Who Should The Fed Answer To? - ft. Sir Paul Tucker

Where fed independence repealed today, long bond yields would go up, I think quite a lot. The currency would fall and probably equidistant fall. The rising interest rates on average are in the future. Would her people, the rising inflation expectations, and then eventually, the rising inflation, or the deep recession to avoid the rising inflation expectations, would her people, and actually quite quickly people would say, well, actually an independent center bank is quite a good thing, isn't it? I'm Bethany McLean. Did you ever have a moment of doubt about capitalism and whether greed's a good idea? And I'm Lucia Zengales. We have socialism for the very rich, rugged individualism for the poor. And this is capitalism, a podcast about what is working in capitalism. First of all, tell me, is there some society you know that doesn't run on greed? And most importantly, what isn't? We ought to do better by the people to get left behind. I don't think we should have killed capital system in the process. So the episode you're about to listen to was recorded before this week's standing news about the Justice Department surveying some penas on the Federal Reserve. We, Gianna, are going to have an additional conversation to discuss that news and what it means. However, we think that this news actually makes this episode all the more relevant. The Federal Reserve is the most powerful economic institution in the United States and arguably the world. It can raise your mortgage rate, move the stock market, throw millions out of work, or rescue the financial system, all without a single vote from the public. We call that independence. The economic justification for independence is very simple. If politicians run monetary policy, they goose the economy before election and leave us with inflation afterwards. So we handed that power to technocrats. But here's the twist or one of the twists. This independence can protect the Fed from politicians, at least arguably until recently, but not necessarily from Wall Street. In fact, Leija, you've argued that the more independent the Fed is from voters, the more dependent it is on Wall Street. Why do you say that and why would that be? Because at the end of the day, when you are a buuworkrat, you want to have an objective function. And if you're not accountable to the political system, then you're accountable to your career incentives. And the career incentives are naturally in the direction of policing Wall Street. Because when you step down, you're going to either work for Wall Street or give speeches to Wall Street, which is a very profitable activities that people do. Once you remove something, as big as monetary policy from the Democratic politics, and you leave in the hands of technocrats, people start to feel shut out. And that opens the door for a populist leader to say, why are these unelected bankers running the economy? Put me in charge and I will tell them what to do. Not surprisingly, this is exactly what is happening under President Trump. In this fight between Trumpian and independence, our concerns about capture and democratic accountability have been lost. To bring them back into focus, we decided to invite Sir Paul Tucker, former Vice President of the Bank of England, an author of several books, including Unelected Power, where he argues that what he calls delegation with insulation is legitimate only under strict conditions. Clear goals set by elected politicians, limited tools, no open-ended missions, and strong transparency and accountability. Welcome to Capitalism, Sir Paul Tucker. You are aware of a civil servant, and this term is often used in Europe, but rarely in the United States. Can you explain to our listeners what a civil servant is and why this term is not very much used in the States? It's a very interesting question. Actually, I wasn't a civil servant. I was a public servant, but I wasn't a civil servant. But in terms of what you're getting at, you want some permanent officials that live by norms of fidelity to the elected government of the day who know their way around, and you absolutely definitely want some elected officials at the top and around the political parts of any of the great departments who can provide direction to those below them, and they will follow. If that is not the case, if there is obstructionism within the machinery of government in Washington, that would be a very bad thing indeed. And you do get elements of that. I mean, British people are amazed with certain things that have happened in the United States over many decades, where a president has given an order to the military, say one about Guantanamo Bay, and it seems not to be carried out. This is a strange thing that should be, I mean, how can that happen? But look, that the norms of governance in Washington have been eroding for quite a long time is widely recognized. And the interesting thing is it's social norms that keep these things alive. It's a kind of social, public, or professional crowd sanction. You know, you can't do that. It's never quite the letter of the requirements, because however full, even if the letter of a constitution said obey this constitution, there's a norm in the background that says obey the sentence that says obey the constitution. There's always something outside the constitution that is doing a lot of the work. Do you think that you're thinking on these, what's called them explicit norms and implicit norms plays a role in how you think about central bank governance and whether it is or should be different in the US and the UK. I think the argument for an independent monofil authority in the United States, the UK, Germany, France, is essentially the same. It's the do with separation of powers that a an absolutely fundamental tenant of our shared system of government is that taxation should be decided and approved whatever in the elected assembly. That's the first step. The second step is the monetary levers are always an unavoidably so inherently implicitly levers of taxation, either by unleashing surprise inflation or surprise deflation or