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Dr. Richard Sylla

lines on the record: 62
first: 2023-04-05
most recent: 2023-04-05
sittings or episodes: 1
sources: podcast

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“Those extremely low interest rate policies cause certain things to happen in the economy that caused us trouble later on. And maybe we should try to have a more normal structure of interest rates going forward.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“I'm thinking that's probably true. And I think we're going to find out that the ZERP policies actually cause some of the problems that we're seeing now in the financial system. A friend of mine named Edward Chancellor has written a couple good books on financial history. And the latest one is called The Price of Time. And it's kind of a discussion of how it was a big mistake to follow these extremely low interest rate policies. And the book came out a year ago. It was written two years ago. And I think Edward Chancellor is saying now, I was predicting some of the things we're seeing right now, the financial problems of being caused by the low interest rate policy. So we're living in a new chapter of financial history and we don't know exactly how it's going to turn out. It's hard to predict the future. But I think when the smoke clears, we'll look back and say that.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“So no one can predict the future, but all things being equal, do you think over the next few decades the ZERP zero interest rate policy is behind us, that interest rates will be two or three percent, if not higher?”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Economic growth slows. I think there's a real relation between interest rates and the rate of economic, real economic growth. And if economic growth slows, as many people are forecasting, interest, real interest rates may stay low and nominal interest rates will sort of depend on where inflation is. The Federal Reserve's target of 2% inflation makes me think that the interest rates might be 3% or 4% would be normal. And that's where we're getting to now. So, I think although Wall Street is worried about our high interest rates and hopes they'll go lower, I think we're really getting to a much more normal situation right now. And maybe they'll, you know, they won't come down a lot from where they are now. They will stabilize at the values that they've climbed up to in recent years.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Are still quite low. They probably go up a little more. But I think the world is pretty rich now. You know, there's been a lot of progress. I mean, one of the great things that's happened is that a lot of the less developed countries in the last 40 years, China being the main example, have become much richer. And there's a lot of savings in the world that's looking for investment. People talk about chasing yield. That's how we get into trouble. You know, Silicon Valley was chasing Silicon Valley Bank was chasing yield. And he got into trouble when it didn't hedge those risks of buying those government bonds at low interest rates. So I would say that.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“It's an interesting question why interest rates are so low. Now, there's a young scholar named Paul Schmelzing that's done some fundamental work, a lot of additions to what you find in our book on the history of interest rates, much richer database. And he says that real interest rates have been falling steadily for the last seven or eight hundred years. And at a time when people, you know, two or three, four years ago, when people were talking about our low interest rates, being unusually low, Schmelzing said, no, they're right where they should be. I mean, you just project the trend of history and they're right where they should be. Those were real interest rates, though. I think that the nominal interest rates now are moving up. Real interest rates, of course, are still low. I mean, if we have 6% inflation and 4% on a government bond, that strikes me as something like minus 2% real interest rate. So...”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“I think basically the government suppressed those interest rates through zero interest rate policies and they could get away with it in the last decade because the banks were holding a lot of excess reserves. But when the banks start lending, then we have an inflation problem.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Do you think Hamilton would have been surprised that interest rates would have been so low with the American debt so large? And specifically that interest rates now are far lower now that the debt is $32 trillion than it was in 1980 when it was $1 trillion.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Of recent years is that the Republicans themselves seem to not care about fiscal responsibility. And that's why, you know, look, Jack, 40 years ago, 43 years ago, 1980, the national debt of the United States was $1 trillion. So from 1776 to 1980, we managed to run up a $1 trillion debt. Now in what's basically And it's because we have demands for spending. Some people want more government spending. Other people want lower taxes. So we cut taxes. We spend a lot more. And the result is we have this huge national debt. And I think Hamilton would be very disturbed, I would almost say disgusted by what has happened here, how we don't seem to have the notions of fiscal responsibility that he tried to teach us.