The Exchanges

Q I, I think this is the perfect time to have you back, Bluntley. I have so many open questions. Before we dive into the core of the show, though, I just want to do a cliff notes, which is really unfair, especially given your career, but what is the cliff notes on your career and the core highlights you'd dive into?

A Okay, uh, well, quick cliff notes. I mean, I guess I'd say I've worked pretty much at the intersection of private markets and public policy most of my career, so. I started in the city, uh, just before the fall of the Berlin Wall, so probably before you were born. Uh, kind of rode the globalization boom from there, uh, in, in Asia and New York, a bit in Canada with Goldman. Uh, then I, uh, became a central bank governor in search of a quiet life. Um, I figured, you know, eight interest rate meetings a year, and I could spend time with my family. And, uh, my timing was a bit off because I started a few weeks before Bear Stearns, uh, uh, Failed. Uh, and then obviously that cascaded into the subprime crisis and, uh, Lehman, et cetera. And so I got involved with, um, the financial reforms after that, uh, picked up from where Mario Draghi left off on leading the financial reforms, uh, went to the Bank of England, uh, you know, during the Euro crisis, uh, Brexit, uh, referendum, uh, focused a bit on climate when I was there, given the responsibilities. And now I'm back More on the private side. So I, that was a long period on the public side, but a public side where, uh, working a lot, obviously, you know, trying to fix and reform private markets. And now I'm back on the private side, focusing in a couple areas, most of which relate to climate. So I work with Brookfield. Uh, we have …

AI assessment note: “quick cliff notes. I mean, I guess I'd say I've worked pretty much”

Q Well, I mean, that's what I wanted to ask you, which is that when you think about kind of what's to come and the consequences, when you think about the consequences of the banking crisis on like monetary policy, how do you think that will look in the next 12 months that start there?

A So I distinguish between a crisis and turmoil, so I'm still going to cling to that turmoil term, uh, but it's nonetheless serious. Like it's serious enough that, you know, it's going to Uh, let's say in the US, it'll probably slow growth by, you know, half to three quarters of a percentage point. It's probably enough if people felt that the US economy was on the cusp of, uh, you know, this narrow path, uh, between avoiding recession and having a recession. It's probably enough of a headwind that, uh, there will be a recession in the US. So that's material. Uh, in terms of monetary policy, uh, I think what, what the central banks have done is, uh, is to try to, uh, differentiate between what they need to do to keep the financial system functioning reasonably well, and what they need to do to, uh, address inflation. So they provide liquidity to, uh, the banks, particularly in the United States, and that keeps, you know, those who have healthy, healthy enough business models to keep going. But they continue to raise interest rates. But the next point is that the, the degree to which they raise interest rates has changed. And, uh, you know, if we had been talking, uh, at the end of February, early March before Silicon Valley bank, I would have said something to the effect of, I think the fed may have to go to six percent fed funds. Now I think, uh, they'll probably stop at five, fi…

AI assessment note: “they'll probably stop at five, five and a quarter”

Q So help me out here in terms of that contingent group that's external to like the core, uh, savior, which would obviously be kind of, um, you know, government led. Is that like a contingent of, uh, JP Morgan, Goldman Sachs, the biggest institutions who collectively come to rescue the banking system together with this guarantee? What does that look like? I'm sorry.

A Yeah. No, no, no. It's well, it's something we put in place, um, after the financial crisis. So I said a few moments ago that look, the system as a whole has six times as much loss absorbency as it had going into the financial crisis. And that's a big multiple part of that, um, a little less than half of that is contingent debt. So it's actually, I mean, there's various structures for this, but in effect, it's subordinate subordinated debt. Which is owned by institutions, not other banks, actually. You don't want other banks to own it because that brings contagion. Let's say, uh, I'll take an extreme, uh, example, JP Morgan fails and Goldman Sachs owned a bunch of their contingent debt. Well, then Goldman Sachs is going to be called into question because they'll take part of the loss on that. So what you want is a different source of capital for it. Um, and that tends to be, uh, an insurance company, it's, it's pension funds. They're the big buyers, straight asset managers as well. They're the big buyers of, I'll call them at one securities, which is a number of people on the, on the pod will recognize. They're the big owners of that. And they are very sophisticated and they do recognize that there are scenarios where they're going to end up owning equity in a stricken institution because it's fail. And in one extreme, which we saw with Credit Suisse, they discovered that they …

AI assessment note: “Which is owned by institutions, not other banks, actually.”

Q change, and I was like, yeah, just leave me on a, like, massive cliffhanger there. Thanks for that, Mark. Um, I do want to make sure, though, that we cover climate, because, you know, you spend a lot of time on it, and there's a lot of questions I just want to touch on, which is, first, what is new in net zero? Will we ever get on track, Mark?