actually even up to a point with expected inflation as well. But since the monetary instrument is an instrument later on in the instrument of taxation, the last people that should control it is the head of the executive branch is the king. So third point to make is that for hundreds of years, in basically during modernity, legislature has solved this problem by the gold standard. After that, after we're off a commodity standard, well then what's there to do? So you could have a committee of the legislature or do it, but that's actually not practically feasible because it's quite a time consuming task monetary policy and legislators and other things to do. Delegating to a central bank emerges as a solution of the following four. It is a delegation to a creature of the legislature. And now this creature of the legislature of the central bank has this kind of instrument that lays them there as an instrument of taxation. And so the legislature must put constraints on it so that it's not abused in that way. But to go back to the second step in the argument, for the executive to take control really is to use the authority of the executive legislature. I once said this to some US constitutional scholars and they said they know that the president would still have to go back to Congress to get spending approval. And I looked at them, I mean I'm going to exaggerate this only a little. I looked at them and the world them it. You think if you've got the money, you need to go and get approval for spending. That relies on the norm of doing that. Well if that norm is holding, so would the norm hold that the president shouldn't be controlling monetary policy. Actually that conversation with those constitutional scholars was an interesting illustration of constitutional scholars not frequently enough thinking there must be something going on outside the constitution itself or said at norms. Tell me if I'm wrong but in the UK the prime minister sends a letter called a mandate letter every year or so in which the fines clearly the macro objectives. Of course you have a general mandate but they actually they specify 2% inflation versus in the United States there is a dual mandate of the Fed but in fact what represent price abilities define by the Fed itself is not determined by the executives. In primary legislation the objective is laid down by Parliament and it's lexicon graphic achieved price stability and subject to that do things that will support the don't kind of cross the economic policies of the government of the day and then the legislation says we Parliament delegate to the executive treasury the power to flesh out what price stability means and it should do so for a remit that it gives to the monetary policy and committee of the bank of England. One difference from the US is in the US the primary legislation sets the Federal Reserve essentially a dual mandate. The UK thing is achieve price stability and subject to that do business cycle stabilization. In the US it's achieve price stability and do business cycle stabilization and trade off one against the other to the extent that you need to. So the second part of this there are more things to be said but the second part of your question that I'm going to pick up on is so the Federal Reserve decides its own target. Do I think that's good? No. I doubt whether the legislature would want to delegate to the executive branch power to set Fed objectives and if it did make that delegation and if some executive eventually abused that power because Congress tends to be sporadic it would find it very difficult to undo it. Whereas that you know, a parliament I'm doing an executive in London is not very difficult. I don't think it's infeasible but I think it's unlikely Congress would ever delegate to the executive branch a power to set the remit but I think the Federal Reserve could have done more to socialize its remit review with Congress and with the executive and I think it should prioritize going to Congress given that on my argument and I think my argument is the true argument it is a creature of Congress and I think the Federal Reserve over a very long time has tended to be somewhat wary in its relations with Congress and I think that's a mistake. Then does thinking about this through the lens of the Fed in particular although I suppose the same could apply to the central bank but with less leniency is the Fed's short term goals to preserve its own independence perhaps at odds with what would ensure its long term survivability in its current form. In other words if you think of the Fed as an independent entity with life of its own our short term goals and its long term goals congruent. It shouldn't have a goal of preserving its own independence on my view. There's also a tactically issue here. We haven't touched on this yet but of course there really are important welfare arguments for having an independent central bank. It's not just a constitutional argument. We're Fed independence repeal today. Long bond yields would go up I think quite a lot and the currency would fall and probably equidistant fall and the rising interest rates on average are in the future would hurt people and the rising inflation expectations and then eventually the rising inflation or the deep recession to avoid the rising inflation expectations would hurt people and actually quite quickly people would say well actually an independent central bank is quite a good thing isn't it but that being the case if I'm right about if you like the violence of the reaction to a loss of independence then a central bank doesn't have to defend its independence too much. It just has to do its job well. This is quite unlike other areas of independence. If you if you stripped independence away from some other bodies it might be harmful in the long run might might not be but might be harmful in the long run but people would only discover in the medium to long run. If Federal Reserve independence was was broken as we are speaking the cost of it will be apparent by TTI and that's a hell of a thing and I think for reasons of principle central bankers should not strive too