November 20, 2024 • 54 mins
For this month's CHATS segment, financial historian Edward Chancellor leads us on a captivating exploration into the evolution of interest rates, showcasing their pivotal role from ancient civilizations to the capitalist era. Chancellor uncovers how the disdain for usury transformed into a tool for economic development. Hear how iconic figures like John Maynard Keynes have shaped modern economic policies with their advocacy for low interest rates and why Chancellor believes the balance of interest rates is crucial for guiding economic behavior.
We also journey through history to understand the impact of low interest rates on financial stability, drawing parallels from John Law's 18th-century France to today's financial crises. Chancellor dissects how artificially low rates have historically spurred speculative bubbles and risky financial behavior, leading to economic turmoil. By reflecting on events like the global financial crisis and the Latin American debt bubble, we unravel how low interest rates incentivize yield chasing and can misalign with growth, becoming a catalyst for instability.
As we navigate the implications of prolonged low interest rates today, we scrutinize the resilience of financial markets despite central banks' interest rate hikes. Chancellor sheds light on the unexpected optimism in the investment landscape, fueled by AI innovations and government interventions. We delve into the intricacies of central banks' policies, questioning the effectiveness of inflation targets and considering how technological advancements could naturally lead to deflation. This episode is an enlightening journey through the complexities of interest rates and their profound impact on economic landscapes throughout history.
If you'd like to learn more about the show, have a topic or speaker to suggest, or would like to leave us a comment, email podcast@cfa-sf.org.
This podcast is produced by CFA Society San Francisco, a not-for-profit professional association, providing professional learning and career resources to over 13,000 investment industry professionals worldwide. To learn more about CFA Society San Francisco, visit our website or connect with us on LinkedIn.
The information contained in this podcast does not constitute financial or investment advice. Please consult your own financial advisor for information concerning your specific situation.
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Episode Transcript
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Speaker 1 (00:05):
Hello and welcome to this month's chat segment of the
Financial Perspectives podcast.
Our chats episodes featuredynamic conversations between
industry experts from some ofour recent and most popular
webinar recordings.
This month you'll hear fromEdward Chancellor and Ken Fryer
as they discuss the evolution ofinterest and the broader
financial landscape.
Speaker 2 (00:29):
It is a great privilege and honor for CFA
Society of San Francisco towelcome Edward Chancellor, the
eminent financial historian.
Mr Chancellor was educated atCambridge and Oxford and worked
for Lazard Brothers and GMO, inaddition to his work as a writer
, and Fortune magazine hascalled him one of the greatest
financial historians alive, andwith good reason.
(00:52):
We all know it's difficult topredict turns in markets,
especially if your predictionscome in the form of books.
But Mr Chancellor wrote DevilTake the Hindmost, a history of
financial speculation which waswell-timed for the peak of the
speculation in tech stocks in1999.
He wrote Crunch Time for Credit.
(01:15):
A story about the excesses incredit markets came out in 2005,
a prescient warning of whatthen became the global financial
crisis, a prescient warning ofwhat then became the global
financial crisis.
And now Mr Chancellor haswritten Topic of the Day's
conversation the Price of Time,a masterful survey of the
history of interest rates, andthat warns of well, we'll find
(01:40):
out today.
So, Edward, if we could easilyfind on the Internet 55 pieces
that say interest rates are justtoo high and another 50 thought
pieces that say interest ratesare just too low, and based on
your book, I expect we couldpick any day in the last 5000
years and that debate would begoing on in some fashion.
And so I want to start by justasking you in the history of
(02:04):
finance and of interest rates,you know sort of what have been
the main camps or theories aboutwhat level of interest rates
are right?
Speaker 3 (02:12):
Well, it's a good question, Ken, of lending at
interest, which goes back, asyou say, five millennia.
The most vocal proponents havealways been for lower interest
rates and if you go back intothe ancient world, you can find
(02:40):
it in the Bible and you find itin really, you find in the Bible
the fact that usury or lendingat interest was considered
illegitimate.
You find it in Greek philosophylike Aristotle and Plato both
decrying lending at interest,that's taken on in the early
(03:01):
Christian church and thenbecomes established in the
Middle Ages the idea thatlending at interest was
illegitimate, that usurers orbankers in Dante's Inferno or in
I don't know, the third orfourth circle of hell.
And then, when lending becomesprogressively legalized from the
(03:25):
16th century onwards, there isstill a debate as you know I
mentioned the book with peopledemanding lower interest rates,
and in that case they wereactually demanding in Britain in
the 17th century that themaximum legal rate of lending be
reduced.
However, there's actuallysomething quite interesting that
(03:46):
comes in here is that by the17th century, the advocates of
lower interest charges areactually business people in the
City of London.
I mentioned this fellow, josiahChilds was rich banker who was
head of the East India Companywho was really speculating in
(04:10):
East India Company shares andborrowed money, so naturally he
wanted low interest rates.
Then if you sort of fastforward into the 19th century,
you get the socialists.
And I said you remember thebeginning of the book, socialist
anarchist Frenchman Proudhonarguing, debating for zero
(04:31):
interest lent by a central bank,quite similar to what the,
let's say, into the 1920s whereJohn Maynard Keynes pops up as
(04:52):
an influential economist.
And Keynes, as I say, never sawan interest rate that he
considered too low.
He was always calling for lowinterest rates, always calling
for low interest rates.
And actually I think that sortof Keynesian view of interest
being something rather sort ofthat one should keep as low as
possible has prevailed intopolicymaking circles in the
(05:19):
post-war period and then, as Ialso mentioned, in emerging
markets.
Emerging markets interestsoften very unpopular.
If you remember the, theturkish president erdogan is
always decrying what he callsthe, the interest rate lobby.
He calls them a sort ofsinister cabal of people around
the world trying to push uphigher interest rates, whereas I
(05:41):
say, if there was, if aninterest rate lobby actually
existed, erdogan himself was themain mouthpiece and they were
always calling for lower rates.
And that really has been thecase and to some extent my book
is an argument against that, notan advocacy of high rates in
(06:04):
themselves, but, as we'lldiscuss, it's an argument to say
well, actually the interestrate serves a number of vital
functions of communicating toeconomic agents how they should
behave.
And if you're too high, yeah,pretty obvious, it's a thing
(06:27):
because you know you crush the,that you crush the um, the
debtors.
And and again, if you go rightback to the ancient world, it
was quite grounded the idea thatvery high interest rates were
about an abomination.
Because if you're in a primary,primarily um agricultural
economy with Because if you'rein a primarily agricultural
economy with no growth, if youhave a high interest rate
(06:50):
compounding over time, it issimply unbearable.
And in the ancient world, as incertain parts of the modern
world today, high rates, thecompounding of debt at high
rates of interest, could sendpeople into debt, bondage or
even slavery in the ancientworld.
(07:11):
So that's, you know, obviouslya pretty bad thing.
On the other hand, in a, onceyou get into the modern world of
sort of, you know, capitalistworld, which we might say starts
sort of sometime in the 15thcentury in Europe, then you know
, of course, you know, peopleare borrowing money for
commercial purposes.
(07:31):
They can earn a decent, youknow, if they're competent, they
can earn a decent return ontheir borrowing, and it's
therefore legitimate, to my view, that the lender should share
in the gains of the of theborrower, have some share of
that.
And and so I think that youknow, as you say, that there are
(07:55):
people always arguing thatinterest rates too high, too low
.
But what?
And it's very, very difficultproblem to solve, and it's a
very, very difficult problem tosolve, it's perhaps almost an
insoluble problem to discoverthe correct rate of interest,
which is an issue.
Speaker 2 (08:30):
However, as I say in my book, you can probably tell
when they decimal points, butyou can probably get it within a
percentage point or two.
So, speaking of that, as yousay, the camp advocating for
lower interest rates has hadmore sway in the outcome than
the camp advocating for higherinterest rates, than the camp
advocating for higher interestrates.
And one thing that the bookdemonstrates is that the winning
camp, when they succeed inhaving rates below, sometimes
(08:51):
that leads to unintendedconsequences and I wonder if you
could share with us some of theinstances in your grand survey
of interest rates where therewas a stretch of very low
interest rates and it turned outbadly Well.
Speaker 3 (09:06):
So first of all I'd say the.
I mean, as you know, I make thepoint in the book that the that
interest rate is, you know,influences the valuation of
assets, the capitalization rateor the discount rate used to
value assets.
And what I argue in the book isthat the great speculative
(09:27):
bubbles, really all the greatspeculative bubbles in history,
have occurred at periods wheninterest rates were abnormally
low, during periods of what wecall easy money, and that I
hadn't you know.
You mentioned my earlier book,devil, take the High Moats,
which have a whole chapter onthe tulip mania.
Central Bank of Holland wasissuing more notes and there
(10:10):
were large capital inflows intoHolland at the time, so there
was clearly a monetary aspect toeven the tulip mania.
But if you go, I mean the case Igive most space to in the early
parts of the book is John Lawof the Mississippi Company fame.
(10:31):
And again, I hadn't realizedbefore writing the book that
John Law said I mean for your,for your members who are not
really familiar with John Law.
He's a Scotsman, a brilliantmathematician, an economic
theorist, a gambler, who travelsaround Europe in the early 18th
(10:54):
century and he comes to Francearound 1710, and he's full of
ideas and of his ideas.
He wants to modernize frenchfinance finances and he wants to
relieve the government debt,which at the time was very high
owing to the fact that louiscato's, the so-called sun king,
(11:15):
was always engaged in in costlyforeign wars, dies in 1715, and
law has his opening.
He manages to persuade the newruler of France, who's the
regent, to start a bank and thatbecomes the first central bank
(11:42):
in France, the first centralbank in France.
And he also starts hisMississippi company, as we call
it, which merges a whole load ofFrench corporations together.