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Behavior, you borrow the money and you think you have a, you know, you're taking some measure to make sure you can pay the interest and ultimately retire the debt. Congress in the United States has not done that though. I think my view is that Hamilton gave us a legacy of sound fiscal management. And it did so much to make the United States a great power and a trusted financial government to lend money to. And Congress is kind of abusing that legacy of people like Hamilton, fiscal responsibility, just because we're so trusted, we can borrow money very easily. And one of the disappointments of my life is that the Republican Party used to stand for fiscal responsibility. The Democrats were a little looser on that. But one of the great disappointments.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“So, in other words, the main principle he had was that when you borrow money, you should take some measures to make sure that you pay the, you know, have enough money to pay the interest on it and a little bit more so that you'll ultimately retire the debt. When New York Belti Erie Canal, they did that. They basically increased taxes. And eventually in state and local government in the US, I've gone into a ballot box sometime and had to vote on whether I was in favor of issuing some bonds. And so that's responsible fiscal.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“that would bring in at least 60 million a year to pay the 6% interest on the billion you borrowed, but a little bit extra, maybe 70 million to pay the interest of 6% on the billion dollar debt, plus a little bit more. And Hamilton was pretty good at financial mathematics. He was actually a descendant of the Scottish mathematician John Napier, who invented natural logarithms. Hamilton was many generations later a descendant. So maybe he had mathematics in his blood. But Hamilton said that that extra $10 billion on the... 10 million on IAS $1 billion debt would allow you in some sum of years to retire the debt.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Okay, or Secretary of the Treasury again Well, Hamilton, I think Hamilton would look at our current situation and Conclude that the United States is being rather fiscally irresponsible, that as Hamilton wanted to make sure that the government would discharge its debt contracts, would service its debts while the debts were outstanding and would pay them when they became due. And he actually had a way of, which he talked about several times in his career, a way of making sure that this would happen. One of his great principles was that when the government borrows money, supposing to borrow a billion dollars and has to pay, let's say, 5% interest or in his time it would have been 6%, then Hamilton would say, if you're borrowing a billion dollars, you should couple the borrowing with a tax increase or some kind of revenue measure”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“A few final questions for you about Alexander Hamilton on whose work you've done a lot of research with all of the issues that monetary authorities, let's just say in the US face right now of inflation and the banking panic, what do you think Alexander Hamilton would suggest or do if he were in a position of power? Let's say if Alexander Hamilton were the chair of the Federal Reserve.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“The longer term capital markets were. But today, I think we have very sophisticated money markets, short-term commercial paper and CDs and so on. So when you get an inverted yield curve, it just means that basically it's kind of odd, but short-term interest rates are high because they're expected to be lowered down the road. And basically what it means is money's a little tight right now because the Fed is fighting the inflation, but they will be successful and that will slow the economy and then they'll reduce the interest rate. So I have to pay 4% for short-term money right now, but I really expect that this policy will work and therefore interest rates will fall in the next year or two. And so I'm willing to accept. The lower interest rate on a five or ten year instrument than I am on a”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“I think let me speak to the history first. The reason short-term rates were often above long-term rates is that the capital markets were sort of more developed than the banking systems, at least in the United States and maybe in some other countries too, that had a large national debts and the governments managed their national debts. So long-term securities often had lower yields in the short term, very short-term loans. So that was a kind of difference between the development of capital markets and the development of short-term lending. And we didn't have such sophisticated short-term money markets as we have today. I mean, the bank loans were a basic source of short-term financing in those days. And you didn't have a, I mean, you had money markets in Britain and that, you know, discounts on bills of exchange and so on. But they weren't as developed.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Sense that we have a mild recession. One thing about modern recessions apart from 2007 to 9, modern recessions tend to be fairly modest. The 1990-91 recession was very modest recession. The 2001 recession only lasted about six months, and it was definitely a recession. But unlike in almost all recessions in history, the GDP actually grew a little bit in 2001 over the year 2000. So a very mild recession. I suspect that we'll be lucky to have such a mild recession this time. But interest rates, well, you know, if we have that recession, we can expect them to peak out and the Federal Reserve will, you know, then when recession becomes this number one problem, replaces inflation as its number one problem, the Fed is likely if history. Any guide to start reducing interest rates.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Given the financial crisis, we'll have a couple more moderate increases in interest rates, but that may work to slow the economy, and let's hope we don't have more banks failing. But it may slow the economy in a...”