hard to defend their independence they should explain the utility of the independence but not strive to defend it but it also shows why they probably don't need to defend it they don't need to protest too much. What is your view on the power of the executive actually to remove the chairman of the Fed or the chairman of the central bank so I'm not asking you a legal question in the United States because I know you're not a legal scot. I've changed from me so theoretical point of view so for example if a chairman of the Fed is doing terribly on inflation can a presser they'll should a presser then be able to remove it. Let me come to your question in just a moment it's a very important one but there was a little qualification that you made I'm not asking you the legal question you said because you're not a lawyer this is a very American thing in the in the UK of course trained lawyers I've given great weight in these views and formally they're given the greatest weight because they made the final decision but it's not assumed that others can't have a view on the law. Indeed the problem with the American way of thinking about this is it kind of implies that the only body that is responsible for maintaining the constitution is the supreme court where it's actually the duty of everybody and that's not cheap shot against the United States I think this is a slight problem the number of times people say to me oh you know we're not lawyers and then I'll go on to discuss just the economics of it and it means that people Luigi and your professional haven't thought enough outside of Kiddland and Prescott and Barrow and Golden about what central bank independence is big to your question which is an important one there are three indices of independence so this is a positive comment not a normative comment they are first of all that the executive branch should not be able to issue a direction that says oh by the way you've got an interest rate meeting today set the interest rate at some number that's the first no directions so the second is can't sack the central bank's policy makers not just the chair but the others as well because if you could well that would be a route to undermining the first and the third one is some budgetary autonomy if you have to go to the legislature for your money frequently once a once a year you will turn out not to be independent I think were a president any president on a widely popular president to sack a fair chair for no reasons well then that would diminish confidence in the independence of the of the federal reserve and it would diminish confidence in the the credibility of its commitment to keep inflation low and it's be clear in those circumstances it will be more difficult to stabilize the business cycle something that isn't said enough about the period after the global financial crisis and I mean in the first two or three or four years I'm going to make an assertion but I think it's an assertion that many people would agree with had central banks not been independent in late 2008 2009 and when interest rates were being cut sharply and QE was being introduced it seems to me extremely unlikely that an elected government would have been able to provide that amount of money for stimulus because what would have happened is that long bond yields would have risen because people would have thought they were going to abuse their capacity to do to do that I mean I say this because there's there are there of people on the political spectrum that that think that central banks are a kind of part of a neoliberal kind of program or even conspiracy and I don't think that I think that the people that that care most about jobs and can marginalize the poor in our societies the capacity of the central bank to provide overwhelming monetary support in dire circumstances without people losing confidence in price stability is an extraordinary and an extraordinary valuable thing that we did not revisit I mean it's been it's been pretty terrible since the global financial crisis in lots of ways don't get me wrong but we did not revisit the great depression and the reasons for that are I think to do with lessons learned from that period about the design of monetary policy institutions and the conduct the policy-making of monetary policy institutions but then I see that point of view that you just expressed as being a bit at odds with the idea that the central bank should be more constrained because what the central bank did in the financial crisis and then again in the pandemic was to stretch the limits of its remit in ways that elected officials did not entirely understand they were they were doing at the time and so how do those two things square together if you want the central bank to have the power to do that but at the same time a central bank with unconstrained power is not a great thing how do those things fit together okay I see the I see the point of the question like that don't think I highly agree with it okay so first of all maintaining monetary stability price stability isn't just about inflation it's about avoiding deflation as well the implosion of the banking system was destroying our money what central banks did is offset a collapse in broad money with some more narrow money now do you then make the point but did they do things that were kind of stretching their boundaries to do so there are two things here were they stretching the boundaries in law and were they stretching the boundaries in terms of a general understanding of how monetary policy can be conducted let me start with the with the UK we were quite clear and everybody else is quite clear that the Bank of England had the authority to buy government bonds that had been doing so for a few hundred years and nor did we think it was hugely unconventional in the 1980s in a period that was called over funding that we shouldn't get to distracted by this the government and the Bank of England over-issued government bonds so as to depress the pace of increase in broad money this is during the period of monotryism which was largely mad it was called over funding a merving king and I said to each