And what Law does is hereplaces gold and silver money
(12:04):
in France with a paper money andhe also offers, via the
Mississippi company, to takeover all the French government
debt, and this is funded reallythrough paper loans made by the
Royal Bank.
Now, the key point about this,about Law's experiment, is that
he was, as his academicbiographer Antoine Murthy says.
(12:25):
He was a low-interest advocate,just like the modern central
bankers were up until recently,and he engineered a decline in
French interest rates from abouta range of 6% to 8% down to
about 2% in 1720.
And at that time he also lent alot of money from the Central
(12:50):
Bank to pump up the MississippiCompany stock, and the
Mississippi Company stock thenwent to a price earnings
multiple of 50 times and as itpaid out all its profits, and
perhaps a tiny bit more, itsdividend yield was 2%.
So you can see that thedividend yield was brought down
in line with the interest rateand law at the time said ah, you
(13:12):
know, don't worry about theprice of Mississippi stock, it's
justified by the low rate ofinterest.
Then, you know, inflation seemsto.
You've heard it before.
Yeah, it's what we call the Fedmodel.
Now, it's the earnings yield ofthe market above the treasury
yield and then.
(13:32):
So then inflation seeps intothe system.
Law has to sort of engage a bitof monetary tightening and the
system collapses and law has toflee the country at the end of
1720.
And this actually is, you know,disaster for France, because
they scrap all laws, innovationsbring out the good ones and
(13:53):
some modern finance with the badones, and that really means
that France I don't write aboutthis in the book, but in France
through the rest of the 18thcentury remained with a very
backward financial arrangementsand government debt arrangements
, no central bank, no bondmarket and so on.
(14:14):
And then, you know, the Frenchinsisted on funding the
Americans in their revolutionand became crippled with their
debt and that really engenderedthe French Revolution.
So you can see that a financialmishap can have a very long
tail.
And then later in the book Iargue that the ebbs and flows of
(14:37):
financial crises through the19th century tend to coincide
with periods of low interestrates, century tend to coincide
with periods of low interestrates, and that in the 1920s,
although nominal and real ratesof interest appeared relatively
high, um, they were actually lowregard in relation to the
(14:57):
extraordinary economic growth ofthe 1920s.
I think economic, I'm sayingthat I think sort of
productivity growth was runningin the range of sort of 7 to 8%
a year in the 20s and rates werekept below nominal GDP growth.
And I think, although I say,one doesn't really know what the
(15:17):
fair rate of interest is, if aninterest rate is kept below the
growth rate, the nominal GDPgrowth rate, that's often a sign
that the rate is too low.
And then what do we have?
In the 1920s we had you know,obviously you know the stock
market, that you know the greatstock market bubble, funded
(15:38):
initially with margin loans.
You had real estate speculationacross the country.
Speaker 2 (15:47):
So that's one of the mechanisms whereby your book has
a number of instances whereinterest rates were kept at a
low level for a period of yearsand then there's a crisis, and
the Mississippi bubble is one ofmany in the book where that
happened, and I think it wouldhelp the audience to just
elaborate on sort of what's themechanism whereby, like very low
(16:11):
interest rates, as you say,perhaps interest rates lower
than the nominal growth of GDP,sort of lead to the conditions
that become a crisis.
Speaker 3 (16:22):
Yeah, well, so I say that interest serves a number of
functions.
We've discussed capitalizationrate, in other words, the
relationship between theinterest rate and the valuation
of assets, how easy money canlead to speculative bubbles.
Interest also affects riskappetite.
(16:45):
I have a chapter, as you know,where I cite an 18th century
Italian intellectual calledFernando Gagliani in which he
says that interest is.
I love it.
He calls interest the price ofanxiety and that all lending
(17:06):
involves some anxiety, or atleast it ought to, and that the
lender should be compensated foranxiety.
And I say, well, actually,let's put this in modern
language, interest is the priceof risk, and it's also, if you
want to be a bit more boringabout it, it's obviously the
cost and price of leverage.
(17:27):
And that works two ways.
You lower the interest rate,and we all know this from our
professional lives.
If you lower interest ratesdown to very low levels, you
create an incentive to chaseyield and once investors get
(17:47):
engaged in yield chasing, theybegin to become.
They tend to lower theirlending standards, and we saw
that.
You know, very clearly, in therun up to the global financial
crisis and you know it's tend tobe people have tended to forget
that.
You know that the origins atleast to my mind, the global
(18:09):
financial crisis lie with theeasy money that followed from
the dot-com bust when the Fedtook its policy rate down to 1%.
Anyhow, if you think back tothe global financial crisis
prior to it, the reason all thatsubprime lending was popular
(18:31):
and the reason CDOs becamefashionable is that was funded
by banks and investors who wereseeking an incremental yield
(18:57):
pickup.
And then you know, on the otherside, you know you've got the
borrowers and who, who, who,when interest rates will low,
will, will lever up, you know,and so so that is problematic.
And there's another function.
If you remember, I have anotherchapter in my book on capital
flows, and this is importantbecause when interest rates are
(19:21):
low in the core of the financialsystem and that would be in
Holland, you know, in the 17thcentury, in Britain from the
18th and 19th century, and thenUnited States thereafter when
rates are low at the core of thefinancial system, there's a
(19:43):
huge incentive for this yieldchasing to take place across
borders, this yield chasing totake place across borders.
And so you get these um foreignlending booms.
And the first one I chart is ormention again, which is also
mentioned in devil take the highmost.
(20:04):
But it is the um latin americanuh lending boom of the early
1820s.
And what you see, and there youknow, the newly independent
Latin American republics allborrowed and they were at a time
when interest rates were low inBritain and investors in the
(20:27):
City of London were looking forhigher yields.
And there's a great surge offoreign lending.
(20:54):
And every single one of thosedebts defaulted, including a
debt, a loan raised by thisScottish buccaneer sort of con
man called Gregor McGregor, whostyled himself the kazik of poye
, which was a little territoryon the darien peninsula.
Uh, and and um gregor mcgregor,the kazik claimed it had great
prospects.
They raised, I think, a halfmillion pound loan.
All these loans officially hada, a sinking fund, and they paid
.
They paid their coupons out ofthe thinking fund.
So they paid.
They tended to pay one or twocoupons and then go bust.
(21:15):
And then we, you know, we seethat through the 19th century,
you know, the great argentineboom of the 1880s that collapses
in the early 1990s and bringsdown uh the great, uh merchant
bank, uh, bearings brothers, atleast for the first time it got
up off its feet and then gotknocked down again a century
(21:35):
later, but that was also inducedby low interest rates in
Britain and then the 1920s.
Again, the relatively low ratesin the United States compared to
the yields in available inCentral Europe and in Latin
America encourage massivecapital outflows into those
(22:00):
countries from the US.
Basically, the Americansstarted tightening money in
early 1928.
Capital ceased to flow toCentral Europe and Latin America
(22:21):
.
In fact, actually, theEuropeans started lending their
money into the US.
Because you get high, you'vegot very high rates on these
margin lends that are verypopular.
It's very important becauseAmericans tend to oversee this
is that the beginning of theGreat Depression really comes
(22:42):
from weakness in Europe and istriggered initially by the
collapse of the Austrian andGerman banking system.
So that's a nice example of lowinterest reading to capital
flows, the reversal of capitalflows leading to you know, after
all, the greatest financialcrisis.
Speaker 2 (23:01):
Yeah, your book talks about that, about how, when
rates are really low, theninvestors become more
risk-seeking because they getsuch a paltry amount from fixed
income.
Then they end up doing as yousay investing overseas or
investing in more speculativeventures.
But you also in your book talkabout how low interest rates can
(23:26):
lead to sustained misallocationof capital as well.
I wonder if you could elaborateon that.
Speaker 3 (23:32):
Yeah, I can.
I mean, this is very important.
To my mind.
One of the functions ofinterest is to determine, as you
know, whether an investment, acapital investment, is viable or
not.
So the interest rate is linkedto the hurdle rate on an
(23:55):
investment or to the payback.
These are just back of theenvelope calculations of whether
a debt, whether an investment,is viable.
If you lower the rate ofinterest, you will then make
certain investments viable thatwouldn't be viable at a higher
rate and, to my mind, that workstwo ways.
(24:17):
First of all, it keepsbusinesses that have too low a
return on capital in businessthat would otherwise be out of
business.
So a very low interest ratebecomes a type of loan
forbearance.
And what you know, what I argue, is that we saw this in Japan
(24:39):
in the 1990s, with thecombination of the beginning of
the zero interest rate policywith the, with the banks
actually straightforwardlyengaged in loan forbearance, of
not pulling the plug on veryweak, unprofitable,
over-indebted companies.
(25:00):
And I argue that the ultra-lowrates of interest after the
global financial crisisencouraged the formation around
the world of these so-calledcorporate zombies, a zombie
being a company that, evendespite low interest rates, is
unable to cover its interestcosts from profits.
(25:23):
And zombies are, I argue, poorfor productivity because they're
associated with low firm exitwithin an industry, but also low
firm entry because the industryis sort of clogged with
relatively low investment levelsand low productivity growth.
(25:47):
So you can see, you don'treally want to encourage the
formation of too many zombies,so you could.
I mean I've mentioned Jim Grant, the financial writer.
He talks about the interestrate being like the tempo at
which an economy is run, so thatas you lower the interest rate
you slow the tempo until finally, at zero rates, you get to a
(26:11):
sort of death march.
Speaker 2 (26:13):
And isn't what you just said, contrary to the
notion that many people,including central bankers, have
that.
Well, if the economy issluggish, then lowering interest
rates is just the thing to getit moving faster.
It sounds like what you justsaid Well, wait a minute, you're
actually like going to a lowertempo.