A You know what's new in net zero is that we're getting on track, actually, and that's not something I ever, I didn't think I would be saying this early. I'll give you some headline numbers, which is, You know, seven years ago when they had the Paris Accord, the world was headed to three and a half degrees. When we had the Glasgow summit just under, I don't know, whatever it is, 16 months ago, 18 months ago, it was less than two and a half degrees. Now with the country commitments that are in place since then, it's 1.8 degrees. But what we have with the US IRA, with the European response, the Canadian response to the European and the American response, what's happening in Japan, Korea, on and on. Is that a number of countries are now, uh, have put in place the policies to get on track to the key way station between now and 20 50 net zero, which is the end of this decade, 2030. And, you know, these are orders of magnitude of 40% to 50% reductions in emissions. To back that up, I'll just give you two data points. One is that the level of clean energy investments, so renewables and other investment Has tripled over the course of the last five years. It's on course to quadruple again, uh, over the course of, uh, you know, between now and the end of the decade. And then if you look at what's happened, uh, in the auto sector and the rise of EVs three, four years ago, about four percent…

AI assessment note: “what's new in net zero is that we're getting on track, actually”

Q Okay, so we see consolidation there within regional banking in the US. You mentioned Credit Suisse earlier. I do have to ask, and I have to thank Mark for this one, but he asked, how do you assess the balance of regulatory and bank management responsibility in the case of SVB and Credit Suisse?

A Yeah, I think it's a great question. I think, you know, you start with management responsibility in both. Management and boards are the first lines of defense. Um, I would say in the case of SVB, it pains me to say this as a former regulator and supervisor, but Uh, much higher regulatory and supervisory responsibility in the case of Silicon Valley Bank because of a couple of things. One is, uh, they changed the rules in the US in 2018, um, and did away with some very basic protections that we apply everywhere else in the world. Um, you know, so, uh, stress tests, uh, uh, we, in the, in the Bank of England when I was there, and, and subsequently, we stress test the banks to a, Four percent, uh, increase within 12 months of interest rates all the way across the curve. Now, it seemed quite extreme at the time. It's more or less what has happened, uh, because of this inflation, but we stress tested everybody. In the U.S., they said, well, no, people undertook two hundred fifty billion, which is a very large number, uh, don't have to, uh, do things as severe as that. So that's the first thing. So they weren't doing that. Then they also, uh, lessened responsibilities around Uh, what are called, uh, liquidity rules or liquidity standards and buffers. Um, and some of those actually protect against having the extreme mismatches that places like Silicon Valley had. And then thirdly, in t…

AI assessment note: “much higher regulatory and supervisory responsibility in the case of Silicon Valley Bank”

Q politics, which is a challenging pole to ascend. He needs to focus on growth. What China does not have, where we are seeing millions of Chinese people being sent back to rural communities in a bid to them to find work, um, China is in trouble. He doesn't give a shit about climate. He needs growth. Do you agree, and can we make headway with China not really being interested?

A Uh, well, I, I disagree with the, I'm going to disagree with the premise. Uh, maybe I won't disagree with what he cares more about as a leader. He cares more about growth than, uh, than short-term climate, but he and the country have made a very big bet on future growth relating to, uh, decarbonization that that's, you know, it's growth for China and I'll come back to why it's growth for China, but it absolutely central to the competitiveness of the Chinese economy over the course of the next 25 years, you know. Decarbonization and AI, the two big drivers of competitiveness for China. And I'm going to back this up in a second, but I'll just make the core point, which is one of the pennies that has dropped for other major economies is that he's right. Xi's right about those drivers of competitiveness and what's motivating, you know, the IRA in the US, which is the big, for those who haven't followed it, the big climate bill, which is enormous in its impact. What motivated that? What's motivated responses in places like Canada and others? Yes, it's climate, but really it's about jobs and growth. It's about these, these industries, you know, if you just harken back to what's happened in the auto sector and what is happening in the auto sector, if you're not building out an EV supply chain and you're an auto manufacturer, you're dead, right? Like, you know, that train is leaving th…

AI assessment note: “he and the country have made a very big bet on future growth relating to decarbonization”

Q well done for surmising an incredible career in about a 150 seconds. But I want to start today on a call, which is in the last show I said, you know, Mark, I haven't seen a boom, and I haven't seen a bust, and I haven't worked through that cycle. I feel like that is changing. And so help me, Mark, where are we now, and what follows a bust?

A Yeah, exactly. So I guess in the last time we were in the middle of a boom, or probably towards the end of a boom, and, uh, uh, for students of, uh, economic and financial history, uh, they'd be familiar with something called the Minsky cycles, and, uh, you know, what you have in those cycles is, uh, it starts with something fundamentally good, you know, some big innovation, uh, Uh, it could have been the productivity, uh, miracle in the US at the start of the 2000. Uh, the first, uh, bits of, uh, financial innovation that helped, uh, develop subprime lending as an example. Uh, blockchain, um, and DeFi as another example. Um, and so these are fundamentally good innovations, but ultimately the, uh, the, uh, the, uh, the growth turns to boom, turns to euphoria. And it turns to the phase that we were pretty close to. I think we were just on the cusp of last time we spoke, which is, uh, what this guy Minsky, uh, uh, the, the, uh, economic historian called the Ponzi phase, uh, which is a phase that you recognize is a phase where you're lending against the asset that's at the center of the boom on the assumption that the asset's going to continue to rise. So it's asset-based lending with price appreciation, absolutely built in. Um, and of course, at some point, uh, there's the so-called Binsky moment. You turn to panic because the assumptions are removed, uh, and we lead into despair…

AI assessment note: “we lead into despair. So we're at, we're at that phase”

Q Well, I mean, that's what I wanted to ask you, which is that when you think about kind of what's to come and the consequences, when you think about the consequences of the banking crisis on like monetary policy, how do you think that will look in the next 12 months that start there?