other well what we're going to do with QE it's under funding but had it been used before in quite that way no so we did two things we talked openly to parliament about it and before that we agreed there was an exchange of letters between the governor of the bank and the treasury secretary or as we call the office the chancellor of the exchequer which had two things in it first of all that they would indemnify the bank of England against losses and get the profits but that was merely a way of publicizing what was true anyway and is true here and the second thing that was part of that exchange of letters they would not change their government debt management strategy to partly undo the effects of QE in other words if we were buying long-term bonds they wouldn't assume more long-term bonds and they agree to that so the details don't matter what's behind that is a this is perfectly within our vare's it's unfamiliar in a world where parliament tells the treasury to set a remit we need an instant exchange of letters with the treasury which we had I was part of the the governor was talked to me a number of times the weekend when he was discussing that with Gordon Brown and Arster darling that was then incorporated into the next annual update of the remit and actually during the during the financial crisis I think not in around QE there was an agreed a mini accord between the US treasury and the federal reserve about the use of its balance sheet during that period as far as I know that has not been updated and I think it should have been I think COVID is completely different actually the COVID is kind of a misuse of powers rather than an abusive powers and by that I mean the Biden administration makes a huge fiscal injection and the federal reserve carries on adding stimulus at the same pace it would do otherwise well I mean this is absolutely extraordinary that the the shop that comes both requires the Biden stimulus and requires the federal reserve to carry on as there are nothings happened so there must be a shop that precisely nonset on that I think the criticisms during that period of the Biden fiscal stimulus were misdirected they should have been directed at the Fed and I think the Biden administration's attacks on the people criticizing its fiscal stimulus were misdirected they should have just said well the the macroeconomic implications of this are for the federal reserve but this came during a period where I don't enjoy saying this but it was a big change a treasury secretary had got used to talking about monetary policy and the conduct of monetary policy and if you go back to the 1990s that didn't didn't happen I was what you would call chief of staff to the government of the Bank of England in the late 80s early 90s and so have been watching these things for a long time and it was quite novel to have a treasury secretary fantastic to expert and monetary policy that happens offering a commentary on all the monetary policy and I think you know these I don't really understand what an over-term window is but the extent that I've got a little grasp of it these little things shift the over-term window if central bank independence is meaningful then this isn't just as I said earlier the central bank shouldn't go around being neurotic about its independence but so everybody else in government holding positions of great power needs to conduct themselves and recognition of that independence and unless they wish to we can during the same period talking about inclusive growth was a mistake it's not a mistake because inclusive growth doesn't matter I mean it plainly does matter it's a mistake because central banks don't have an instrument for generating inclusive growth only aggregate short term demand growth if they were to give an instrument to affect distributional issues I think the response of many people including me would be hold on this and that why we elect people but in the United States it seems that the the chairman of the Fed does not really pay for his mistakes because you said that power made a big mistake in 2021 with inflation or the stimulus and then in 2023 there was a major banking crisis that was a failure in supervision but we have not seen any accountability or any under two counts in fact after the first he was renewed as chairman of the Fed and after the second nobody except me in blaming for that and this just seems like almost in polite circles you cannot raise criticism of the chairman of the Fed I do think this is to do polite circles I do think it is a big issue and I think you are basically right but it goes back to the question about remit which I'll come back to if I may I'd like to start with the supervision and so this was the failure of SVB alongside other large regional banks had been exempted from various supervisory and regulatory requirements including resolution planning and when they were consulting on whether to do this the Federal Reserve and as it happened as the FDIC had been told by various people that this would be on stake and could lead to wholesale deposit run on the regional banks and if it did because there were others that had similar liability structures there could be a degree of contagion I know that because I was chair of something called the systemic risk council at the time which included Paul Volcker and John Cawtree-Shea and I signed a letter and she'd a bear for which are the FDIC and many others I signed the letter from the SIC that effectively said that but we weren't the only ones who said it the then vice chair of the FDIC said it in a speech in Washington and they went ahead and I do think it matters that there's been very little debate about that I think it's probably the most egregious supervisory set of mistakes that I can remember pretty well anywhere that affect stability so the problem here is that if you just if you sack the person or they resign after testifying to Congress or to the parliament well then you start to undermine independence and I think the remedy actually is to tweak the regime to require more transparency to to realize I think in the in the US's case I think in the wake of