that it has important implications for the ways in which governments manage their debts, and that they are prepared UH to UH do their part.

Doesn't necessarily mean explosions in debt, but it does mean careful thought about a range of fiscal and structural policies. But we do need to recognize that Whereas from the period from the late nineteen seventies until the early two thousands, the central macroeconomic problems were the temptation to inflate and the crowding out of private investment by budget deficits, today the central problem is absorbing all the savings in a healthy way so that we have strong economic growth and

we don't have huge leverage and huge financial bubbles. And that is a fundamentally different macro economic problem. The calls for fundamentally different macro economic strategies, of which there may be a role for inflation targeting, but it is largely beside the point in a world where the real problem is insufficient price inflation and excessive asset price inflation, and we need to adjust central banks paradigm to take account

of uh those realities. Look, if I can say one more thing, the world's financial leaders said after Dodd Frank was passed, after the Financial Stavility Forum did all its things, that we now had a much healthier financial system that could continue to function without large scale bailouts less than five years after that was definitively proclaimed. We've had the biggest set of actions directed at propping up the financial

system in UH global history. And while it's looking okay right now, as Ragou said, we're not sure that even what we've done is going to be enough to hold. That suggests the need for a great, all a fundamental rethinking. John Yellen, what's your response to what what Larry was just saying? Well, I agree very much with Larry. I think he gave an excellent description of what the core problem is that the developed world faces. That there is

a glood of saving and a shortage of investment. And that's why the effect of lower bound is such an important constraint. And it's what really means that we have to have fiscal policy, structural policy, and things other than just relying on central banks UM to UH keep healthy

growth with low inflation UM. I think central banks need to do what they can, but then not overstate UM what it's possible for them to do UH to FED his recently concluded its strategic policy review and made adjustments to UM its monetary policy strategy, adopting a system called flexible average inflation targeting. I think this is an appropriate change.

It somewhat improves the scope for monetary policy to support the economy when short term interest rates are often constrained by the effect of lower bound I think it's helpful in preventing a cycle of falling inflation feeding falling inflation expectations. But well, I strongly believe central banks need to be

independent and need to do everything they can. The changes they've made, they're not a game changer from the point of view of secular stagnation and bottom line, I agree with Ring on which which required it's a lot about the importance of fiscal policy at this moment. I have to ask you, would you like to be more closely involved in that as a treasury Treasury secretary for the

new administration. I don't have anything for you, and that I'm sorry you don't think you'd be a good Treasury secretary? Could I ask you that? I could probably ask the rest of the panel that for other people to decide. I think, yeah, she would be a great Treasury secretary. But let let me talk about another issue, which is

related to Larry's secular stagnation idea. I mean, in some sense, the hope for the world was that fast growing emerging markets and developing countries would provide that demand, which sorely seems lacking at the aggregate level. One of the big concerns we should have with this pandemic is how much scarring has gone on in those economies because they haven't had the ability to provide the kind of fiscal as

well as credit support and industrial countries have. So my worry is, apart from the North Asian economies which seem to have come out quite well from this crisis, many countries in Latin America, Africa, South Asia are going to suffer some diminishing in growth potential going forward, coupled with some of the impediments to create that we see. I think this is a cause for concern for the global economy. It's something that we should very much work very hard

over the next few years to try and reverse. And that's where Larry's called for global sort of leadership I think makes a huge is a huge importance. We all talk about cooperating with China on the most important global issues, there needs to be cooperation with China on the whole

set of issues around support for emerging markets. If central banks could explain, not that they can do it, but that ultimately the financial stability of all the institutions they're responsible for, the financial stability of their economies depends much more urgently on achieving successful global cooperation than it does on anything else. If they could make that case, they would be making a much greater contribution to the current

global moment than they currently are. I agree with Mervin, but I think the world looks to the central banking community two explain the nature of the macro economic challenges before it, even if the central banks themselves lack the tools to deal with it. And if the central banking community can explain, as Janet uh just is is. I tried to um a little bit in talking about the absorption of saving problem. If that problem can be laid

out clearly, that is the first step. It's not doesn't solve it to lay it out clearly, but it's a crucial step towards the whole range of measures. And you're absolutely right, Mervin, that it involves a million different things that are necessary to resolve it. But first we need to to find that problem, and that's something central banks can surely do. Lord Mervin King Ragan, Janet Yellen and

Larry Summers. Thank you very much. We could end the podcast there, but I wanted to give you a short taste of my conversation with the Irish tea shop or Prime Minister Mihal Martin. He'd recently had a warm phone conversation with President elect Joe Biden and I couldn't resist asking him about that. But come January one, the UK will no longer be trading on the rules it had while it was inside the European Union. It will be fully out and with six weeks to go, we still

don't know what comes next. We do know that Ireland is stuck in the middle and has a huge stake in what happens. I started by asking him whether he thought these last minute negotiations we're going to produce a deal. I would still hope there will be a comprehensive trade deal, but it will be challenging my sense of if there's a political will in the United Kingdom to get a Brexit deal done, then it will happen. I think the