A So I distinguish between a crisis and turmoil, so I'm still going to cling to that turmoil term, uh, but it's nonetheless serious. Like it's serious enough that, you know, it's going to Uh, let's say in the US, it'll probably slow growth by, you know, half to three quarters of a percentage point. It's probably enough if people felt that the US economy was on the cusp of, uh, you know, this narrow path, uh, between avoiding recession and having a recession. It's probably enough of a headwind that, uh, there will be a recession in the US. So that's material. Uh, in terms of monetary policy, uh, I think what, what the central banks have done is, uh, is to try to, uh, differentiate between what they need to do to keep the financial system functioning reasonably well, and what they need to do to, uh, address inflation. So they provide liquidity to, uh, the banks, particularly in the United States, and that keeps, you know, those who have healthy, healthy enough business models to keep going. But they continue to raise interest rates. But the next point is that the, the degree to which they raise interest rates has changed. And, uh, you know, if we had been talking, uh, at the end of February, early March before Silicon Valley bank, I would have said something to the effect of, I think the fed may have to go to six percent fed funds. Now I think, uh, they'll probably stop at five, fi…

AI assessment note: “Now I think, uh, they'll probably stop at five, five and a quarter”

Q Can I ask, can you provide me with an example of an innovation that went through this cycle, experienced this Ponzi realization moment, but had underlying value to the innovation, that then was kind of reborn efficiently? Because in my mind, it's just like, people realize it's a Ponzi scheme and never come back.

A I'll give you an example of a financial innovation where that's the case. So, you know, the collateralized loan market, uh, CMBS, uh, collateralized mortgage backed securities got taken to the assumptions underlying them got taken to ridiculous extremes, Ponzi extremes. So the price appreciation built into those structures in 2006, 2007 brought the whole, literally the house, uh, you know, the house of cards crashing down. But the core innovation there lives on And I think has served the market quite well, the financial system as a whole quite well. And we've ended up actually with a much more robust is not totally robust to be clear, but a much more robust, what some would call shadow banking system. I would call non-bank finance, uh, that providing a different channel of credit and actually given what's going on in the banking sector, a very welcome example of credit. I think you're also asking though about a Fundamental innovation that, you know, has gone up and down through the boom bust cycle. And I think the example a little closer to home for me would be in hydrogen, where we've had a couple of those, uh, euphoric cycles. The last one was early 2000. Uh, we're entering another, and I think a much more solidly, uh, grounded one. Time will tell though. I can't actually Give you the example of hydrogen fully deployed in a way that's, uh, you know, mainstream commercial. I t…

AI assessment note: “I'll give you an example of a financial innovation where that's the case.”

Q Um, I, I wonder what else you mentioned there. You touched on the banking situation. Let's put it that way. Uh, we were talking before about FRB being in turmoil. I just want to understand kind of where we are there, Mark. Is the banking crisis over?

A Well, so you were, you're always careful with your words, uh, and you started with situation, you ended with crisis. I'd put it more in turmoil. So, uh, I, the, the, I guess the quick answer to your question is no, this turmoil isn't over. We see it as we're talking today, you know, FRB is under a great strain. It is the case that almost one in 10 U S regional banks would fall below their minimum capital levels if all of their assets were marked to market. So I think it's increasingly well understood that one of the challenges, the number of the regional banks, the extreme being Silicon Valley bank, one of the challenges they have is they have a lot of actually quite high quality assets, but very low yielding assets. And they have in some cases, massive franchise problems because of that, because they're just, you know, Uh, unless we go back to a low for long world, which I think is extremely unlikely, unless we go back to that world, they're just going to have very large earnings headwinds, uh, going forward. So there are a large number of regional institutions in the U S that have varying degrees of this problem. And the longer higher rates go on and the more deposits move to perceived safer places, we're going to see more, uh, at a minimum, I'll put it politely. We're going to see more consolidation in that sector. But, and here's the big but, this is a very different situat…

AI assessment note: “the quick answer to your question is no, this turmoil isn't over.”

Q over in some respects. So that is, uh, that's quite refreshing in some ways. Um, my question to you is, I have Bill Ackman on the show, and he presented the view that, essentially, we need to guarantee all deposits in banks, and once you do that, you'll reinsert consumer confidence, and turmoil will really be quashed in many ways. Do we need to guarantee all deposits in banks, Mark?