the post-COVID mistakes I think the the starts from Congress should have been well you can't be left entirely free to make these regime changes of the kind that you made and we're going to put some constraints around your regime refuse in the future and then of course you get to the problem to the extent that Congress tried to do that in law it would a tie itself up in knots while it was trying to do so and if it wrote a wrote a law that wasn't terribly good it would find it horribly difficult to amend it which is very different from a parliamentary system and so I think all I think the point about accountability can't quite be about the individuals unless the individuals have been egregiously kind of negligent or or whatever but I think has to be about how can how can we the American people within when they're elected representatives within our system of government set up something that is a little bit more flexible to ensure proper congressional oversight and constraints around the federal reserve I have a simple very simple proposal that every time the chairman of the Fed invokes the systemic exceptions in which they expand the deposit insurance issued tender as a resignation at the same time because to some extent you arrive at the crisis because of lack of proper regulation exempt and so and also you want to make it difficult to use the systemic exception so the systemic exception comes with a resignation of the chairman I think so I haven't thought about that and I'm not going to think about it out loud now I have thought about something else which is in the same ballpark because there's a accountability of the Federal Reserve and the circumstances you're describing and there's the accountability of bankers and non bankers that end up getting emergency help so I open for a system everybody that runs these large maturity mismatches has to sign up for the discount window and if ever there are circumstances where somebody hasn't signed up for the discount window but needs to use it and the government and the Fed decide together that they should use it then all the bosses of the firm concerned should be banished from financial commerce for the rest of their biological lives so one last question I suppose you were king of a day for a day but king of America for a day what would you change in the institutional structure of the Fed to make it more legitimate I don't know what should have a king for a day so it might country doesn't have a king for a day or it hasn't had since the early 17th century you'll apply ministers for date for a date well he he'll see you would have to go to parliament even Mrs. Thatcher had to go to parliament Mr Blair too I think the chairs of the Fed should get around the country more and be more visible around the country whenever I've said this to Fed people they say we have regional Fed presidents that do that and I don't think that's enough I think I think the people in America are entitled to see the most powerful person in the Federal Reserve in their neck of the country and I think the chair of the Federal Reserve and this has been changing a bit should be on television a bit more I mean go on as a the Bank of England go on television there there used to be I'm sure this delays a strong norm that but don't compete with the politicians and that's a fuzzy that it's possible to cross and it's important not to cross but the people need to know who you are particularly the the number one office holder because when things going wrong go horribly wrong they well who is this person and yet at the same time I believe that in the big crisis the presidents should front up more though these things are not inconsistent can I say one final thing Luigi that you haven't absolutely and I thought you might there are some people around the place who are saying well Fed independence from monetary policy has to be maintained but it should really be taken out of regulation and supervision the Federal Reserve is inalienably the lender of last resort there's anything to create another central bank and it will be the inalienable lender of last resort you do not want a lender of last resort that doesn't know anything about banks the UK tried that supervision and regulation were taken away in 1997 and I want to choose my words carefully parts of the of the Bank of England struggled during 2007 in ways that were probably harmful to the country and the world and I think it would be a terrible terrible thing for the American people and that in fact for the world for the US to to try that experiment I mean I think there's trope of when you talk about democracy as an experiment I mean get over it you've had it nearly 250 years now whereas taking supervision out of the Federal Reserve an irregular role would be an experiment and it would end in it would end in tears and it would end in more fiscal bailouts and the people on the libertarian rights not only them that argue for for this stripping of the regulatory supervisory role the banking role away from the Fed that they would hate the eventual outcome even more than they dislike the current state of affairs which is not to say that there aren't really big improvements to be made on that side of the Federal Reserve and we have touched on some of them in in this conversation but the final thing to say if I may Luigi is that financial stability is now part of national security the great winners from the global financial crisis are based in Beijing it was a confidence boosting moment for them it enhanced their reach around the world partly because the Western capitals were distracted partly because then the Western system was discredited the last thing those of us that are deeply committed to liberal democracy constitutional democracy a democratic republic whatever the three synonyms the last thing we need is another grave financial crisis it is insufficiently understood that the Federal Reserve headquarters is actually an important element of United States leadership in the world and I really don't think enough people in Washington appreciate how important the Federal Reserve is how important Federal Reserve