Speaker 3 (26:33):
Yeah, I think so, and I mean obviously I.
You know I have two advantagesover central bank, and one I
have the benefit of hindsight,and the other is that, as I
didn't implement these policies,I'm not responsible for
covering up any policy error.
Now I think the central bankersthought oh, we lower rates,
(26:55):
companies will borrow more andthey'll invest more and then,
you know, economic growth willtake off.
It didn't happen that way andin part, as you know, ken and I
write about it, but we all sawit is that when interest rates
were extremely low, companiestended to turn to financial
(27:16):
engineering by using the debt topay back, to buy back their
shares and lever up, which givesimmediate return to
stockholders.
It tends to be applauded by,you know, your activist
investors and um is um and ispopular with, with senior
(27:38):
management who have paid withequity-based incentives, whereas
you know if, you if, and it hasvery quick payoff to that.
Whereas you invest in a newplant, you know it's going to
(28:00):
take longer and and take longerand it's, in a way, higher risk
for a manager with short termhorizons.
Capital allocation story is notjust about zombie companies,
although zombie companies, as Isay, you know, slow creative
destruction, and that slowcreative destruction, slowing of
creative destruction, which theAustrian economist Joseph
(28:23):
Schumpeter calls the most vitalforce in capitalism, is in
itself a bad thing.
But the other aspect of verylow interest rates is that they
encourage investment in longdated assets.
And I would say, as you're youknow, none of you so far from
Silicon Valley that SiliconValley was one of the prime
(28:46):
beneficiaries of the ultra lowrates, for two reasons really.
One is, um, you know, sort ofreturns chasing, uh again with
low rates, um threatening todepress returns on portfolios,
uh, there was an incentive to togo in you know more into onto
the vc side of things.
(29:06):
But also because venturecapital investments by their
nature produce profits in thelong, distant future not all of
them, but in general andtherefore those long dated
profits have a higher value,current value, at times of
(29:27):
depressed interest rates.
And I think what we saw thenwas a sort of slew of
investments.
You know, a great SiliconValley boom that became, you
know, I think, sort of, to mymind, rather sort of you know it
became rather irresponsible inits last years and funded a lot
of businesses that probablyshouldn't have been been funded.
(29:49):
So you've got sort of capitaltrapped in, uh, in low return
businesses and then capitaldiverted to sort of high you
know, potentially high returnbut very distant return uh
ventures that then get, um, youknow that.
Then the plug is pulled and wesee that I mean I think really
you know, you see that with youknow, with you know, then the
(30:10):
plug is pulled and we see that Imean I think really you know,
you see that, with you know,with a whole load of the funding
of electric vehicle businesses.
You look at the Wall StreetJournal on almost a weekly basis
you see another EV companygoing to the wall.
You see, actually a lot of thealternative energy, very long
dated, you know, these windfarms and so on, where all
(30:34):
capital costs are up front butreturns in a more distant future
.
So if you have a low rate ofinterest, these businesses
become viable and suddenly youchange the rate of interest and
that business loses itsviability and that business
loses its viability and you havea lot of and we haven't
mentioned it yet, but we can doobviously a lot of money going
(30:59):
into commercial real estate,because the real estate
developers love easy money morethan anyone else on earth and
you're sure that the marginaldeveloper will borrow and lever
up to the highest possible rateand overbuild at rates Q&A, and
I'll try to get to them.
First, though, I want to askabout the recent period of low
(31:22):
interest rates, a long period,and then there was a crisis got
me thinking.
Speaker 2 (31:26):
Well, we just now, recently, had the lowest
(31:55):
interest rates ever, you know, alarge portion of the sovereign
bond market, uh, having negativeyields, in fact, and, and given
the pattern that your bookestablishes, it suggests that we
could be in store for sometrouble in financial markets.
It doesn't seem, other than thebond market.
(32:15):
It doesn't seem that thattrouble has manifested itself
yet.
But I'm very interested inhaving you comment on, like one
of the reviewers of your booksaid well, now that I've read,
you know, mr Chancellor's book,I'm just going to sell
everything because you know, weknow what happens when interest
going to sell everything,because you know, we know what
happens when interest rates arereally low for a long time.
Uh, what do you think willhappen this time?
Speaker 3 (32:37):
I wouldn't.
I wouldn't actually necessarilyadvise that, but everyone could
do do what they want to be.
So so this is interesting.
Um, I mean, I have to say, youknow, say there is an element of
sort of there's a doom-ladenelement to my book.
As you get towards the end, Ithink, when I was sending it to
(32:59):
the publishers, they had somesort of blurb which they'd
written saying well, unlesspolicymakers come to understand
this, will the world movetowards another financial crisis
.
And I said no, forget it, thisis far too late to get out of
this hole that we've dugourselves in.
And so then what?
(33:21):
And it is, you know, it isinteresting what's happened over
the last couple of years,because I sent the book in to
the publisher just yet, butreally before the Fed and any
other other central banks hadtightened.
So in 2022, the Fed starts totighten and as, as you mentioned
(33:41):
, we get this huge sell-off inthe bond markets and the bond
market crash is reallyphenomenal, actually year since
the creation of the first sortof long bond issued in Britain
(34:06):
in the 1750s so-called consuls.
And you have some of thesebonds, like the Austrian
100-year bond, selling off 75%.
And you have a UK linker indexlink bond 50-year bond also down
75%, 80%.
So you get a pretty big bondcrash.
You get a sort of decent bearmarket, if you remember, but it
(34:31):
doesn't last very long and themarkets come back pretty quickly
.
You get this expectation of aso-called hard landing and a
recession, and that hard landingand recession doesn't
immediately arrive.
And then you get this flurry ofinterest around artificial
(34:51):
intelligence and a new sort ofspeculative boom in the market,
initially concentrated aroundthe so-called magnificent seven
stocks, all of whom have somesort of AI story to tell.
And so that is you know.
That's sort of where we are.
(35:12):
There are reasons.
So why have we not had a hardlanding?
I think you know in part.
Simply, you know the US federalgovernment borrowed and spent a
huge amount of money last year.
They sort of preempted any hardlanding before anything had
come about.
I think the AI I mean I wouldcall it a bubble, but you know
(35:35):
the AI boom has rekindled animalspirits.
As you see, meme stocks are backin favor, gamestop or whatever
has risen from the dead, and myview is it takes you know I
thought about this a bit moreand it takes a while to readjust
(35:59):
to the higher rates.
I think you know corporationstook advantage of the very low
rates to lock in the very lowrates and people got interest
rate swaps when they borrowed,even when they borrowed a
floating rate again to lock infor two or three years into low
(36:19):
rates at very low costs.
I think you could, real estatedeveloper, could ensure that,
you know, get an interest rateswap on one hundred million
dollar loan for fifty seventhousand dollars back in 2021.
So you'd have to be a sort ofyou know pretty dumb not to
spend that fifty seven thousandto lock in the rates, not to
(36:41):
spend that 57,000 to lock in therates.
And then you know a lot of inthe US, a lot of the most
homeowners you know, termed outtheir borrowing with fixed rate
borrowing.
And so what I think that meansis that it's taking a while for
the markets to really sort ofyou know, take on board the
(37:03):
readjustment to higher rates.
And you know I mentionedcommercial real estate, I think,
because a lot of commercialreal estate funding is floating
rate.
That is actually pretty much,you know, a slow motion train
wreck, pretty much a you know aslow motion train wreck, and you
(37:26):
know you can read perfectlyrespectable analyses of the
commercial real estate situation.
That, look, you know, thatmakes it sound fairly horrendous
.
You've got, you know, on aglobal basis.
You've got China.
China's real estate bust isgoing on.
And to me, you know, as youknow, I've got a chapter on
China in the book.
When I talk about the build-upof debt and the real estate
(37:47):
bubble and the overinvestment, Ithink the China story again is
quite slow play but really avery big story.
And then look at Japan.
Japan took, after the bubbleeconomy, another boom that was
created in some part by easymoney from the Bank of Japan in
(38:11):
the 1980s.
It took, you know, a couple ofdecades to play out.
So my, my sense is that there'sa pig in the python, okay,
slowly moving through it.
You know we're talking about.
(38:33):
You know the economies andfinancial markets.
They're very complex systems,aren't they?
And therefore one never quiteknows when, you know when things
are going to be triggered.
Speaker 2 (38:40):
You have a question that kind of relates to this
thread of the conversation.
You know, of course, we're herein Silicon Valley, Many of us
have worked at tech firms orhave positions with tech
companies and, as you saidearlier, the very low interest
rates sort of induces moreinvestment in long duration
(39:02):
assets, including, you know,startup companies whose profits
are well down the road.
The questioner is asking thatmade sense or that could be why
many things were funded in, youknow, 2020, 2021.
But now that interest rateshave risen quite a lot since
then, we're still seeingrecovery to record highs for
(39:24):
NASDAQ 100 and other kind oftech indices.
So then does that mean that thelong duration assets get priced
up?
Low interest rates are high.
Speaker 3 (39:35):
Well, I mean, it's pretty anomalous, I have to say,
the rebound of NASDAQ and theinsertion or the appearance of
this AI frenzy, just as allthese SPACs the SPACs that merge
(39:58):
with the flakiest techcompanies you'd ever heard Just
as those SPACs were down 95% andgoing bust.
You suddenly had this sort ofbunny boiler of a new tech boom
rising from the dead, and that Imean I have racked my head to
(40:21):
see anything like it.
And what we've seenhistorically is, you know, good
old fashioned bear marketrallies, and sometimes a bear
market rally, you know, takesthe market back, you know, quite
close to its highs.
This is, you know, if this is abear market rally.