A Um, I think it's, well, I'll say a couple of things. One is that what we're seeing is that the current commitment, the current structure, which does not guarantee all deposits in banks is proving time inconsistent. So under pressure, authorities are coming in and on a case by case basis, effectively guaranteeing all deposits in banks. So After you have a few of those, you ask the question, it's a fair question whether, well, shouldn't you just jump to the end state, which is to guarantee all deposits in banks? That's the first point. Second point, there is a bit of an issue, uh, which is somebody has to take that decision. It has to be duly authorized, and in the US that requires, uh, an act of Congress. So the effective way to guarantee all those deposits is not going to happen quickly. That's second. Third, There is a bigger argument and maybe we'll get into this, but I'll just put it on the table, which is, uh, something, uh, uh, Andrew Bailey, uh, the current governor of the bank of England, uh, a point, he made a seemingly esoteric point, but quite an important point around the nature of money. And his point was in effect, most people don't realize that there's a difference between money that's created by a bank, a private bank, so-called inside money, Uh, versus the money that, you know, when people used to use cash that, uh, they would see the manifestation of money crea…

AI assessment note: “it's a fair question whether, well, shouldn't you just jump to the end state”

Q So help me out here in terms of that contingent group that's external to like the core, uh, savior, which would obviously be kind of, um, you know, government led. Is that like a contingent of, uh, JP Morgan, Goldman Sachs, the biggest institutions who collectively come to rescue the banking system together with this guarantee? What does that look like? I'm sorry.

A Yeah. No, no, no. It's well, it's something we put in place, um, after the financial crisis. So I said a few moments ago that look, the system as a whole has six times as much loss absorbency as it had going into the financial crisis. And that's a big multiple part of that, um, a little less than half of that is contingent debt. So it's actually, I mean, there's various structures for this, but in effect, it's subordinate subordinated debt. Which is owned by institutions, not other banks, actually. You don't want other banks to own it because that brings contagion. Let's say, uh, I'll take an extreme, uh, example, JP Morgan fails and Goldman Sachs owned a bunch of their contingent debt. Well, then Goldman Sachs is going to be called into question because they'll take part of the loss on that. So what you want is a different source of capital for it. Um, and that tends to be, uh, an insurance company, it's, it's pension funds. They're the big buyers, straight asset managers as well. They're the big buyers of, I'll call them at one securities, which is a number of people on the, on the pod will recognize. They're the big owners of that. And they are very sophisticated and they do recognize that there are scenarios where they're going to end up owning equity in a stricken institution because it's fail. And in one extreme, which we saw with Credit Suisse, they discovered that they …

AI assessment note: “owned by institutions, not other banks, actually... insurance company, it's, it's pension funds”

Q Mark, can I ask, you mentioned regional banks earlier. What's the future of regional banks in the US?

A I would say, uh, go small or go home. I mean, it's, uh, it's, you know, it's always the US banking system, relatively, uh, you know, very large number of institutions by, by number in the US, you know, kind of barbell strategy was, it was dangerous to be in that awkward middle where you're a large regional, and therefore you have a lot of corporate deposits, deposits above the minimum, They turn out to be much more flighty. What we saw with Silicon Valley, what we're seeing with First Republic, that's an awkward place to be. If you're, if you're a narrow regional, you know, small, literally close to your customers, uh, largely insured deposits, more stable funding base, you're okay. It's an okay business. You don't have a lot of growth opportunities, or you're going to get consolidated up into, uh, some of those, uh, very large institutions. So I think there's going to be really a wave of consolidation, another wave. This, this has, Happened over time, but we'll accelerate. And, you know, in part it's accelerating because the competition, not just, uh, well, not just for the regionals, but also for the large institutions is very much coming from FinTech. And as a bigger picture point, the system is moving towards a form of narrow banking as a, as, as a core competitor to a fractional, uh, fractional reserve banks. In other words, banks that create their own money, uh, and lever…

AI assessment note: “I think there's going to be really a wave of consolidation”

Q Okay, so we see consolidation there within regional banking in the US. You mentioned Credit Suisse earlier. I do have to ask, and I have to thank Mark for this one, but he asked, how do you assess the balance of regulatory and bank management responsibility in the case of SVB and Credit Suisse?

A Yeah, I think it's a great question. I think, you know, you start with management responsibility in both. Management and boards are the first lines of defense. Um, I would say in the case of SVB, it pains me to say this as a former regulator and supervisor, but Uh, much higher regulatory and supervisory responsibility in the case of Silicon Valley Bank because of a couple of things. One is, uh, they changed the rules in the US in 2018, um, and did away with some very basic protections that we apply everywhere else in the world. Um, you know, so, uh, stress tests, uh, uh, we, in the, in the Bank of England when I was there, and, and subsequently, we stress test the banks to a, Four percent, uh, increase within 12 months of interest rates all the way across the curve. Now, it seemed quite extreme at the time. It's more or less what has happened, uh, because of this inflation, but we stress tested everybody. In the U.S., they said, well, no, people undertook two hundred fifty billion, which is a very large number, uh, don't have to, uh, do things as severe as that. So that's the first thing. So they weren't doing that. Then they also, uh, lessened responsibilities around Uh, what are called, uh, liquidity rules or liquidity standards and buffers. Um, and some of those actually protect against having the extreme mismatches that places like Silicon Valley had. And then thirdly, in t…

AI assessment note: “much higher regulatory and supervisory responsibility in the case of Silicon Valley Bank”

Q change, and I was like, yeah, just leave me on a, like, massive cliffhanger there. Thanks for that, Mark. Um, I do want to make sure, though, that we cover climate, because, you know, you spend a lot of time on it, and there's a lot of questions I just want to touch on, which is, first, what is new in net zero? Will we ever get on track, Mark?