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“If the inflation rate doesn't show some signs of coming down we're talking at the end of March in 2023, if the interest rates don't, I mean, if the economy doesn't show some signs of slowing, then the Federal probably have one or two or three more increases in its rate. Remember, we're just getting back to what most of U.S. history would be considered normal rates. I think as a rough guideline, you need to get interest rates sort of above the inflation rate in order to end the inflation. And we're getting there, but I don't think we're still quite there. I mean, we have four to five to five percent interest rates and the inflation rate is still around five or six percent. So we're a lot better than we were a few months ago, but so I suspect, especially.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“So, in a recession, typically interest rates fall, as I learned from your book, not always, but typically the interest rates do not go up in a recession So maybe on over the short term, the rise in interest rates could be halted. And what is your medium-term outlook on interest rates? If in 1981, when the 20-year treasury note yielded 15%, you said, hmm, probably going to go lower from here and you were very right. Where do you think yields are going to be over the next decade or two?”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“These things going on, not just the Federal Reserve policy and the financial problems in the United States, but around the world there are signs. In 2007 to 9, you know, a global financial crisis and a global recession.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“They'll overshoot a little bit and we'll get something called a recession. Let's just hope it's a mild recession, not a deep one. But when you have big banks failing in Europe like Craigie Swiss lately, we shouldn't just focus on our situation in the United States. We've got a war going on in the Ukraine. There are problems with international trade. protectionism seems to be on the rise. And the US has a kind of ongoing dispute with China about these things. So I think there, you know, if you look at the whole world situation, there may be a slowdown. We're a very large economy and we export a lot. And so that could contribute to a recession in the US too. If the rest of the world has some trouble and can't import from us, well, that slows our economy. So I see all...”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Because the bankers are being more cautious, the Fed has raised interest rates a lot. The Fed has almost been saying, you know, and getting some backlash that the labor market is too tight. Reduce inflation by reducing the growth of wages. There seem to be a shortage of labor. You know, I live a good bit of my life in New Hampshire and I see help wanted ads everywhere. I'm retired, but sometimes I think, well, if they need this help, maybe I should go out and apply for a job. But anyway, it is a tight labor market. The Fed seems to want to loosen the tight labor market. In other words, it wants unemployment to go up a little bit to reduce the pressures of inflation. So I think that that, you know, Fed almost, you know, it hopes for a soft landing, but I think hope is not a strategy. And it's very likely that.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Well, there's no doubt that the profitability of banks will be harmed if people who lend the money in banks, you know, they get a lot of money from depositors, but in modern banking, you go out and get a lot of market funding as well. And you borrow from Wall Street or the bigger banks on loans. And I think everyone's more cautious now. In fact, Jay Powell said recently that the greater caution that banks are going to be making now when they examine applications for loans, that in itself will help to tighten money and may help the Federal Reserve in its war against inflation. It may also get us into a recession as well. I'm actually suspecting that we will have a recession. It hasn't shown.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Was kind of swept under the rug. It wasn't realized until later in the 80s, even in the 1990s these things were still failing. I want to ask you, though, was the actual cause of these banks failing? And I'm sort of not asking about sort of the twigs or the wood that burned. I'm asking about what lit the match. Was it a run on the bank or just a necessary increase cost of funding on those banks that they used to be paid 3% on deposits and you got to raise that when the interest rates are at 10%? Because that, I think, was what happened with Silicon Valley Bank. And now a lot of people are talking about how the bank funding costs will go up, which will harm their profitability.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“And that stock rallied, I think, something like 50 or 60 percent the day the news was announced yesterday. So the rapid rise in interest rates in the 1980-81 that caused a collapse in the value of the duration sensitive mortgages assets.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Rather thin margin of capital behind their balance sheets. And if something on the asset side goes down in value, the capital position of a bank can disappear very, very quickly. That's what happened to a lot of very big banks in 1990, 08 and 2009. And a lot of them failed. Washington Mutual, you know, that was a big failure. Wakovia failed. They were absorbed into bigger banks. But the same thing, rising interest rates, reducing the value of their assets. Basically, they, you know, they had to be taken over and merged with other banks. I see Silicon Valley Bank was just merged this week with the first Citizens Bank of North Carolina.