(40:41):
Even though new record highs arebeing set yeah, yeah, it was
part of part of a longer bearmarket and then I mean I, if it
were, I'd say it was thegreatest bear market rally
history uh and I don't know.
You know you can take.
You know you said that someoneread the book.
A reviewer read the book.
(41:02):
Know you know you can take.
You know you said that someoneread the book.
A reviewer read the book andsaid you know, sell all your
stock.
It's actually not the messageof the book.
It's actually, I think, one ofthe problems that I identified
from the low interest rate era.
And bear in mind, as youmentioned, I was working in the
asset allocation team at GMO forthe first half of the decade
(41:25):
and you know we were findingrelatively few you know
investment opportunities.
So you know, and whereas in theprevious period, at least at
the end of the dotcom bubble,there was huge investment
opportunities in stuff outsideof NASDAQ, the NASDAQ might have
been fated to go down 75%, butyou could make.
(41:45):
If you had your head screwed onthe right way, you could invest
quite heavily.
I think at the end of you know,going into 2022, it was very
difficult to think of a.
You know which assets wereparticularly attractively priced
and therefore, I think underthose circumstances, you need a
tiny bit of diversification.
(42:07):
You don't want to.
I think the good news from anyou know, from an investment
perspective over the last coupleof years is that, while the
stock market remains prettyexpensive in the US, you know
the bonds have repriced and inparticular you know the
inflation, inflation, protectedbonds, the tips.
(42:27):
You know yield, you know areally decent return to my mind.
You know sort of in range.
And even if you go to Japan,you know the 30 year bond is no
longer yielding negative but youget 200 basis points.
So from an asset allocationperspective now, I mean, my view
(42:51):
is, you know I wouldn't put allyour money on this, on there
not being a next leg down in thebull market, but I think you
can allocate capital.
It's a somewhat bettersituation at least, than it was
two years ago.
Speaker 2 (43:08):
In the book.
I'm going to riff on one of thequestions the question is
asking.
In the Mississippi bubbleexample, the questioner is
asking you know, were marketrates, market, interest rates,
market determined then, and nowthey're kind of engineered by
central banks.
Is that in the book?
(43:30):
In the book you kind of it's apretty strong critique of how
central banks think and, inparticular, if you know if the
guiding light is managinginflation up and down.
You seem to be suggesting thatthey're missing some other
guiding lights.
That might even be moreimportant than that.
Can you talk about themanagement of interest rates,
(43:52):
what central banks have beendoing in the last decade and
what you would have them do?
That's different.
Speaker 3 (43:59):
Yes, I mean.
First of all, I'd like toclarify that the under the
mississippi company in the johnlaw's period of preeminence in
the past it was a paper currency.
So law in effect wasmanipulating the interest rates
under a um, under the sort ofgold standard system.
Um, which you know was sort ofbecame predominant in the late
(44:20):
19th century, but you could saythat the British was engaged in
that from the early 18th centuryonwards.
Basically, the central bank hadto redeem its notes in gold
with a certain fixed quantity ofgold and therefore what the
central bank would do is whenits stock of gold was high, it
(44:45):
would issue more notes, and whenits stock of low was and
interest and lower interestrates, and when its stock of
gold was very low, it wouldraise interest rates and so that
so the flow.
You didn't need you know a PhDin economics to find out what
your stock of bullion was.
(45:06):
So in fact, actually I quiteliked about the Bank of England
in the 18th century.
It was sort of run by merchants.
There was no, there was noeconomist within you know 100
miles, economists within youknow 100 miles.
There were no bankers.
Bankers weren't allowed nearthe court of the Bank of England
because they were considered tobe sort of likely to be
(45:27):
undermining its purpose Anyhow.
So there you know the.
Under that system.
You know I don't want to getinto defence of the system
because it does lead to verysevere busts.
However, the interest rate isbeing set automatically by the
relationship between, if youwill, the amount of credit
outstanding and the underlyingmonetary stock.
(45:49):
And the underlying monetarystock cannot be sort of fiddled
with.
To go into the modern world,because you've got a fiat
currency system which basicallydepends on the apex of which is
the central bank and under whichmoney can be created by the
(46:10):
central bank.
To determine the rate ofinterest, you can no longer have
a merchant who left school atthe age of 12 determining what
the century, what the interestrate is.
Instead, you have to employ,you know, you know, hundreds of
hundreds of economists, uh, withtheir models, to um, determine
(46:34):
what the what the right rate ofinterest is.
And I suppose I come at it.
You know, from the perspectivethat how would a committee, how
could a committee of people knowwhat the correct rate of
interest should be?
It's they set themselves toground a task and then, and then
they I think you know they.
(46:54):
What's happened is everyone'sclutched on to because the task
was so difficult.
They said we need to know, youknow something to set the rate,
so we'll just clutch onto this.
You know inflation targetThat'll be our life vest tossed
around in the uncertainties ofthe monetary world.
(47:15):
And, as you know, I say thatthe interest rate is not a.
The current near-term inflationrate is not a good guide for
setting monetary policy.
You know the central bankers, tomy mind, obsess far too much
about deflation.
I mean, you know, think aboutSilicon Valley and computers and
(47:39):
this.
And that you know huge Everyyear, falling prices.
Falling prices are just, andthat you know, huge every year,
falling prices.
Falling prices are just aresult.
You know, inevitableconsequence of technological
development, of productivitygrowth and a welcome.
You know people like fallingprices, believe it or not.
And yet you know the centralbankers did their best to
(48:03):
prevent, to stop the price levelfrom falling.
Which means, frankly, if you'vegot let's just say you had you
know two products, yeah, let'ssay you've got two products, a
good and a service economy.
One is your tech goods, goods,your computers, and the other is
, say, college education and asas your, as the price of the
(48:27):
tech product is um coming down,you're going to have to push up
the central bank is going tohave to push up the price of the
college education in order tokeep his average the same.
It it's.
It has a very um has a verycorrupting effect.
This, uh, near-term focus on,on, on um, on inflation
(48:48):
targeting, uh, and I I mean Idon't know the correct system to
move to.
I I wouldn't advocate going backto gold standard.
There is a friend of mine whowas former chief economist at
Deutsche Bank, called ThomasMeyer.
He thinks that you could createa central bank digital currency
that was limit, that grew onlyby a certain amount.
(49:12):
You know was constitutionallycreated, that it would only grow
by a certain amount a year, twoor three percentage points, and
that could you know that would,that would, that would create a
fixed, a relatively fixed moneyat least, with a constant rate,
and that, you could see, wouldallow for the interest rate then
(49:33):
to be determined by the, bygenuine savings and um and and
the and the demand for savings.
So I mean really one.
I don't think enough thoughthas gone into if central bankers
cannot determine, if noindividual can determine, what
the right rate of interest isand we wouldn't ask them to
(49:57):
determine.
You know, I'm holding a pen inmy hand.
We wouldn't ask any individualto say look, what are the
components of this pen?
How much should it be priced?
We let the market determine theprice of this pen.
Speaker 2 (50:10):
We just got a question.
I know we're almost out of time, but it sounds like the
questioner says so.
Data dependency is a prettypoor idea, but I don't think
that's really what you'rearguing.
I think you're saying that justlooking at one piece of data,
which is the rate of inflation,and not looking at what's
happening to credit creation orto stock prices and leverage,
(50:36):
it's just kind of myopic.
What data matters, right?
Speaker 3 (50:40):
I mean, I don't look, I don't.
What I know about the centralbank models is second hand, but
I think the central bank modelsalso you know the huge amount of
theoretical input into the veryunrealistic is that their
models don't actually includemoney in a financial system.
They, there is, you know,there's one firm like the
(51:01):
representative firm, so that onefirm doesn't know all this
zombie stuff I told you about,doesn't really recognize that
you have, you know, oneindividual the representative
investor.
So the it's not.
It's that the central bankingis both a mixture of, you know,
drowning in data but also having, you know, highly unrealistic
(51:21):
models, of highly unrealisticmodels of how the world actually
works.
But yeah, to go back to yourpoint, you're going to be
pragmatic and you're not goingto have a new monetary system.
You can at least step back fromthis near-term inflation target
and say, you know, is thedeflation, say you were in a
(51:42):
period of deflation.
Is this deflation, debtdeflation, you know, which might
be bad if it's going to crumblethe financial system as it was
in 2008, 2009?
Or is it the deflation thatcomes from higher productivity
growth?
Because that's a very simplequestion to analyze.
And if it's the deflation fromhigher productivity growth, you
say, well, this is the way to go.
(52:04):
Yeah, you don't.
You don't fight that deflation.
Likewise, you know with theleverage and you know I mean I
think you know they.
As you know, after thefinancial crisis we introduced
huge amount of you know offinancial regulation.
That you know I'm sure it madeyour job a nightmare.
It it's a nightmare work and itbecame an increasing nightmare
(52:25):
if you're working professionalinvestor to deal with this
regulation.
But in the end, the regulationthe financial system doesn't
come properly from, cannot comeproperly just from printing new
rules.
It has to come from actuallysetting a rate of interest that
prevents excessive leverage,that doesn't encourage the
deterioration in underwritingstandards and carry trades and
(52:48):
the like.
All right.
Speaker 2 (52:52):
I think we could.
We could carry on and have thisfascinating conversation, but I
think we've come to the end ofthe hour.
Thoroughly enjoyed this book.
I highly recommend it.
But I think we've come to theend of the hour.
Thoroughly enjoyed this book.
I highly recommend it.
It's not just informative, it'salso an engaging history of
interest and I learned a lot,and I expect that those of you
(53:12):
in the audience would enjoy itas well.
So thank you so much, edward,for spending your time with the
CFA Society of San Francisco.
Thank you, thank you sincerelyfor joining us today.
Speaker 1 (53:23):
Okay, Thank you for listening to this month's chat
segment.