A You know what's new in net zero is that we're getting on track, actually, and that's not something I ever, I didn't think I would be saying this early. I'll give you some headline numbers, which is, You know, seven years ago when they had the Paris Accord, the world was headed to three and a half degrees. When we had the Glasgow summit just under, I don't know, whatever it is, 16 months ago, 18 months ago, it was less than two and a half degrees. Now with the country commitments that are in place since then, it's 1.8 degrees. But what we have with the US IRA, with the European response, the Canadian response to the European and the American response, what's happening in Japan, Korea, on and on. Is that a number of countries are now, uh, have put in place the policies to get on track to the key way station between now and 20 50 net zero, which is the end of this decade, 2030. And, you know, these are orders of magnitude of 40% to 50% reductions in emissions. To back that up, I'll just give you two data points. One is that the level of clean energy investments, so renewables and other investment Has tripled over the course of the last five years. It's on course to quadruple again, uh, over the course of, uh, you know, between now and the end of the decade. And then if you look at what's happened, uh, in the auto sector and the rise of EVs three, four years ago, about four percent…

AI assessment note: “You know what's new in net zero is that we're getting on track, actually”

Q politics, which is a challenging pole to ascend. He needs to focus on growth. What China does not have, where we are seeing millions of Chinese people being sent back to rural communities in a bid to them to find work, um, China is in trouble. He doesn't give a shit about climate. He needs growth. Do you agree, and can we make headway with China not really being interested?

A Uh, well, I, I disagree with the, I'm going to disagree with the premise. Uh, maybe I won't disagree with what he cares more about as a leader. He cares more about growth than, uh, than short-term climate, but he and the country have made a very big bet on future growth relating to, uh, decarbonization that that's, you know, it's growth for China and I'll come back to why it's growth for China, but it absolutely central to the competitiveness of the Chinese economy over the course of the next 25 years, you know. Decarbonization and AI, the two big drivers of competitiveness for China. And I'm going to back this up in a second, but I'll just make the core point, which is one of the pennies that has dropped for other major economies is that he's right. Xi's right about those drivers of competitiveness and what's motivating, you know, the IRA in the US, which is the big, for those who haven't followed it, the big climate bill, which is enormous in its impact. What motivated that? What's motivated responses in places like Canada and others? Yes, it's climate, but really it's about jobs and growth. It's about these, these industries, you know, if you just harken back to what's happened in the auto sector and what is happening in the auto sector, if you're not building out an EV supply chain and you're an auto manufacturer, you're dead, right? Like, you know, that train is leaving th…

AI assessment note: “I'm going to disagree with the premise... he and the country have made a very big bet”

Q The subsequent question is very much the same as in technology then is will those incumbents embrace innovation and move fast enough, or will we see innovators embrace, you know, bluntly distribution and engage with distribution fast enough to challenge the incumbents? Where does the value agree there in your mind?

A Yeah. Yeah, I think that's the, you know, the history would say that it's the, it's more likely to be the latter, right? Uh, we see that, you know, time and time again in, uh, in technology. We saw it in the steel sector. Classic example. It's, you know, it has a fancy name, uh, the innovators dilemma, uh, Clayton Christensen's, uh, work on that. So it's almost the default and the challenge, you know, there are exceptions to this. You know, Netflix is an exception to this. Amazon was, uh, early days Amazon was an exception. Microsoft, I guess, in technology would be an exception. So it's not destiny, but you really have to fight against it, and you have to, you do have to not cannibalize your business, but you've got to, well, in effect, you do have to cannibalize your business. You ultimately have to take the cash flows from a very nice business, and, uh, And invest on something that's not a, not a sure thing. Uh, and that's hard to do.

AI assessment note: “history would say that it's the, it's more likely to be the latter”

Q This is really unfair of me to ask, but I'm too interested. When we see interest rates increase, what happens then, Mark? How do the markets respond in your mind? Obviously, it's futuristic looking, but how do you expect them to respond?

A Well, what tends to happen when interest rates increase is that there is a amplified impact on the interest rates of risk assets or the discount rates on risk assets. So if If the bank rate goes up by one percentage point, the discount rate tends to go up by one and a half to two and a half points, depending on where the asset is on the risk spectrum. And so unless the income from that asset is rising more rapidly, you get a price adjustment, and this is an overall tightening in financial conditions. So the extent to which you're at the furthest end of the spectrum in terms of risk tends to have a larger effect on the value, at least in temporary terms for those risk assets. You could crypto various DeFi applications in that camp. They've had a very large run-up. To some extent, it's been indiscriminate, and there's likely to be a pullback. Now, let me not say, unless anyone thinks that, that a pullback means an end, because I think I've tried to stress that there's real value being created here. So it's a pullback, which then, for the better applications, the more resilient ones, there's a new bottom from which to move.

AI assessment note: “what tends to happen when interest rates increase is that there is a amplified impact”

Q I mean, this is true, but at least our steps would be off the charts. I do want to start there with some context, and this is going way back, but I love a bit of history. So how did you make your way into the world of finance, come to be governor of the Bank of England, and now come to Brookfield?