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Right. I mean, basically they were asked to give the money back to their depositors and they didn't have the money to do it. And if they had dumped their securities on the market at fire sale prices, they would have been even less able to do it. So things were happening very quickly. The authorities swooped in and took over the bank and told the depositors that you'll be made safe. I mean, in a sense, they failed, had some other bank failed, Silicon Valley Bank might have gotten the guarantees from the government a week later and survived. But things happen very quickly in financial crisis. You work hard to build up a business for a long time and you think it's going well. It can collapse on you very quickly. That's another lesson of financial history. That's basically because all banks are highly leveraged.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Earning assets of the financial institutions. They were mostly mortgages for savings and loans. And basically their assets got to be worth less than their liabilities. So they were bankrupt and should have been shut down, but they weren't shut down. Silicon Valley Bank and Signature Bank were shut down. I just wonder whether there are more banks that are going to be like them. I mean, there certainly weren't the only ones experiencing the problem.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Take on more risk in the 1980s. And by the end of the 80s, they were failing right and left. Things didn't work out for them. And so many of the savings and loans were absorbed into banks and basically there's not much difference between a bank and a savings and loan anymore. And so they all failed instead of costing 10 or 20 billion. It ended up costing taxpayers $120 billion where the government had to basically shut down the savings and loans, auction off their assets, which they did in the early 1990s. Most of the savings and loans were absorbed into banks and so on. And so we got through the crisis, but it was costly. But the cause of it was exactly what's going on now. Rising interest rates reduced the value of the”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Later on. Well, the government did not do it in 1980-81. Instead, it relaxed the regulations of savings and loans and gave them some of the allowed them to invest in a wider range of security. You know, the idea was, we'll let them take more risks and therefore they will earn higher returns and they'll become less bankrupt than they were, maybe even become solvent again. So Congress did the wrong thing. It should have shut down the savings and laws of the authorities should have shut them down in 1980-81. And the loss might have been, you know, 10 or 20 billion to the FDIC or this Fizlake Savings and Loan Insurance Corporation. That's not around anymore, but there was a separate insurance agency for savings and loans. So Fislig might have lost $20 billion. Instead, they let the savings and loans.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“It had, you know, I mean, it was the same thing that's going on now, the rise in interest rates technically bankrupted most of the country savings and loans by 1980 or 81 when the peak interest rates came in. There were all these savings and loans that back in the 1950s and 60s and 70s had made mortgage loans at much lower interest rates. Those mortgage loans were when interest rates were very high the savings in loans had to pay their depositors more, but they were earning less on their portfolio of old mortgages. And Franco Modigliani, who was an MIT economics professor, I was at a conference with him around 1981. He said basically all the savings and loans of the country are almost all of them are bankrupt right now. They should be shut down. And if the government doesn't do it, it'll just be a bigger problem.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“We'll have to see. I mean, I think the Fed is sitting around probably right now somebody at the headquarters in Washington, D.C. They're sort of asking themselves, you know, can we guarantee all the deposits of the banking system? There's a lot of moral hazard in that because you're just politicians will start talking about the government and the banks. The government just bails out the banks and lets the rest of us be unemployed. We saw that in 2009 and 10 and there was a bit of a backlash about it. So the American public is not very fond of rich bankers being bailed out by the federal government.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“So the Fed wants to continue the war on inflation, but at the same time, it has to be asking itself, we got to be careful because if we aren't careful, there'll be more bank failures. So I think it's in a pickle of its own making in a sense. We'll just have to see how they handle it. So far, I think they've done a pretty good job Silicon Valley Bank was not the only bank to have the problems. The other ones have the problem. They did guarantee all the deposits. There's a question that's going around now. Is that going to be extended to the whole banking system or was it just a special case of Silicon Valley and signature bank?”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think the Fed, as you might say, is between a rock and a hard place now. I mean, it has to fight inflation, but now in the last month or so, we've developed banking and financial system problems. So the Fed would like to Continue with this anti inflation policy by maybe having a few more maybe more moderate 25 basis points, not 50 or 75, because it thinks it hasn't really won the war on inflation yet. But now with the banking problems coming up because of the rising interest rate policies of the Fed, it has to worry about financial stability. And a lot of banks”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Interest rates came down. It took a long time. I mean, in the early 1990s, a decade after Volcker broke the back of the inflation, it was six, seven, eight percent interest rates were still pretty common, much higher than we got used to. I would say it wasn't until about the mid-1990s and Greenspan was running the Fed then, and that we got back to sort of normal interest rates and the Federal Reserve was regaining credibility, regained the credibility that it had lost in the 1970s.