Chats is a monthly segmentfeaturing audio from our
recently recorded webinarsairing on the second Tuesday of
the month.
To view the video recording ofthis episode and discover
additional Society webinars,visit the CFA Society San
(53:46):
Francisco YouTube channel.
Join us next time for ourregularly scheduled Financial
Perspectives podcast episodeairing on the last Tuesday of
the month, and make sure to sendin a message to the show using
a link at the top of eachepisode description or by
emailing podcast at cfa-sforg.
We'd love to hear what youthink of our new chat segment or
(54:07):
any suggestions on futuretopics you'd like us to cover.
Thank you for being a dedicatedlistener.
This podcast is produced by CFASociety San Francisco, a
not-for-profit professionalassociation providing
professional learning and careerresources to over 13,000
(54:30):
investment industryprofessionals worldwide.
To learn more about CFA SocietySan Francisco, visit our
website at cfa-sforg or connectwith us on LinkedIn.
Hello and welcome to this month's chat segment of the
Financial Perspectives podcast.
Our chats episodes featuredynamic conversations between
industry experts from some ofour recent and most popular
webinar recordings.
This month you'll hear fromEdward Chancellor and Ken Fryer
as they discuss the evolution ofinterest and the broader
financial landscape.
Speaker 2 (00:29):
It is a great privilege and honor for CFA
Society of San Francisco towelcome Edward Chancellor, the
eminent financial historian.
Mr Chancellor was educated atCambridge and Oxford and worked
for Lazard Brothers and GMO, inaddition to his work as a writer
, and Fortune magazine hascalled him one of the greatest
financial historians alive, andwith good reason.
(00:52):
We all know it's difficult topredict turns in markets,
especially if your predictionscome in the form of books.
But Mr Chancellor wrote DevilTake the Hindmost, a history of
financial speculation which waswell-timed for the peak of the
speculation in tech stocks in1999.
He wrote Crunch Time for Credit.
(01:15):
A story about the excesses incredit markets came out in 2005,
a prescient warning of whatthen became the global financial
crisis, a prescient warning ofwhat then became the global
financial crisis.
And now Mr Chancellor haswritten Topic of the Day's
conversation the Price of Time,a masterful survey of the
history of interest rates, andthat warns of well, we'll find
(01:40):
out today.
So, Edward, if we could easilyfind on the Internet 55 pieces
that say interest rates are justtoo high and another 50 thought
pieces that say interest ratesare just too low, and based on
your book, I expect we couldpick any day in the last 5000
years and that debate would begoing on in some fashion.
And so I want to start by justasking you in the history of
(02:04):
finance and of interest rates,you know sort of what have been
the main camps or theories aboutwhat level of interest rates
are right?
Speaker 3 (02:12):
Well, it's a good question, Ken, of lending at
interest, which goes back, asyou say, five millennia.
The most vocal proponents havealways been for lower interest
rates and if you go back intothe ancient world, you can find
(02:40):
it in the Bible and you find itin really, you find in the Bible
the fact that usury or lendingat interest was considered
illegitimate.
You find it in Greek philosophylike Aristotle and Plato both
decrying lending at interest,that's taken on in the early
(03:01):
Christian church and thenbecomes established in the
Middle Ages the idea thatlending at interest was
illegitimate, that usurers orbankers in Dante's Inferno or in
I don't know, the third orfourth circle of hell.
And then, when lending becomesprogressively legalized from the
(03:25):
16th century onwards, there isstill a debate as you know I
mentioned the book with peopledemanding lower interest rates,
and in that case they wereactually demanding in Britain in
the 17th century that themaximum legal rate of lending be
reduced.
However, there's actuallysomething quite interesting that
(03:46):
comes in here is that by the17th century, the advocates of
lower interest charges areactually business people in the
City of London.
I mentioned this fellow, josiahChilds was rich banker who was
head of the East India Companywho was really speculating in
(04:10):
East India Company shares andborrowed money, so naturally he
wanted low interest rates.
Then if you sort of fastforward into the 19th century,
you get the socialists.
And I said you remember thebeginning of the book, socialist
anarchist Frenchman Proudhonarguing, debating for zero
(04:31):
interest lent by a central bank,quite similar to what the,
let's say, into the 1920s whereJohn Maynard Keynes pops up as
(04:52):
an influential economist.
And Keynes, as I say, never sawan interest rate that he
considered too low.
He was always calling for lowinterest rates, always calling
for low interest rates.
And actually I think that sortof Keynesian view of interest
being something rather sort ofthat one should keep as low as
possible has prevailed intopolicymaking circles in the
(05:19):
post-war period and then, as Ialso mentioned, in emerging
markets.
Emerging markets interestsoften very unpopular.
If you remember the, theturkish president erdogan is
always decrying what he callsthe, the interest rate lobby.
He calls them a sort ofsinister cabal of people around
the world trying to push uphigher interest rates, whereas I
(05:41):
say, if there was, if aninterest rate lobby actually
existed, erdogan himself was themain mouthpiece and they were
always calling for lower rates.
And that really has been thecase and to some extent my book
is an argument against that, notan advocacy of high rates in
(06:04):
themselves, but, as we'lldiscuss, it's an argument to say
well, actually the interestrate serves a number of vital
functions of communicating toeconomic agents how they should
behave.
And if you're too high, yeah,pretty obvious, it's a thing
(06:27):
because you know you crush the,that you crush the um, the
debtors.
And and again, if you go rightback to the ancient world, it
was quite grounded the idea thatvery high interest rates were
about an abomination.
Because if you're in a primary,primarily um agricultural
economy with Because if you'rein a primarily agricultural
economy with no growth, if youhave a high interest rate
(06:50):
compounding over time, it issimply unbearable.
And in the ancient world, as incertain parts of the modern
world today, high rates, thecompounding of debt at high
rates of interest, could sendpeople into debt, bondage or
even slavery in the ancientworld.
(07:11):
So that's, you know, obviouslya pretty bad thing.
On the other hand, in a, onceyou get into the modern world of
sort of, you know, capitalistworld, which we might say starts
sort of sometime in the 15thcentury in Europe, then you know
, of course, you know, peopleare borrowing money for
commercial purposes.
(07:31):
They can earn a decent, youknow, if they're competent, they
can earn a decent return ontheir borrowing, and it's
therefore legitimate, to my view, that the lender should share
in the gains of the of theborrower, have some share of
that.
And and so I think that youknow, as you say, that there are
(07:55):
people always arguing thatinterest rates too high, too low
.
But what?
And it's very, very difficultproblem to solve, and it's a
very, very difficult problem tosolve, it's perhaps almost an
insoluble problem to discoverthe correct rate of interest,
which is an issue.
Speaker 2 (08:30):
However, as I say in my book, you can probably tell
when they decimal points, butyou can probably get it within a
percentage point or two.
So, speaking of that, as yousay, the camp advocating for
lower interest rates has hadmore sway in the outcome than
the camp advocating for higherinterest rates, than the camp
advocating for higher interestrates.
And one thing that the bookdemonstrates is that the winning
camp, when they succeed inhaving rates below, sometimes
(08:51):
that leads to unintendedconsequences and I wonder if you
could share with us some of theinstances in your grand survey
of interest rates where therewas a stretch of very low
interest rates and it turned outbadly Well.
Speaker 3 (09:06):
So first of all I'd say the.
I mean, as you know, I make thepoint in the book that the that
interest rate is, you know,influences the valuation of
assets, the capitalization rateor the discount rate used to
value assets.
And what I argue in the book isthat the great speculative
(09:27):
bubbles, really all the greatspeculative bubbles in history,
have occurred at periods wheninterest rates were abnormally
low, during periods of what wecall easy money, and that I
hadn't you know.
You mentioned my earlier book,devil, take the High Moats,
which have a whole chapter onthe tulip mania.
Central Bank of Holland wasissuing more notes and there
(10:10):
were large capital inflows intoHolland at the time, so there
was clearly a monetary aspect toeven the tulip mania.
But if you go, I mean the case Igive most space to in the early
parts of the book is John Lawof the Mississippi Company fame.
(10:31):
And again, I hadn't realizedbefore writing the book that
John Law said I mean for your,for your members who are not
really familiar with John Law.
He's a Scotsman, a brilliantmathematician, an economic
theorist, a gambler, who travelsaround Europe in the early 18th
(10:54):
century and he comes to Francearound 1710, and he's full of
ideas and of his ideas.
He wants to modernize frenchfinance finances and he wants to
relieve the government debt,which at the time was very high
owing to the fact that louiscato's, the so-called sun king,
(11:15):
was always engaged in in costlyforeign wars, dies in 1715, and
law has his opening.
He manages to persuade the newruler of France, who's the
regent, to start a bank and thatbecomes the first central bank
(11:42):
in France, the first centralbank in France.
And he also starts hisMississippi company, as we call
it, which merges a whole load ofFrench corporations together.
And what Law does is hereplaces gold and silver money
(12:04):
in France with a paper money andhe also offers, via the
Mississippi company, to takeover all the French government
debt, and this is funded reallythrough paper loans made by the
Royal Bank.
Now, the key point about this,about Law's experiment, is that
he was, as his academicbiographer Antoine Murthy says.
(12:25):
He was a low-interest advocate,just like the modern central
bankers were up until recently,and he engineered a decline in
French interest rates from abouta range of 6% to 8% down to
about 2% in 1720.
And at that time he also lent alot of money from the Central
(12:50):
Bank to pump up the MississippiCompany stock, and the
Mississippi Company stock thenwent to a price earnings
multiple of 50 times and as itpaid out all its profits, and
perhaps a tiny bit more, itsdividend yield was 2%.
So you can see that thedividend yield was brought down
in line with the interest rateand law at the time said ah, you
(13:12):
know, don't worry about theprice of Mississippi stock, it's
justified by the low rate ofinterest.