A Well, you know, I became an economist and went into finance, and particularly the macroeconomic end of finance, because out of interest, I wanted to understand how the world worked, make some money along the way, but understand how the world worked, and really, I've operated at the intersection of the private sector and the public sector, so when I was at Goldman Sachs, we did a lot of sovereign advisory work. I ultimately, as you know, then went into public service proper at the Bank of Canada, and then, candidly, an accident of history made me the governor of the Bank of England. Many are You know, still wondering why that happened, but, you know, too late now. I can at least say that the shift to Brookfield and my association with Stripe, both of those were very deliberate. You know, I had a very good seat on as governor and over a tumultuous time on where the world was going, where the big opportunities would be, and I felt that I wanted to be both in climate transition and in this intersection of the future of finance.

AI assessment note: “I became an economist and went into finance, and particularly the macroeconomic end of finance”

Q well done for surmising an incredible career in about a 150 seconds. But I want to start today on a call, which is in the last show I said, you know, Mark, I haven't seen a boom, and I haven't seen a bust, and I haven't worked through that cycle. I feel like that is changing. And so help me, Mark, where are we now, and what follows a bust?

A Yeah, exactly. So I guess in the last time we were in the middle of a boom, or probably towards the end of a boom, and, uh, uh, for students of, uh, economic and financial history, uh, they'd be familiar with something called the Minsky cycles, and, uh, you know, what you have in those cycles is, uh, it starts with something fundamentally good, you know, some big innovation, uh, Uh, it could have been the productivity, uh, miracle in the US at the start of the 2000. Uh, the first, uh, bits of, uh, financial innovation that helped, uh, develop subprime lending as an example. Uh, blockchain, um, and DeFi as another example. Um, and so these are fundamentally good innovations, but ultimately the, uh, the, uh, the, uh, the growth turns to boom, turns to euphoria. And it turns to the phase that we were pretty close to. I think we were just on the cusp of last time we spoke, which is, uh, what this guy Minsky, uh, uh, the, the, uh, economic historian called the Ponzi phase, uh, which is a phase that you recognize is a phase where you're lending against the asset that's at the center of the boom on the assumption that the asset's going to continue to rise. So it's asset-based lending with price appreciation, absolutely built in. Um, and of course, at some point, uh, there's the so-called Binsky moment. You turn to panic because the assumptions are removed, uh, and we lead into despair…

AI assessment note: “So we're at, we're at that phase, certainly, I think, in the DeFi crypto universe.”

Q Um, I, I wonder what else you mentioned there. You touched on the banking situation. Let's put it that way. Uh, we were talking before about FRB being in turmoil. I just want to understand kind of where we are there, Mark. Is the banking crisis over?

A Well, so you were, you're always careful with your words, uh, and you started with situation, you ended with crisis. I'd put it more in turmoil. So, uh, I, the, the, I guess the quick answer to your question is no, this turmoil isn't over. We see it as we're talking today, you know, FRB is under a great strain. It is the case that almost one in 10 U S regional banks would fall below their minimum capital levels if all of their assets were marked to market. So I think it's increasingly well understood that one of the challenges, the number of the regional banks, the extreme being Silicon Valley bank, one of the challenges they have is they have a lot of actually quite high quality assets, but very low yielding assets. And they have in some cases, massive franchise problems because of that, because they're just, you know, Uh, unless we go back to a low for long world, which I think is extremely unlikely, unless we go back to that world, they're just going to have very large earnings headwinds, uh, going forward. So there are a large number of regional institutions in the U S that have varying degrees of this problem. And the longer higher rates go on and the more deposits move to perceived safer places, we're going to see more, uh, at a minimum, I'll put it politely. We're going to see more consolidation in that sector. But, and here's the big but, this is a very different situat…

AI assessment note: “the quick answer to your question is no, this turmoil isn't over.”

Q Mark, I've seen all of my friends, many, many managers centralize their funds to the top four, um, the biggest names, the two bigs to fail. Why is it bad to have a centralization of wealth to the top four, and why is that not a world that we want to live in?

A Well, I think, you know, I, we all believe in competition and, uh, there is value in, uh, having a broader range of, uh, institutions that are competing for that business. Um, so they're providing better service for the business and they're, and most importantly, I guess they're competing to provide credit to companies and, and entrepreneurs. And, uh, you know, the more you move into a banking oligopoly, uh, the softer the competition comes. On, on both sides. So that's one reason. And then the second reason is that the more you have concentration, the more those who benefit from that concentration are too big to fail. Um, they're, they're essential for the system. And then that brings a moral hazard into the system. All that said, look, entrepreneurs like yourself, people are listening, uh, should be focused not on whether or not their bank's going to go down. They should be focused on whether their investments are going to work out. So, you know, we've got to design a system that, or have a system that gives that peace of mind, and it's, it's part, you know, the first line of defense is, do you have a well-run bank, and, you know, in, in the broad scheme of things, those larger institutions are well-run, and they're, and they're solid, so it's understandable that money's going there.

AI assessment note: “the more you move into a banking oligopoly, uh, the softer the competition comes.”

