Shane Dunn:
Good evening, everyone. First, I hope you're all healthy, well, and safe wherever you are this evening, or this morning, depending where you are. It's so great to have close to 200 people so far participating in tonight's event from around the world. It's nighttime here in Massachusetts, and morning if we have anyone here in China. So, thank you regardless of where you are. We have Brandeis alumni, current students, who we of course miss dearly, especially, at this time of year, as we celebrate the end of the year, and commencements.
Shane Dunn:
We also have Brandeis parents, friends, and others who are affiliated with the university. Thank you all for joining. We're really excited. My name is Shane Dunn, and I am senior director of development and alumni relations at Brandeis International Business School. It's been very fun for us to host several virtual events that feature faculty and alumni experts in this new environment. Before we get started with our program, I want to outline a few ground rules for how we will conduct tonight's virtual event to ensure a positive stimulating experience for all.
Shane Dunn:
Just so everyone is aware, we are playing an event right around 9:00 PM, Eastern. Dean Graddy, and Professor Cecchetti will speak for about 30 to 35 minutes before we open it up for Q&A. We ask for those of you who have not done it yet, please update your name with first and last name so that we know who is present, and who may end up asking questions. If you don't know how to do it on Zoom, you just click the three little blue dots up at the upper right hand corner of your screen, or you can go into the chat window and click participants, and you should be able to rename to whatever you'd like.
Shane Dunn:
And we do ask for first and last name, if you don't mind. Attendees are invited to share their location via chat. We won't ask you otherwise, but if you want to say where you are tonight, the chat is a great function to use for that. And all chats are public for this event. So, please be respectful of our speakers and attendees. Video, and audio, we're going to turn it off for most of the event. And we are recording this event. And we plan to send an email out within 48 hours, which will also include a survey. And we would love to hear your feedback on your experience tonight, as well as any ideas you have for future programming for Brandeis, alumni, and friends. And then finally, if you want to ask a question at the end of the event this evening, I will call it out.
Shane Dunn:
Please use the Q&A function which you'll see at the bottom of your screen. We will get to as many questions as possible. Although, it's such a big audience tonight. I regret to say, we won't get to all of them. Before I turn it over to our moderator, we want to do a really quick poll just to see who's with us. So, Gina, can you throw up a poll please? So, for folks could see, we are curious who you are. All right. So, we have a lot of folks on the line. Thank you. About 45% of our alumni.
Shane Dunn:
We also have a lot of parents, which is great to see as well as some students, staff, faculty, and others who are affiliated with university. So, welcome to every single one of you. We expect more will join, but we're really glad to have such a diverse audience this evening. So, without further ado, I'm going to turn it over to my colleague, and to the dean of the international business school, Dean Katy Graddy. Who's also the Fred and Rita Richmond distinguished professor in economics.
Shane Dunn:
Katy has been dean of the international business school since 2018, and is currently leading our school through our own period of change. We are grateful to Dean Graddy for joining us tonight to facilitate this important topic with Professor Cecchetti. Katy, I'm happy to turn it over to you.
Kathryn Graddy:
Thank you, Shane. Welcome to everyone. We're so glad to have alumni, students, friends, faculty, and staff, joining us here tonight. As Shane said, I'm Katy Graddy, I'm the dean of the Brandeis International Business School. I've been dean since 2018, but I'm not new to Brandeis. I actually came to Brandeis in 2007 from Oxford University. I spent the first 14 years of my career in the UK, and I was a faculty member starting in 2007 in the economics department. I like Steve am an economist, though I'm a microeconomist. And my area of research is the economics of the arts.
Kathryn Graddy:
So, we are certainly living in turbulent, uncertain times due to the COVID-19 pandemic. Before we start, I would like to say that Brandeis University though remains deeply committed to providing an outstanding educational experience to all of our students. And we at the business school are continuing to provide support in all ways. Your support as alumni and friends of the school is more important than ever. If you are so inclined after this is over, please do go on and make a donation, and you can make a difference in a Brandeis student's life at giving.brandeis.edu. These are scary times. They're trying times for a lot of families, as you will hear tonight from Professor Cecchetti.
Kathryn Graddy:
So, I'm glad to be here. And I'm also glad to introduce my colleague and my friend, Stephen Cecchetti. Steve is the Rosen Family Chair in International Finance at the Brandeis International Business School. Before rejoining Brandeis in January, 2014, he completed a five-year term as economic advisor, and head of the monetary and economic department at the Bank for International Settlements in Basel, Switzerland. During his time at the bank for International Settlements, Professor Cecchetti participated in numerous post-crisis global regulatory reform initiatives.
Kathryn Graddy:
This work included involvement with both the Basel Committee on Banking Supervision, and the Financial Stability Board in establishing new international standards. An author and contributor on numerous books, papers, and articles. He's also co-contributor on the blog Money and Banking, and he also has one of the leading textbooks on monetary policy. He's also one of the very smartest macro economists of this time. So, thank you, Steve, for joining us tonight.
Stephen G. Cecchetti:
It's great to be here. Thanks for having me. This is fun.
Kathryn Graddy:
Yeah. Well, thank you. So, we're excited to hear about this. I'm going to start by asking you to set the stage, we're two months into the Coronavirus lockdown. What is the state of the economy right now?