credibility is to the credibility of the dollar I think debates about Fed independence should be seen in that context and I do not have great confidence that the the the Supreme Court will be able to find its way through all of this in a sufficiently principled way if you're enjoying the discussions we're having on this program there's another University of Chicago podcast network show you should check out it's called the pie economists are always talking about the pie how it grows and shrinks how it's sliced and who gets the biggest share join veteran MPR host Tess Vigland as she talks with leading economists about their cutting edge research and the key events of the day here how the economic pie is at the heart of issues like the aftermath of a global pandemic jobs energy policy and so much more so we do the really new thing that I learned is that among economists actually this idea of how free the Fed is from political influence has been debated for a long time and the door is opening on that more and more but the point you made about the Fed not being free from influence from Wall Street I haven't seen studied by economists has that been as well and I guess what do you think of that first point I don't think that there's much interest in economists discussing about the capture by Wall Street in part because it's admitting that they themselves are captured when I at least raised the fact that somebody like Janet Yellen who is a wonderful economist and I think was a good chairman of the Fed or a woman of the Fed and a good secretary of treasury but thanks to the fact that she was appointed to the treasury shortly after she was of the Fed we learned that she earned eight million dollars giving speeches in their year following her position as a chairman of the Fed there is not nothing wrong about giving speeches being paid for speeches the question that I raise imagined she had a very aggressive policy that for example did not bail out banks in Wall Street would she be so welcome in giving speeches at Wall Street and if the answer is no I find it the fine gravity that an economist can think that this potential reward on the margin would affect her decision and I don't want to pick on Janet Yellen I'm just saying any economist but the only reason why is Janet Yellen is because we have a disclosure or a much she made okay my definition of an economist and somebody that think that eight million dollar on the margin should affect decisions because you believe that money and incentives matter if you are a doctor you are free to think whatever you want but if you're an economist I think you're bound to believe that but most of my colleagues don't believe that so that's the perplexing part that's really interesting certainly anecdotally that does make some sense of what we've seen from the Fed in the decades since I've been covering the markets because certainly we saw it from Greenspan's Fed and we saw that through presidents with whom he was not aligned politically and I think we've seen it from every Fed chairman since then by which I mean an adherence to Wall Street it's not just that they stand to make money from giving speeches or from being close to Wall Street or have better career opportunities after they leave the Fed it's that so much of the health of our economy rests on the stock market now that they almost are victims to the success of the stock market or captives of the success of the stock market no Fed chairman wants to be the person who cratered the stock market and therefore caused another depression of our financialized economy and so I think our very reliant son of financialized economy has also created that dependence but this is much more recent phenomenon the dependence on Wall Street I think the dependence on Wall Street goes back to Greenspan even before so many dependent on the stock market for their retirement but certainly that only accumulated or increased importance of that but the other part that we don't want to forget is that the Fed is an important role as a supervision authority that's where the capture is more dangerous because you are afraid to really to use a technical turn a piece of people in Wall Street as a result not to mention that after 2008 there was a reform but before you had the presidents of the values feds where elected by or appointed by a board that included all the major bankers this is still the case that is the board but they don't have the voting power in the decision to elect the board chairman or the values fed so in the New York Fed you have the JP Morgan CEO and values of the people on the board of the fed so speaking of the influence you are making those fed officials independent from politicians but talking to business people and what kind of business people every board meeting have you ever heard the term a greenhouse effect for Supreme Court justices now or you love that actually is coming from a journalist Linda greenhouse that was specializing in treating the Supreme Court and people were saying that in the past the Supreme Court was drifting left when they were going to Washington and why because they were living in Washington and were constantly aroused by Linda greenhouse with their articles and so they were moving left as a result of the social pressure and I can tell you that in Europe the fact that the central bank of Europe is in Frankfurt and is not in Paris or God forbid Rome changes dramatically the environment because the pressure the day we see is from the German press and the German environment rather than being the French press of the French environment or the Italian press and the Italian environment so the fact that the fed at least the president of the local feds are embedded in the business environment plays a huge role yeah and I guess one other way to measure the fed's power and it's hold in some ways on our economy is that even though one of the largest institutions to fail the financial crisis was city group a regulated bank and certainly a lot of the problems came out of the regulated banking sector and out of Wall Street which even though at that time was regulated by the SEC the