Q Incredibly unfair question. Is FRB a stricken asset with a damaged business book, or is it a consequence of a wider macro banking turmoil situation where really it's being pulled into something that it doesn't deserve to be?

A I think it On the balance, it bears more responsibility for the situation it is than the, than the macro. And let me make a macro point, which is that, you know, if we go back to where we were, whatever it was we spoke, uh, last time, you know, uh, uh, 1215 months ago, uh, you know, we're just rolling into this period where the world's moving out of low, low for long, uh, interest rate environment, low volatility environment, which some had interpreted as low forever. Including low vol forever and had built up books of business. And in the case of FRB and SBB, very large books of business that were low yielding, assumed low volatility for a very long period of time. And, you know, that was not, it wasn't prudent risk management. Uh, you should have been able to see that at the time. And now that we've moved into a different regime, it, It is a huge headwind on the franchise. Uh, you can't just, you know, reprice these. Nobody has an incentive to, uh, reprice their own loan. I mean, they might as well keep the, uh, keep the terms that they have. They're certainly not going to get them again. So, uh, it's more a victim of, um, its own situation. You could say, I guess that the macro situation has changed quite dramatically, but one of the things you're supposed to do as a risk manager You're certainly supposed to do it, uh, do this as a, as a central banker, as a regulator is thi…

AI assessment note: “On the balance, it bears more responsibility for the situation it is than the, than the macro”

Q Mark, if I put you in charge of the Fed, what would you have done differently?

A Well, I, the main thing I would have done differently is that the original, so what the Fed did is when we're in the depths of the pandemic, just in the run-up to the depths of the pandemic, and in the depths of the pandemic, it effectively tied its hands, uh, and it said that, um, we are going to, we, the Fed, are going to target average inflation, um, and we will make, we will not Raise interest rates until we, uh, have the prospect of getting unemployment back to the level it was prior to the pandemic, including in various socioeconomic groups. So it also had an inflation condition as well. So it, it, it, instead of anticipating where inflation was going, it was, uh, it changed its rule, changed its decision rule to a backward looking decision rule. And that meant that You know, they lost six to nine months probably of tightening, ah, time that could have been spent initiating a more gradual tightening, squeezing out some of the excess which built up, you know, in these late stages of a, of a cycle, you get the excess building up, so there would have been less of that. Now, the big forces on inflation, the big global forces that help drive inflation to the high single digits, Uh, they still would have been acting, so I, you know, we wouldn't have seen an appreciably different level in the short term of inflation. It would have been lower, but not, you know, it wouldn't have …

AI assessment note: “the main thing I would have done differently is that the original”

Q Mr. Mr. Evans agreed with you, um, and he agreed with you citing several problems with, with China and also several positives of the US, uh, which, for his sake, I'll probably leave, uh, for him to tell you over a dinner. Can I, can I ask you, for Europe, is Europe weaker than ever, Mark?

A No, I don't think it is actually on the face of it. It's obviously there's a massive shock with the war and the energy, uh, hit that comes with that. And so there's reason to think that it might be, but I'm going to take the other side of this. First is that, uh, the financial system, this is unusual. I don't think I've ever been in a position in my career where I've been able to say, uh, the European banking system is in better shape than in most other countries. And certainly the U S in this case, Uh, but that is the case, so their financial system is, uh, is, is solid. Uh, I know Credit Suisse failed, but, you know, it had relatively unique circumstances, and the core of the system is strong. The second is to say that they're using most of the levers of policy now. So fiscal policy is not a permanent headwind to growth there. Thirdly, they've got a pretty good framework in place for the climate, you know, the net zero transition. So the U S is going to catch up and I think a pull ahead, but Europe's been doing pretty well there and that's driving investments. So I don't think they're weaker and at least initially, and it's, it's more than initial because it's been longer than a year. I think the European response to the crisis, the crisis being the war, has actually, has made them stronger. It will make them stronger in the medium term. It's accelerated some things that they…

AI assessment note: “No, I don't think it is actually on the face of it.”

Q The subsequent question is very much the same as in technology then is will those incumbents embrace innovation and move fast enough, or will we see innovators embrace, you know, bluntly distribution and engage with distribution fast enough to challenge the incumbents? Where does the value agree there in your mind?

A Yeah. Yeah, I think that's the, you know, the history would say that it's the, it's more likely to be the latter, right? Uh, we see that, you know, time and time again in, uh, in technology. We saw it in the steel sector. Classic example. It's, you know, it has a fancy name, uh, the innovators dilemma, uh, Clayton Christensen's, uh, work on that. So it's almost the default and the challenge, you know, there are exceptions to this. You know, Netflix is an exception to this. Amazon was, uh, early days Amazon was an exception. Microsoft, I guess, in technology would be an exception. So it's not destiny, but you really have to fight against it, and you have to, you do have to not cannibalize your business, but you've got to, well, in effect, you do have to cannibalize your business. You ultimately have to take the cash flows from a very nice business, and, uh, And invest on something that's not a, not a sure thing. Uh, and that's hard to do.

AI assessment note: “history would say that it's the, it's more likely to be the latter”

Q Mark, I've seen all of my friends, many, many managers centralize their funds to the top four, um, the biggest names, the two bigs to fail. Why is it bad to have a centralization of wealth to the top four, and why is that not a world that we want to live in?