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“1982 was the mid-year midterm elections and all of Ronald Reagan's advisors that told him to get tough with the Fed and blame and the unemployment rate was getting up to 10%. Reagan's advisors told him that you've got to get tough with the Fed and blame the Fed and Volcker told me that Reagan refused to do that. He didn't have the greatest understanding in the world of monetary policy, but he knew that inflation was bad for the economy. And so Reagan apparently told his advisors, no chairman Volcker and I believe that inflation is bad for the economy, so I'm not going to do what you're telling me to do. I'm going to support Paul Volcker at the Fed. And he did. And the inflation rate came down. And the 1980s were the start of the Great Bull Market and stocks that peaked out around 1999, 2000.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“ten percent by some in some months by late nineteen eighty two. Worse than anything we've seen lately, although I guess it got close to that in 2009, that recession. So interest rates went up. We had a pretty severe recession. At the time, 1981-82 recession was called the worst since the Great Depression, and it was. But then, you know, the high interest rate policy of Volcker by focusing on monetary aggregates, the inflation rate started coming down in 1982, and the Fed reversed course at East Policy. An interesting thing, you know, you mentioned that I knew Volker pretty well, and he taught with me, and of course at NYU when he was visiting professor.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Well, I'm not sure that interest rates went down against his will. I mean, I think basically he sponsored the policies that led to the highest interest rates in U.S. history. And that was part of his plan, I think, that to let the rates go up and break the back of the inflation. started those policies in 1979 shortly after he came into the Federal Reserve. And basically there was a bit of a recession in 1980. 1980 was an election year. But Jimmy Carter had appointed Paul Volcker and Volcker's policies probably weren't the best for Jimmy Carter's re-election prospects, but Reagan won the election that year and Volcker kept that his high interest policies. I mean, the peak. Come till 1981. And then 1981-82, there was a pretty bad recession. Unemployment rate got up to”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“A lot of government securities that went into bank reserves and the bank started lending them out. And so you got, in other words, the money supply grew in 2020, 2021, 2022 at very high rates because of the liquidity, the reserves that the Fed had created. But in 2008, 9 and 10 and 2011, the banks were reluctant to, you know, they had been burned by the crisis. And so as in the 1930s, they held the reserves and didn't make a lot of loans. So that's the big difference. The question is, are the banks willing to lend in 2009, 10, 11, 12? They were reluctant to lend. They felt comfortable holding excess reserves. The same thing happened in the 1930s. But because we had a decade of fairly moderate economic growth by 2020, the banks, when they got more reserves, they Sorry if lending them out and the money supply grew rap.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“The reason that didn't cause inflation is that the banks held those reserves, and the Fed began to pay interest on them, so the banks, I was reminded of the 1930s. One of the problems of the 1930s is that the United States banking system, the bankers of the country were shell-shocked by all the bank failures of 1930 to 33. And the Federal Reserve adopted policies of adding to buying securities, but the banks didn't make more loans. They held excess reserves. I think they were shell shocked by what had happened. They were cautious about making loans. And so that particular crisis, the Federal Reserve, acted dramatically by creating a lot of bank resource, but the banks held the reserves. I think what happened in 2020 is that when the Federal Reserve did the same thing, it bought.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think we had a major financial crisis from 2007 to 2009. And I think what happened then, the Federal Reserve fought the economic fallout, the Great Recession we called it. I mean, the financial crisis led to what was called the Great Recession with rising unemployment. The Federal Reserve fought that by buying a lot of government bonds and mortgage-backed securities, but that money was basically held by the banks. They didn't, their reserves went from what seemed to be a very low level of 50, say 50 billion dollars to $2,000 billion, $2 trillion and more later on. As the Federal Reserve bought up these securities, the checks that paid for those securities got deposited in the banks and bank reserves went through the roof.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Too. Basically, the Federal Reserve printed the money and the government mailed it out to people and the money stock was growing at 20 or 30 percent. And I knew from a long history that if money grows at 20 to 30 percent, inflation rises won't be far behind. And that's what exactly what happened. And it turned out, you know, initially they said, oh, this is transitory inflation. It has to do with supply problems. Those will remedy themselves in the inflation rate will come down. But it didn't take long before the Fed realized it wasn't so transitory. And I think that's because they created so much money. So I think it's fair to say, and I think history will say that the Fed and fiscal policy, fiscal and monetary policies cause the inflation. And now they're being reversed, or at least monetary policies being reversed.