fed also was in there talking to people all the time the fed still somehow managed to emerge from the financial crisis with more power rather than less power unlike many other regulatory authorities so I think some of that shows that it's kind of a two way street there's also the fed may be captive to Wall Street but there's very little incentive anywhere to anger the fed either yeah you're so correctly not only with more power but with impeccable reputation because the fed did do a lot to rescue the situation after the facts but honestly did nothing to prevent the fact right right right it was a situation in part caused by the fed and and so when we when the fed gets all the the credit for being the hero in that situation I always thought it was interesting that that was the way that the the narrative told the man was told there was a lot of effort to blame the SEC and I think it was because blaming the SEC detracted from any blame that could accrue to the fed and it was interesting it was on the part of a lot of economists who were overeat overly eager to blame the SEC for the financial crisis because that way they could say the fed was perfect anyway we digress a little bit no no but we wait a second you actually made me think one thing remember Tim Geiner who was first at the fed and then at the treasury was very fun to say when there is a fire you have to put out the fire you don't have to look for the arsonist and of course I'm exaggerating a bit but if you are the arsonist the last thing you want is to look for the arsonist right that is true what did Tucker have a clear sense to you of what we in the US should do what it is we're getting wrong and what would be a better way forward yes my reading of what he said is that he does believe that Congress should play a more active role in in mandating and specifying the goal the fed should follow but certainly there's not one the president to be so influential in monetary policy so it's an interesting kind of nuance because most of the people who oppose a tramp on that dimension are people who want a total independence of the fed from anything while Paul Tucker recognizes the importance of having a political mandate for the fed because the fed shouldn't basically go on its own in part because maybe captureable or sweet but in general if the fed is too much seen as a technocratic institution eventually will lose political support and the backlash will be even worse and so what he thinks is that there should be a very clear mandate from Congress on what to do and then leave the fed independent on out to do it yeah I thought his point about how this situation allows elected officials to duck their responsibility is really really interesting because this fig leaf of independence also allows politicians to say oh it's the fed as if they have no control over it and given the importance of monetary policy in our rule in our world that is a dereliction of duty in a sense on the part of elected politicians right the ability to say that this really important thing is happening but not my fault not my problem my I don't have any control over it whereas in reality probably exerting control through backchannels and you'd rather just have it be explicit so Luigi what was the first thought that went across your mind when you saw the news that the Federal Reserve had been subpoenaed that we went down one step in our banana republic the United States is becoming I refuse to think that this is just about interest rates because either Trump is stupid and I don't think it's stupid or is something about much bigger than interest rate if you want an interest rate lower there were a more subtle way to nudge the fed to do that by using this large hammer he all but insure that the next meeting will not cut interest rate because you have to prove the so why is he doing this is doing that to prove that he has absolute power this is a power grab move to scare everybody in a sense we are worse than the Soviet Union because you can be attack criminally attacked criminally indicted for resisting to Trump that's basically the message the impact that this has through the institutions through firms is enormous I just heard that a bunch of firms were afraid to shop at an academic seminar about immigration because the journalists were there and why is because they don't want to say in public that they are in favor of more immigration because they are afraid of Trump retaliation so I think that this is not just an attack to fed independence is an attack to the integrity of the U.S. system maybe in this case Trump has finally gone too far and that there is going to be and you're already seeing some signs of that there is pushback against this in broadly speaking in a way that some of his previous actions have not registered and I think it's because people do recognize how much all of this matters you decrease faith in the federal reserve the cost of American debt goes up the dollar goes goes down and that ends up impacting all of us in a way that is really devastating yeah but look at it you did not see the market collapse you didn't see a lot of people revolting yeah you had like central bankers writing a letter etc but this is within a small group of intellectual elite imagine a second in which you had President Obama doing something like this I think you would have seen part of the conservative down the street in with guns to say that this is a takeover we need to protect America we need to do this you know to that in the grand scheme of things I think that I don't want to say this one on the silence but it's not as dramatic as it should be that does beg a question why do you think the market didn't react more I think because at the end of the day they think they're gonna get from Trump more than Trump is gonna cost them is a vague sort of a cynical calculation but all this idea that the market protects institutions etc etc no the market protects the brands of the shareholders if the shareholders expect to receive more then it's gonna cost them they're gonna sort of be happy okay well that's an argument though for the US stock market and I