A Well, I think, you know, I, we all believe in competition and, uh, there is value in, uh, having a broader range of, uh, institutions that are competing for that business. Um, so they're providing better service for the business and they're, and most importantly, I guess they're competing to provide credit to companies and, and entrepreneurs. And, uh, you know, the more you move into a banking oligopoly, uh, the softer the competition comes. On, on both sides. So that's one reason. And then the second reason is that the more you have concentration, the more those who benefit from that concentration are too big to fail. Um, they're, they're essential for the system. And then that brings a moral hazard into the system. All that said, look, entrepreneurs like yourself, people are listening, uh, should be focused not on whether or not their bank's going to go down. They should be focused on whether their investments are going to work out. So, you know, we've got to design a system that, or have a system that gives that peace of mind, and it's, it's part, you know, the first line of defense is, do you have a well-run bank, and, you know, in, in the broad scheme of things, those larger institutions are well-run, and they're, and they're solid, so it's understandable that money's going there.

AI assessment note: “the more you move into a banking oligopoly, uh, the softer the competition comes.”

Q Incredibly unfair question. Is FRB a stricken asset with a damaged business book, or is it a consequence of a wider macro banking turmoil situation where really it's being pulled into something that it doesn't deserve to be?

A I think it On the balance, it bears more responsibility for the situation it is than the, than the macro. And let me make a macro point, which is that, you know, if we go back to where we were, whatever it was we spoke, uh, last time, you know, uh, uh, 1215 months ago, uh, you know, we're just rolling into this period where the world's moving out of low, low for long, uh, interest rate environment, low volatility environment, which some had interpreted as low forever. Including low vol forever and had built up books of business. And in the case of FRB and SBB, very large books of business that were low yielding, assumed low volatility for a very long period of time. And, you know, that was not, it wasn't prudent risk management. Uh, you should have been able to see that at the time. And now that we've moved into a different regime, it, It is a huge headwind on the franchise. Uh, you can't just, you know, reprice these. Nobody has an incentive to, uh, reprice their own loan. I mean, they might as well keep the, uh, keep the terms that they have. They're certainly not going to get them again. So, uh, it's more a victim of, um, its own situation. You could say, I guess that the macro situation has changed quite dramatically, but one of the things you're supposed to do as a risk manager You're certainly supposed to do it, uh, do this as a, as a central banker, as a regulator is thi…

AI assessment note: “it bears more responsibility for the situation it is than the, than the macro.”

Q Mark, I am a, I'm a technologist, I'm a startup investor, so I'm naive, which means I'm allowed to ask questions like this. What's the speed of rate hike? Was it irresponsible? It was unparalleled to any other rate hike, supposedly, you know, in the recent times. Was it an irresponsible speed of rate hike?

A I think it was necessary. It has consequences. I think that one of the assumptions that Uh, economists, uh, not always financiers, but economists often make is that things move in a linear fashion. Whereas, uh, well, certainly technologist knows that things, uh, things get disruptive. Uh, there's, there's quantum moves and in finance, there are situations where it isn't the case that when you move from, uh, well, certainly in this case, when you move from zero interest rates to five percent interest rates in a short period of time, It doesn't mean the cost of credit moves up lockstep with each of those moves. You get to positions where the availability of credit just stops from certain channels. We're starting, you know, we're seeing that in the regional banking sector. We'll see that in other part, uh, leverage parts of, uh, of the system. I guess we saw it at the various, at the very start of this move, uh, we saw it in leverage crypto, which wasn't macro significant, but it was for some individuals. So I think the responsibility, uh, dancing around this a bit, as you can tell, but as a responsibility of the authorities is, is to recognize that the faster things go, the more likely there are to be these, to put it politely, nonlinearities or sudden stops, and that needs to be taken into account. Yeah.

AI assessment note: “I think it was necessary. It has consequences.”

Q Mark, if I put you in charge of the Fed, what would you have done differently?

A Well, I, the main thing I would have done differently is that the original, so what the Fed did is when we're in the depths of the pandemic, just in the run-up to the depths of the pandemic, and in the depths of the pandemic, it effectively tied its hands, uh, and it said that, um, we are going to, we, the Fed, are going to target average inflation, um, and we will make, we will not Raise interest rates until we, uh, have the prospect of getting unemployment back to the level it was prior to the pandemic, including in various socioeconomic groups. So it also had an inflation condition as well. So it, it, it, instead of anticipating where inflation was going, it was, uh, it changed its rule, changed its decision rule to a backward looking decision rule. And that meant that You know, they lost six to nine months probably of tightening, ah, time that could have been spent initiating a more gradual tightening, squeezing out some of the excess which built up, you know, in these late stages of a, of a cycle, you get the excess building up, so there would have been less of that. Now, the big forces on inflation, the big global forces that help drive inflation to the high single digits, Uh, they still would have been acting, so I, you know, we wouldn't have seen an appreciably different level in the short term of inflation. It would have been lower, but not, you know, it wouldn't have …

AI assessment note: “the main thing I would have done differently is that the original”