European Union want a deal of that. I'm clear not an advanced but it's our view and it's Ireland's as a member state that is in the interests of our citizens and respect of economies to get a deal that makes sense, and no deal would be very damaging to our respective economies. Logic dictates we should we do. We should do everything we pass we can to get a deal. It's a responsible thing as politicians to do in behalf

of the citizens that we represent. We now have an incoming US president who has made very clear his views on the Good Friday Agreement and the importance of their not being a hard border between Northern Ireland and Ireland. Do you think that changes the calculus? Do you think that makes it more likely that Boris Johnson would compromise

with the EU? I think it's it's held when I spoke to Joe Biden during the week, very warm, clearly very proud of his Irish heritage, and it makes no secret of that, and we're looking forward to his presidency to be frank from that perspective. But in the more broader issue is the prospects of a Biden presidency being more multilateral in its trust in it and its impulse.

That was careful my conversation with the President elect that he was going to engage with Europe now that could That's probably more significant in terms of the impact on the UK's response, because it seems to me that the United Kingdom values its relationship with the United States and vice versa. I think President Biden would too, and so therefore I think the US the new presidency would prefer

a deal between Europe in the UK. I think UK is conscious of that, and the president of Lex three climate change, I think Boris Johnson would like him in Gasgow for example, for the cops. So I can see an alignment of of interests here sparked by the President's commitment to montinaturalism and to resetting. If you like the sets of relationships between the US and Europe that might be better, that are wight enhanced, the prospects of a deal,

weld broaden it out of it. I mean, you say, itself, it's going to be a shock when we even if you had a deal, it's a big change from what we have before. And the deal itself is not like it is likely to be quite thin compared to what might have been expected. If we're thinking about global cooperation and inspiring more negotiation on trade globally, I mean, are there any positive lessons from this negotiation for the rest

of the world or all Are they all negative? I think the the important lesson is I don't engage in any sort of knee jerk reactions to anything, and don't start announcing things or doing things without adequate preparation in advance. I mean, these are very very weighty issues. They're complex, they have a lot of unintended consequences um and they affect people's lives and livelihoods fairly significant as we know. Well.

I would hope but that the election of President Biden as well as that we would move to a more open trading prospective. And I think, you know, we're all perplexed at times as to what UK would decide to leave one of the largest trading blots in the world, which has brought about significant economic advancement for all of

our economies in Europe. So I think our lessons to be learned in terms of the basic principles that that really power in economy, and I think we need to be very conscious of that and reverse any move towards protectionism and move towards an open trading environment. Obviously, we've had a second wave of COVID coming a US Europe in the last couple of months are in high frequency indicators of the economy show that that is causing a

double dick in many economies in terms of activity. How hopeful are you that we can have a faster recovery this time around and maybe even still see that v shape recovery that people have talked about. I think the success or otherwise of vaccines is going to be a very important story from two dozen twenty one um and from the Irish perspective, we we we moved early on the second wave, so we're I think the second lowest

incidents in Europe. Now we're doing very well in terms of a downward trajectory of cases, downward in numbers in hospital and I see you. I think in the early part of the tournament twenty one, depending on the efficacy of vaccines as the marriage, I think the by the middle of two dozen twenty one, it could be better

than we might have anticipated. And but I think we're we're learning a lot more about the virus that will inform how we exit this level five of restrictions and how long we can protect livelihoods as well as lives, and that's important and to get people back working again in certain sectors travel, tourism, aviation, hospitality. Those are the sectors that I mean that that have been hardest hit. We believe all those sectors can come back much more strongly,

more quickly. And finally, just to go back to President Biden, you said yourself, he's one of the presidents who American presidents who is long boasted of his Irish roots. Do you think it's impossible that the Irish, the special relationship that America has with the European country will be with Ireland under President Biden, not the UK. Well, I think he values his relationship with the UK, but there's no question for my conversation last week, he loves Ireland. He's

very proud of his Irish heritage. Even in our conversation we spoke about his his great grandparents and his grandparents home in County leve and in in Mail and I said to him, look, we'd like to see you an aranand and he said, you're not going to be able to start me from coming. El Martin, thank you very much, You're very welcome. Indeed, thanks for listening to Stephanomics. We'll be back next week with more on the ground reporting and analysis on anything we think you might want to

hear about. Remember you can always find us on the Bloomberg Terminal, website, app, or wherever you get your podcasts. And for more news and analysis from Bloomberg Economics, you should follow at Economics on Twitter. This episode was produced by Magnus Hendrickson, with special thanks to t Shop, Michael Martin, Larry Summers, rum Rajan Janet Yellen, Lord, Mervin King, and Cat Glass. Lucy Meekin is the executive producer of Stephanomics

and the head of Bloomberg Podcast is Francesca Levi. Four th