Then, you know, inflation seemsto.
You've heard it before.
Yeah, it's what we call the Fedmodel.
Now, it's the earnings yield ofthe market above the treasury
yield and then.
(13:32):
So then inflation seeps intothe system.
Law has to sort of engage a bitof monetary tightening and the
system collapses and law has toflee the country at the end of
1720.
And this actually is, you know,disaster for France, because
they scrap all laws, innovationsbring out the good ones and
(13:53):
some modern finance with the badones, and that really means
that France I don't write aboutthis in the book, but in France
through the rest of the 18thcentury remained with a very
backward financial arrangementsand government debt arrangements
, no central bank, no bondmarket and so on.
(14:14):
And then, you know, the Frenchinsisted on funding the
Americans in their revolutionand became crippled with their
debt and that really engenderedthe French Revolution.
So you can see that a financialmishap can have a very long
tail.
And then later in the book Iargue that the ebbs and flows of
(14:37):
financial crises through the19th century tend to coincide
with periods of low interestrates, century tend to coincide
with periods of low interestrates, and that in the 1920s,
although nominal and real ratesof interest appeared relatively
high, um, they were actually lowregard in relation to the
(14:57):
extraordinary economic growth ofthe 1920s.
I think economic, I'm sayingthat I think sort of
productivity growth was runningin the range of sort of 7 to 8%
a year in the 20s and rates werekept below nominal GDP growth.
And I think, although I say,one doesn't really know what the
(15:17):
fair rate of interest is, if aninterest rate is kept below the
growth rate, the nominal GDPgrowth rate, that's often a sign
that the rate is too low.
And then what do we have?
In the 1920s we had you know,obviously you know the stock
market, that you know the greatstock market bubble, funded
(15:38):
initially with margin loans.
You had real estate speculationacross the country.
Speaker 2 (15:47):
So that's one of the mechanisms whereby your book has
a number of instances whereinterest rates were kept at a
low level for a period of yearsand then there's a crisis, and
the Mississippi bubble is one ofmany in the book where that
happened, and I think it wouldhelp the audience to just
elaborate on sort of what's themechanism whereby, like very low
(16:11):
interest rates, as you say,perhaps interest rates lower
than the nominal growth of GDP,sort of lead to the conditions
that become a crisis.
Speaker 3 (16:22):
Yeah, well, so I say that interest serves a number of
functions.
We've discussed capitalizationrate, in other words, the
relationship between theinterest rate and the valuation
of assets, how easy money canlead to speculative bubbles.
Interest also affects riskappetite.
(16:45):
I have a chapter, as you know,where I cite an 18th century
Italian intellectual calledFernando Gagliani in which he
says that interest is.
I love it.
He calls interest the price ofanxiety and that all lending
(17:06):
involves some anxiety, or atleast it ought to, and that the
lender should be compensated foranxiety.
And I say, well, actually,let's put this in modern
language, interest is the priceof risk, and it's also, if you
want to be a bit more boringabout it, it's obviously the
cost and price of leverage.
(17:27):
And that works two ways.
You lower the interest rate,and we all know this from our
professional lives.
If you lower interest ratesdown to very low levels, you
create an incentive to chaseyield and once investors get
(17:47):
engaged in yield chasing, theybegin to become.
They tend to lower theirlending standards, and we saw
that.
You know, very clearly, in therun up to the global financial
crisis and you know it's tend tobe people have tended to forget
that.
You know that the origins atleast to my mind, the global
(18:09):
financial crisis lie with theeasy money that followed from
the dot-com bust when the Fedtook its policy rate down to 1%.
Anyhow, if you think back tothe global financial crisis
prior to it, the reason all thatsubprime lending was popular
(18:31):
and the reason CDOs becamefashionable is that was funded
by banks and investors who wereseeking an incremental yield
(18:57):
pickup.
And then you know, on the otherside, you know you've got the
borrowers and who, who, who,when interest rates will low,
will, will lever up, you know,and so so that is problematic.
And there's another function.
If you remember, I have anotherchapter in my book on capital
flows, and this is importantbecause when interest rates are
(19:21):
low in the core of the financialsystem and that would be in
Holland, you know, in the 17thcentury, in Britain from the
18th and 19th century, and thenUnited States thereafter when
rates are low at the core of thefinancial system, there's a
(19:43):
huge incentive for this yieldchasing to take place across
borders, this yield chasing totake place across borders.
And so you get these um foreignlending booms.
And the first one I chart is ormention again, which is also
mentioned in devil take the highmost.
(20:04):
But it is the um latin americanuh lending boom of the early
1820s.
And what you see, and there youknow, the newly independent
Latin American republics allborrowed and they were at a time
when interest rates were low inBritain and investors in the
(20:27):
City of London were looking forhigher yields.
And there's a great surge offoreign lending.
(20:54):
And every single one of thosedebts defaulted, including a
debt, a loan raised by thisScottish buccaneer sort of con
man called Gregor McGregor, whostyled himself the kazik of poye
, which was a little territoryon the darien peninsula.
Uh, and and um gregor mcgregor,the kazik claimed it had great
prospects.
They raised, I think, a halfmillion pound loan.
All these loans officially hada, a sinking fund, and they paid
.
They paid their coupons out ofthe thinking fund.
So they paid.
They tended to pay one or twocoupons and then go bust.
(21:15):
And then we, you know, we seethat through the 19th century,
you know, the great argentineboom of the 1880s that collapses
in the early 1990s and bringsdown uh the great, uh merchant
bank, uh, bearings brothers, atleast for the first time it got
up off its feet and then gotknocked down again a century
(21:35):
later, but that was also inducedby low interest rates in
Britain and then the 1920s.
Again, the relatively low ratesin the United States compared to
the yields in available inCentral Europe and in Latin
America encourage massivecapital outflows into those
(22:00):
countries from the US.
Basically, the Americansstarted tightening money in
early 1928.
Capital ceased to flow toCentral Europe and Latin America
(22:21):
.
In fact, actually, theEuropeans started lending their
money into the US.
Because you get high, you'vegot very high rates on these
margin lends that are verypopular.
It's very important becauseAmericans tend to oversee this
is that the beginning of theGreat Depression really comes
(22:42):
from weakness in Europe and istriggered initially by the
collapse of the Austrian andGerman banking system.
So that's a nice example of lowinterest reading to capital
flows, the reversal of capitalflows leading to you know, after
all, the greatest financialcrisis.
Speaker 2 (23:01):
Yeah, your book talks about that, about how, when
rates are really low, theninvestors become more
risk-seeking because they getsuch a paltry amount from fixed
income.
Then they end up doing as yousay investing overseas or
investing in more speculativeventures.
But you also in your book talkabout how low interest rates can
(23:26):
lead to sustained misallocationof capital as well.
I wonder if you could elaborateon that.
Speaker 3 (23:32):
Yeah, I can.
I mean, this is very important.
To my mind.
One of the functions ofinterest is to determine, as you
know, whether an investment, acapital investment, is viable or
not.
So the interest rate is linkedto the hurdle rate on an
(23:55):
investment or to the payback.
These are just back of theenvelope calculations of whether
a debt, whether an investment,is viable.
If you lower the rate ofinterest, you will then make
certain investments viable thatwouldn't be viable at a higher
rate and, to my mind, that workstwo ways.
(24:17):
First of all, it keepsbusinesses that have too low a
return on capital in businessthat would otherwise be out of
business.
So a very low interest ratebecomes a type of loan
forbearance.
And what you know, what I argue, is that we saw this in Japan
(24:39):
in the 1990s, with thecombination of the beginning of
the zero interest rate policywith the, with the banks
actually straightforwardlyengaged in loan forbearance, of
not pulling the plug on veryweak, unprofitable,
over-indebted companies.
(25:00):
And I argue that the ultra-lowrates of interest after the
global financial crisisencouraged the formation around
the world of these so-calledcorporate zombies, a zombie
being a company that, evendespite low interest rates, is
unable to cover its interestcosts from profits.
(25:23):
And zombies are, I argue, poorfor productivity because they're
associated with low firm exitwithin an industry, but also low
firm entry because the industryis sort of clogged with
relatively low investment levelsand low productivity growth.
(25:47):
So you can see, you don'treally want to encourage the
formation of too many zombies,so you could.
I mean I've mentioned Jim Grant, the financial writer.
He talks about the interestrate being like the tempo at
which an economy is run, so thatas you lower the interest rate
you slow the tempo until finally, at zero rates, you get to a
(26:11):
sort of death march.
Speaker 2 (26:13):
And isn't what you just said, contrary to the
notion that many people,including central bankers, have
that.
Well, if the economy issluggish, then lowering interest
rates is just the thing to getit moving faster.
It sounds like what you justsaid Well, wait a minute, you're
actually like going to a lowertempo.
Speaker 3 (26:33):
Yeah, I think so, and I mean obviously I.
You know I have two advantagesover central bank, and one I
have the benefit of hindsight,and the other is that, as I
didn't implement these policies,I'm not responsible for
covering up any policy error.
Now I think the central bankersthought oh, we lower rates,
(26:55):
companies will borrow more andthey'll invest more and then,
you know, economic growth willtake off.
It didn't happen that way andin part, as you know, ken and I
write about it, but we all sawit is that when interest rates
were extremely low, companiestended to turn to financial
(27:16):
engineering by using the debt topay back, to buy back their
shares and lever up, which givesimmediate return to
stockholders.
It tends to be applauded by,you know, your activist
investors and um is um and ispopular with, with senior
(27:38):
management who have paid withequity-based incentives, whereas
you know if, you if, and it hasvery quick payoff to that.