might agree with that but what about the lack of reaction in terms of global investors to US debt or the dollar why has the reaction not been more pronounced I mean you would have thought that if something like this had happened that interest rates would spike and the dollar would plunge and I think there was there was some reaction I actually need to check this but but not as much as one might have expected you know this is the big advantage of a monopolist when you add a leak in some of the credit rating agency no sorry credit scoring agency like TransUnion etc you saw the market price go down a little bit but then go back half right away why because you have no alternative they have such market power that you can go anywhere else and I think that the same is true with a US dollar and the US Treasury the US dollar is the international medium of change and it's very difficult for anybody to go anywhere else and at the end of the day if you want to say farce you're gonna invest in US Treasury what is the alternative so in that sense does the lack of reaction say as much about the state of affairs around the globe as it does about what's happening in the US absolutely and I think that President Trump can get away precisely because there is this this vacuum this uncertainty at the moment this needs for US dollars this is dangerous because it doesn't create a sufficient pushback to stop this deterioration we're going to wake up a moment with a country with much much weaker institutions and going back is much more difficult I wanted to ask that is there any historical analogy you're obviously an expert on much of this including on on Italy is there any historical analogy that would argue that the lack of an immediate reaction doesn't mean a slow degradation oh absolutely in a sense that historically the markets were seen as a way to provide an immediate feedback for something that has long time consequences in many institutional choices we don't have a market that immediately give a feedback and that's a problem because you don't pay the immediate cost for stuff that in the long term is very negative this monopoly situation of the US in the world weakens this this reaction and and also this prospect of great wishes through some AI boom is an exercising even the stock market so we lack a powerful response to institutional degradation so it's then there a larger conversation here about the lack of market response and and how problematic that is and is there a time in history where the market also hasn't responded and maybe I think actually I don't know but maybe the advent of World War Two might be one of those times where the market didn't tell us immediately that and I'm not sure about this I wonder actually it would be really interesting to look at gigantic world changing events and whether the market reaction other actually was a predictor of of the importance of something and that does in a really fascinating way challenge this idea that the market is a barometer of what's happening in the world I think that the the market is very good and measuring small things is not very good at interpreting catastrophic changes I add a student who did this very interesting dissertation about the nuclear risk during the Cold War and the market was pretty good at interpreting this nuclear risk in a cross-section of variation so human missile crisis exploded for example the market went down interestingly places that were located next to nuclear missiles where the Soviets will attack first or companies located there went down more that companies located away from there so as you know New York was one of the major point of attack but also there were some places in whatever Dakota where the United States stole some important nuclear capability and there would be obliterated by a nuclear war so what is interesting is that after the end of the Cold War they release all the estimates they add of a nuclear war and at the time it would not have wiped out humankind all it can like half of it or something like that but the remaining half would have been alive so now the point is that the market was very good at the cross-section but was missing completely the risk the market went down I think 5% that day when the probability of the nuclear war was substantial and the actually ultimate killer for me or the fact that the market did not get it right if you were in enormous probability of dying tomorrow but then if you don't die tomorrow then it's business as usual you should see a very funny yield curve right because they interest rate between today and tomorrow you want to drink more champagne if I know I'm gonna die tomorrow I'm gonna sell some of my bonds and drink more champagne the most expensive champagne so you should see kind of a very high yield in the short term and then going back up to normal after that none of that took place during the Cuban Missile Crisis so the point is the market is not very good at making dramatic forecast where you don't really have a good scenario this is what will happen after a nuclear war got only known right would the US bond market still function where electricity still function or what what other things we like the most under that situation this is a kind of really really difficult question and I don't think the market takes those possibility ways usually until it's probably too late so that's actually fair just fairly dismay in terms of the wisdom of crowd being reflected through the markets and also in terms of just how sanguine we should be about current events given the lack of market reaction in other words if you are inclined to take comfort in the lack of market reaction and say all right well maybe this is okay it actually doesn't really mean anything at all I'm sorry to say you're right I didn't want to be right capitalism is a podcast from the University of Chicago podcast network and the Steegler Center in collaboration with the Chicago booth review the show is produced by me Matt Hodeb and Leah C's Reign with production assistants for Udsof Gandhi Matt Lucky Sebastian Berka Andy Shee 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