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“The inflation rates came down in the early to mid 1970s. So there is two sides of the coin. If you focus on interest rates, there will be some monetary effects of that. If you push interest rates down, people will borrow more and the money supply should grow. If you push interest rates up, people will borrow less of the money. The banks sort of create money when they make loans to people and people take fewer loans at higher interest rates. So the money supply grows more slowly. But there are two ways of looking at it. I must say we've gotten back to focusing on interest rates, and that may have been part of the problem in our current inflation. Because what I noticed in late 2020 and 2021, what was going on at the Federal Reserve was the money supply of the United States through their low interest rate policies. And we have to talk about the fiscal policies of the government mailing out checks to feed.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Basically, the ups and downs of the economy, you modified them by moving interest rates up and down, and that's what central banks were supposed to do. Milton Friedman focused more on money, and I think it's fair to say that in the 1960s and 70s, Friedman got more and more adherents and the Keynesians focusing on interest rates because of the inflation of the 70s got less and less backing. And Volcker was aware of all this. This was in his mid-career, and he decided that let's try a sort of version of Milton Friedman. Let's focus on controlling the money supply instead of interest rates, and we'll let interest rates go where they will. And of course, they went through the roof, but that ended the inflation rather more quickly than most economists expected at the time. Even Milton Friedman was surprised by how quickly”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Well, we're talking about the money of the economy, which was currency. In those days, we say currency and bank deposits. And I think one of the backstories there is that a famous economist named Milton Friedman, and sometimes with collaborators, had done a lot of research showing that through U.S. history from the Civil War to the 1960s, he measured the money supply and then he showed that it had a high correlation with what was going on in the economy in terms of inflation and so on. And so he kind of switched thinking from the Keynesian idea was that interest rates mattered and you could get people to buy houses if you reduced interest rates or you could get them to slow down their purchases if you raised interest rates. And so you controlled the”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“Now, but in 1979 to 81, the peak years of the inflation of the 1970s, the interest rates were double digits, you know, 10, 11, 12, I mean, not the interest rates, the inflation rate was 10, 11, 12 percent. Higher, much higher than anything we see in this latest episode of inflation.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“And then, of course When interest rates went down, those bonds nearly doubled in value. They were 20-year bonds. They couldn't be called for 15 or 20 years. And so when interest rates came down as a result of Volcker's policies, he broke the back of the inflation. And inflation was the cause of those high interest rates. Volcker changed the way the Fed operated. Of course, the Fed had focused its attention in the 1970s on interest rates. And Volcker decided to focus more on monetary aggregates. You might say that he got control of the money supply, but by reducing its rapid rate of growth, interest rates went through the roof. And we had a pretty serious recession. But we did get rid of that inflation. That inflation rate was among the highest in U.S. history too. I think in 1979 to 81, people are worried about inflation.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“While they were the highest rates in U.S. history, I mean, you had 14, 15% yields on 20-year government bonds, you had 18, 19% mortgage interest rates. I think the bank's prime interest rate got to be above 20% for a while in 1981. Those rates had never been seen before in American history. I mean, think about it today. We're thinking you're getting a pretty good deal on a government bond that yields three and a half or four and a half percent. And then, you know, you could get a government bond that yielded 15% or 14. I bought some for my mother for 14.5%.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT
“State banks would get rid of a competitor. They would get rid of a regulator and they would get the government's banking business. So the banks, the state banks basically lobbied Congress and failed by the slimmest of the Martians. It was one of these votes like we've seen lately where the vice president of the United States had there was a tie in the Senate and the vice president who was an old political enemy of Hamilton. He was former New York Governor George Clinton, vice president of the U.S. He cast a vote against the bank so it failed by one vote to be renewed. And unfortunately, we had the war of 1812 following fast on the heel and the government's finances were rather embarrassed. And so the first thing they did after the war of 1812 was over was to found a second bank of the United States. Some of the banks, old enemies, realized it was important. But that one ran into trouble 20 years later with Andrew Jackson.”
2023-04-05 · Forward Guidance · The Next Chapter In Interest Rate History | Dr. Richard Sylla · IDENTIFIED FROM THE TRANSCRIPT