Whereas you invest in a newplant, you know it's going to
(28:00):
take longer and and take longerand it's, in a way, higher risk
for a manager with short termhorizons.
Capital allocation story is notjust about zombie companies,
although zombie companies, as Isay, you know, slow creative
destruction, and that slowcreative destruction, slowing of
creative destruction, which theAustrian economist Joseph
(28:23):
Schumpeter calls the most vitalforce in capitalism, is in
itself a bad thing.
But the other aspect of verylow interest rates is that they
encourage investment in longdated assets.
And I would say, as you're youknow, none of you so far from
Silicon Valley that SiliconValley was one of the prime
(28:46):
beneficiaries of the ultra lowrates, for two reasons really.
One is, um, you know, sort ofreturns chasing, uh again with
low rates, um threatening todepress returns on portfolios,
uh, there was an incentive to togo in you know more into onto
the vc side of things.
(29:06):
But also because venturecapital investments by their
nature produce profits in thelong, distant future not all of
them, but in general andtherefore those long dated
profits have a higher value,current value, at times of
(29:27):
depressed interest rates.
And I think what we saw thenwas a sort of slew of
investments.
You know, a great SiliconValley boom that became, you
know, I think, sort of, to mymind, rather sort of you know it
became rather irresponsible inits last years and funded a lot
of businesses that probablyshouldn't have been been funded.
(29:49):
So you've got sort of capitaltrapped in, uh, in low return
businesses and then capitaldiverted to sort of high you
know, potentially high returnbut very distant return uh
ventures that then get, um, youknow that.
Then the plug is pulled and wesee that I mean I think really
you know, you see that with youknow, with you know, then the
(30:10):
plug is pulled and we see that Imean I think really you know,
you see that, with you know,with a whole load of the funding
of electric vehicle businesses.
You look at the Wall StreetJournal on almost a weekly basis
you see another EV companygoing to the wall.
You see, actually a lot of thealternative energy, very long
dated, you know, these windfarms and so on, where all
(30:34):
capital costs are up front butreturns in a more distant future
.
So if you have a low rate ofinterest, these businesses
become viable and suddenly youchange the rate of interest and
that business loses itsviability and that business
loses its viability and you havea lot of and we haven't
mentioned it yet, but we can doobviously a lot of money going
(30:59):
into commercial real estate,because the real estate
developers love easy money morethan anyone else on earth and
you're sure that the marginaldeveloper will borrow and lever
up to the highest possible rateand overbuild at rates Q&A, and
I'll try to get to them.
First, though, I want to askabout the recent period of low
(31:22):
interest rates, a long period,and then there was a crisis got
me thinking.
Speaker 2 (31:26):
Well, we just now, recently, had the lowest
(31:55):
interest rates ever, you know, alarge portion of the sovereign
bond market, uh, having negativeyields, in fact, and, and given
the pattern that your bookestablishes, it suggests that we
could be in store for sometrouble in financial markets.
It doesn't seem, other than thebond market.
(32:15):
It doesn't seem that thattrouble has manifested itself
yet.
But I'm very interested inhaving you comment on, like one
of the reviewers of your booksaid well, now that I've read,
you know, mr Chancellor's book,I'm just going to sell
everything because you know, weknow what happens when interest
going to sell everything,because you know, we know what
happens when interest rates arereally low for a long time.
Uh, what do you think willhappen this time?
Speaker 3 (32:37):
I wouldn't.
I wouldn't actually necessarilyadvise that, but everyone could
do do what they want to be.
So so this is interesting.
Um, I mean, I have to say, youknow, say there is an element of
sort of there's a doom-ladenelement to my book.
As you get towards the end, Ithink, when I was sending it to
(32:59):
the publishers, they had somesort of blurb which they'd
written saying well, unlesspolicymakers come to understand
this, will the world movetowards another financial crisis
.
And I said no, forget it, thisis far too late to get out of
this hole that we've dugourselves in.
And so then what?
(33:21):
And it is, you know, it isinteresting what's happened over
the last couple of years,because I sent the book in to
the publisher just yet, butreally before the Fed and any
other other central banks hadtightened.
So in 2022, the Fed starts totighten and as, as you mentioned
(33:41):
, we get this huge sell-off inthe bond markets and the bond
market crash is reallyphenomenal, actually year since
the creation of the first sortof long bond issued in Britain
(34:06):
in the 1750s so-called consuls.
And you have some of thesebonds, like the Austrian
100-year bond, selling off 75%.
And you have a UK linker indexlink bond 50-year bond also down
75%, 80%.
So you get a pretty big bondcrash.
You get a sort of decent bearmarket, if you remember, but it
(34:31):
doesn't last very long and themarkets come back pretty quickly
.
You get this expectation of aso-called hard landing and a
recession, and that hard landingand recession doesn't
immediately arrive.
And then you get this flurry ofinterest around artificial
(34:51):
intelligence and a new sort ofspeculative boom in the market,
initially concentrated aroundthe so-called magnificent seven
stocks, all of whom have somesort of AI story to tell.
And so that is you know.
That's sort of where we are.
(35:12):
There are reasons.
So why have we not had a hardlanding?
I think you know in part.
Simply, you know the US federalgovernment borrowed and spent a
huge amount of money last year.
They sort of preempted any hardlanding before anything had
come about.
I think the AI I mean I wouldcall it a bubble, but you know
(35:35):
the AI boom has rekindled animalspirits.
As you see, meme stocks are backin favor, gamestop or whatever
has risen from the dead, and myview is it takes you know I
thought about this a bit moreand it takes a while to readjust
(35:59):
to the higher rates.
I think you know corporationstook advantage of the very low
rates to lock in the very lowrates and people got interest
rate swaps when they borrowed,even when they borrowed a
floating rate again to lock infor two or three years into low
(36:19):
rates at very low costs.
I think you could, real estatedeveloper, could ensure that,
you know, get an interest rateswap on one hundred million
dollar loan for fifty seventhousand dollars back in 2021.
So you'd have to be a sort ofyou know pretty dumb not to
spend that fifty seven thousandto lock in the rates, not to
(36:41):
spend that 57,000 to lock in therates.
And then you know a lot of inthe US, a lot of the most
homeowners you know, termed outtheir borrowing with fixed rate
borrowing.
And so what I think that meansis that it's taking a while for
the markets to really sort ofyou know, take on board the
(37:03):
readjustment to higher rates.
And you know I mentionedcommercial real estate, I think,
because a lot of commercialreal estate funding is floating
rate.
That is actually pretty much,you know, a slow motion train
wreck, pretty much a you know aslow motion train wreck, and you
(37:26):
know you can read perfectlyrespectable analyses of the
commercial real estate situation.
That, look, you know, thatmakes it sound fairly horrendous
.
You've got, you know, on aglobal basis.
You've got China.
China's real estate bust isgoing on.
And to me, you know, as youknow, I've got a chapter on
China in the book.
When I talk about the build-upof debt and the real estate
(37:47):
bubble and the overinvestment, Ithink the China story again is
quite slow play but really avery big story.
And then look at Japan.
Japan took, after the bubbleeconomy, another boom that was
created in some part by easymoney from the Bank of Japan in
(38:11):
the 1980s.
It took, you know, a couple ofdecades to play out.
So my, my sense is that there'sa pig in the python, okay,
slowly moving through it.
You know we're talking about.
(38:33):
You know the economies andfinancial markets.
They're very complex systems,aren't they?
And therefore one never quiteknows when, you know when things
are going to be triggered.
Speaker 2 (38:40):
You have a question that kind of relates to this
thread of the conversation.
You know, of course, we're herein Silicon Valley, Many of us
have worked at tech firms orhave positions with tech
companies and, as you saidearlier, the very low interest
rates sort of induces moreinvestment in long duration
(39:02):
assets, including, you know,startup companies whose profits
are well down the road.
The questioner is asking thatmade sense or that could be why
many things were funded in, youknow, 2020, 2021.
But now that interest rateshave risen quite a lot since
then, we're still seeingrecovery to record highs for
(39:24):
NASDAQ 100 and other kind oftech indices.
So then does that mean that thelong duration assets get priced
up?
Low interest rates are high.
Speaker 3 (39:35):
Well, I mean, it's pretty anomalous, I have to say,
the rebound of NASDAQ and theinsertion or the appearance of
this AI frenzy, just as allthese SPACs the SPACs that merge
(39:58):
with the flakiest techcompanies you'd ever heard Just
as those SPACs were down 95% andgoing bust.
You suddenly had this sort ofbunny boiler of a new tech boom
rising from the dead, and that Imean I have racked my head to
(40:21):
see anything like it.
And what we've seenhistorically is, you know, good
old fashioned bear marketrallies, and sometimes a bear
market rally, you know, takesthe market back, you know, quite
close to its highs.
This is, you know, if this is abear market rally.
(40:41):
Even though new record highs arebeing set yeah, yeah, it was
part of part of a longer bearmarket and then I mean I, if it
were, I'd say it was thegreatest bear market rally
history uh and I don't know.
You know you can take.
You know you said that someoneread the book.
A reviewer read the book.
(41:02):
Know you know you can take.
You know you said that someoneread the book.
A reviewer read the book andsaid you know, sell all your
stock.
It's actually not the messageof the book.
It's actually, I think, one ofthe problems that I identified
from the low interest rate era.
And bear in mind, as youmentioned, I was working in the
asset allocation team at GMO forthe first half of the decade
(41:25):
and you know we were findingrelatively few you know
investment opportunities.
So you know, and whereas in theprevious period, at least at
the end of the dotcom bubble,there was huge investment
opportunities in stuff outsideof NASDAQ, the NASDAQ might have
been fated to go down 75%, butyou could make.
(41:45):
If you had your head screwed onthe right way, you could invest
quite heavily.
I think at the end of you know,going into 2022, it was very
difficult to think of a.
You know which assets wereparticularly attractively priced
and therefore, I think underthose circumstances, you need a
tiny bit of diversification.
(42:07):
You don't want to.
I think the good news from anyou know, from an investment
perspective over the last coupleof years is that, while the
stock market remains prettyexpensive in the US, you know
the bonds have repriced and inparticular you know the
inflation, inflation, protectedbonds, the tips.
(42:27):
You know yield, you know areally decent return to my mind.
You know sort of in range.
And even if you go to Japan,you know the 30 year bond is no
longer yielding negative but youget 200 basis points.
So from an asset allocationperspective now, I mean, my view
(42:51):
is, you know I wouldn't put allyour money on this, on there
not being a next leg down in thebull market, but I think you
can allocate capital.
It's a somewhat bettersituation at least, than it was
two years ago.
Speaker 2 (43:08):
In the book.
I'm going to riff on one of thequestions the question is
asking.
In the Mississippi bubbleexample, the questioner is
asking you know, were marketrates, market, interest rates,
market determined then, and nowthey're kind of engineered by
central banks.
Is that in the book?
(43:30):
In the book you kind of it's apretty strong critique of how
central banks think and, inparticular, if you know if the
guiding light is managinginflation up and down.
You seem to be suggesting thatthey're missing some other
guiding lights.
That might even be moreimportant than that.
Can you talk about themanagement of interest rates,
(43:52):
what central banks have beendoing in the last decade and
what you would have them do?
That's different.
Speaker 3 (43:59):
Yes, I mean.
First of all, I'd like toclarify that the under the
mississippi company in the johnlaw's period of preeminence in
the past it was a paper currency.
So law in effect wasmanipulating the interest rates
under a um, under the sort ofgold standard system.
Um, which you know was sort ofbecame predominant in the late
(44:20):
19th century, but you could saythat the British was engaged in
that from the early 18th centuryonwards.
Basically, the central bank hadto redeem its notes in gold
with a certain fixed quantity ofgold and therefore what the
central bank would do is whenits stock of gold was high, it
(44:45):
would issue more notes, and whenits stock of low was and
interest and lower interestrates, and when its stock of
gold was very low, it wouldraise interest rates and so that
so the flow.
You didn't need you know a PhDin economics to find out what
your stock of bullion was.
(45:06):
So in fact, actually I quiteliked about the Bank of England
in the 18th century.
It was sort of run by merchants.
There was no, there was noeconomist within you know 100
miles, economists within youknow 100 miles.
There were no bankers.
Bankers weren't allowed nearthe court of the Bank of England
because they were considered tobe sort of likely to be
(45:27):
undermining its purpose Anyhow.
So there you know the.
Under that system.
You know I don't want to getinto defence of the system
because it does lead to verysevere busts.
However, the interest rate isbeing set automatically by the
relationship between, if youwill, the amount of credit
outstanding and the underlyingmonetary stock.
(45:49):
And the underlying monetarystock cannot be sort of fiddled
with.
To go into the modern world,because you've got a fiat
currency system which basicallydepends on the apex of which is
the central bank and under whichmoney can be created by the
(46:10):
central bank.
To determine the rate ofinterest, you can no longer have
a merchant who left school atthe age of 12 determining what
the century, what the interestrate is.
Instead, you have to employ,you know, you know, hundreds of
hundreds of economists, uh, withtheir models, to um, determine
(46:34):
what the what the right rate ofinterest is.
And I suppose I come at it.
You know, from the perspectivethat how would a committee, how
could a committee of people knowwhat the correct rate of
interest should be?
It's they set themselves toground a task and then, and then
they I think you know they.
(46:54):
What's happened is everyone'sclutched on to because the task
was so difficult.
They said we need to know, youknow something to set the rate,
so we'll just clutch onto this.
You know inflation targetThat'll be our life vest tossed
around in the uncertainties ofthe monetary world.
(47:15):
And, as you know, I say thatthe interest rate is not a.
The current near-term inflationrate is not a good guide for
setting monetary policy.
You know the central bankers, tomy mind, obsess far too much
about deflation.
I mean, you know, think aboutSilicon Valley and computers and
(47:39):
this.
And that you know huge Everyyear, falling prices.
Falling prices are just, andthat you know, huge every year,
falling prices.
Falling prices are just aresult.
You know, inevitableconsequence of technological
development, of productivitygrowth and a welcome.
You know people like fallingprices, believe it or not.
And yet you know the centralbankers did their best to
(48:03):
prevent, to stop the price levelfrom falling.
Which means, frankly, if you'vegot let's just say you had you
know two products, yeah, let'ssay you've got two products, a
good and a service economy.
One is your tech goods, goods,your computers, and the other is
, say, college education and asas your, as the price of the
(48:27):
tech product is um coming down,you're going to have to push up
the central bank is going tohave to push up the price of the
college education in order tokeep his average the same.
It it's.
It has a very um has a verycorrupting effect.
This, uh, near-term focus on,on, on um, on inflation
(48:48):
targeting, uh, and I I mean Idon't know the correct system to
move to.
I I wouldn't advocate going backto gold standard.
There is a friend of mine whowas former chief economist at
Deutsche Bank, called ThomasMeyer.
He thinks that you could createa central bank digital currency
that was limit, that grew onlyby a certain amount.
(49:12):
You know was constitutionallycreated, that it would only grow
by a certain amount a year, twoor three percentage points, and
that could you know that would,that would, that would create a
fixed, a relatively fixed moneyat least, with a constant rate,
and that, you could see, wouldallow for the interest rate then
(49:33):
to be determined by the, bygenuine savings and um and and
the and the demand for savings.
So I mean really one.
I don't think enough thoughthas gone into if central bankers
cannot determine, if noindividual can determine, what
the right rate of interest isand we wouldn't ask them to
(49:57):
determine.
You know, I'm holding a pen inmy hand.
We wouldn't ask any individualto say look, what are the
components of this pen?
How much should it be priced?
We let the market determine theprice of this pen.
Speaker 2 (50:10):
We just got a question.
I know we're almost out of time, but it sounds like the
questioner says so.
Data dependency is a prettypoor idea, but I don't think
that's really what you'rearguing.
I think you're saying that justlooking at one piece of data,
which is the rate of inflation,and not looking at what's
happening to credit creation orto stock prices and leverage,
(50:36):
it's just kind of myopic.
What data matters, right?
Speaker 3 (50:40):
I mean, I don't look, I don't.
What I know about the centralbank models is second hand, but
I think the central bank modelsalso you know the huge amount of
theoretical input into the veryunrealistic is that their
models don't actually includemoney in a financial system.
They, there is, you know,there's one firm like the
(51:01):
representative firm, so that onefirm doesn't know all this
zombie stuff I told you about,doesn't really recognize that
you have, you know, oneindividual the representative
investor.
So the it's not.
It's that the central bankingis both a mixture of, you know,
drowning in data but also having, you know, highly unrealistic
(51:21):
models, of highly unrealisticmodels of how the world actually
works.
But yeah, to go back to yourpoint, you're going to be
pragmatic and you're not goingto have a new monetary system.
You can at least step back fromthis near-term inflation target
and say, you know, is thedeflation, say you were in a
(51:42):
period of deflation.
Is this deflation, debtdeflation, you know, which might
be bad if it's going to crumblethe financial system as it was
in 2008, 2009?
Or is it the deflation thatcomes from higher productivity
growth?
Because that's a very simplequestion to analyze.
And if it's the deflation fromhigher productivity growth, you
say, well, this is the way to go.
(52:04):
Yeah, you don't.
You don't fight that deflation.
Likewise, you know with theleverage and you know I mean I
think you know they.
As you know, after thefinancial crisis we introduced
huge amount of you know offinancial regulation.
That you know I'm sure it madeyour job a nightmare.
It it's a nightmare work and itbecame an increasing nightmare
(52:25):
if you're working professionalinvestor to deal with this
regulation.
But in the end, the regulationthe financial system doesn't
come properly from, cannot comeproperly just from printing new
rules.
It has to come from actuallysetting a rate of interest that
prevents excessive leverage,that doesn't encourage the
deterioration in underwritingstandards and carry trades and
(52:48):
the like.
All right.
Speaker 2 (52:52):
I think we could.
We could carry on and have thisfascinating conversation, but I
think we've come to the end ofthe hour.
Thoroughly enjoyed this book.
I highly recommend it.
But I think we've come to theend of the hour.
Thoroughly enjoyed this book.
I highly recommend it.
It's not just informative, it'salso an engaging history of
interest and I learned a lot,and I expect that those of you
(53:12):
in the audience would enjoy itas well.
So thank you so much, edward,for spending your time with the
CFA Society of San Francisco.
Thank you, thank you sincerelyfor joining us today.
Speaker 1 (53:23):
Okay, Thank you for listening to this month's chat
segment.
Chats is a monthly segmentfeaturing audio from our
recently recorded webinarsairing on the second Tuesday of
the month.
To view the video recording ofthis episode and discover
additional Society webinars,visit the CFA Society San
(53:46):
Francisco YouTube channel.
Join us next time for ourregularly scheduled Financial
Perspectives podcast episodeairing on the last Tuesday of
the month, and make sure to sendin a message to the show using
a link at the top of eachepisode description or by
emailing podcast at cfa-sforg.
We'd love to hear what youthink of our new chat segment or
(54:07):
any suggestions on futuretopics you'd like us to cover.
Thank you for being a dedicatedlistener.
This podcast is produced by CFASociety San Francisco, a
not-for-profit professionalassociation providing
professional learning and careerresources to over 13,000
(54:30):
investment industryprofessionals worldwide.
To learn more about CFA SocietySan Francisco, visit our
website at cfa-sforg or connectwith us on LinkedIn.
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