Stephen G. Cecchetti:
So, I'm going to share my screen a little bit, and show you a few pictures. I always have to start with some pictures. So, this is the first thing. Well, I guess I should start by saying that this is the third crisis I've been in, at least ones that I would call crises. And it's the first one that I get to watch from an academic vantage point, instead of inside of a official sector institution. It's a lot more relaxed. I'm not spending 24 hours a day worrying about daily stuff. So, but let me start here. So, I'm sure most of you are familiar with some of what I'm going to show you to start. This is unemployment, the number of people that are unemployed.
Stephen G. Cecchetti:
So, these are millions of people on the left hand graph. And the black line is the number of people who are insured. And the red line is the number of people who the Bureau of Labor Statistics Surveys. And they say, this is how many people are unemployed. And you can see that the red line is almost always way above the black line. And the reason is that normally only about a third of the people are insured. And so, normally when you see unemployment rates rise, they rise to get the insured unemployed and the total rise together. But they'll rise at a rate of about two and a half to one, or so. Now, this is very scary if you look at this picture. It's not happening right now, part of the reason it's not happening is because of some policies that offer many more people unemployment insurance payments.
Stephen G. Cecchetti:
But it's almost surely the case that the official unemployment rate, which is 14.7% for the week of the 12th of April. So, it's always the week of the 12th, for April, that that number is way, way, way too low. And the reason is because of some idiosyncrasies of the way that this has counted. So, the number of unemployed is probably about 20%. And it's really I think hard to get your mind around the hardship that that really entails. And the fact that so many people have lost their jobs. Those of us that have our jobs I think are really, really lucky. Now, from this, we can make some estimates about levels of activity.
Stephen G. Cecchetti:
So, if I go to the next picture, I want to try and put the what's going on now into a very long run perspective. We have data on something called industrial production, which is mostly really manufacturing, but includes some services as well. And I want to make ... These are peak to trough. So, these are business cycle recessions, and they show you how big the declines were from the business cycle peak, to the bottom of the recession, going back to 1920, which was the first data that we have that looked like this from this source.
Stephen G. Cecchetti:
And what's striking about what's going on right now is that we're going to almost surely exceed everything except for the 1929-'33 Great Depression. At least that's the hope. If the cumulative decline in unemployment goes to about 20%, then we're going to go to the bottom of that red bar that I have. But the thing that's amazing about this is the speed at which it's happening. So, the peak recently was November of 2019. In fact, really, February wasn't that far from November, it's just technically not the peak, but this is just a couple of months. And so the likelihood is that this is going to decline much further, about 35% decline probably by some time in June or July.
Stephen G. Cecchetti:
So, that's just over a period of a couple of months. The third picture I want to show you is GDP. People are used to looking at GDP. This is real GDP, so it's adjusted for inflation. And I just want to show you going back to 1990, those bars are recessions. That's what a normal recession looks like. And that's the 2007-2009 recession. We all think of as being really big. It's nothing compared to what we're seeing now. So, just in terms of what we're seeing the March to June decline, the decline will probably be something like 20% in the second quarter. And that's in the level you were used to seeing in this country, GDP at annual rates.
Stephen G. Cecchetti:
And the decline is going to be somewhere about 40 to 60%. You can't just multiply by four. The number's too big. To give you some sense of what that means, I just want you to keep in mind, these are good numbers to have when you look at the newspaper right now. And that is the nominal GDP before this all started was about 20 and a half trillion dollars per year, which is about $5.4 trillion per quarter, per three month period. And that's $60 billion a day. So, when somebody tells you what something's going to cost, and the losses that you're thinking, think how much out of that $60 billion is getting lost. So, that's what's going on I think with the economy at large.
Kathryn Graddy:
Okay. This is grim. So, tell us, what has the government done so far to address this situation?
Stephen G. Cecchetti:
Well, so, there are a lot of parts to the government, of course. And I'm going to focus on the federal government because that's where the real money is at least in this country. And other parts of the world, governments have different structures. But here most of the money is coming from the federal government. So, Congress has acted so far in four phases, starting with March 3rd. And for the federal government out of a 21 and a half trillion dollar economy, $8.3 billion is nothing. So, they did in March do something to provide a little bit of assistance to state and local governments, to provide some money to try and support vaccine development. Then on March 18th, they put out another $100 billion for a few things.
Stephen G. Cecchetti:
The big thing that everybody knows about is this thing called the Cares Act, which I'll talk a little bit more about in a second. And that's $2.2 trillion. And then, that was March 27th, and in April 22nd, there was another $484 billion because everybody said that the 2.2 trillion was running out really fast, which was true for part of it, but not all of it. The question is whether phase five is coming. And here's something you can look at. If you want to look at what the Congress has done, this is a chart that gives you some sense of how it's distributed.
Stephen G. Cecchetti:
So, you look around this, and you say, "Okay, there've been some tax cuts." I'm not sure tax cuts are the thing to do when people don't have incomes or profits, cutting their taxes doesn't really help much. Aid to state and local governments, which has been actually pretty modest at $181 billion, because a lot of the costs are there. Emergency health care assistance, that's important. Then I'll skip over the next one. I'll come back. Enhanced unemployment benefits at 260 billion. That's running out right now. Direct payments to households. Those are the $1,200 checks that have been going out. That's $290 billion.
Stephen G. Cecchetti:
It's not clear why those had to go to everybody. I'm not sure why social security recipients, or pension recipients needed $1,200, but they got them. It's hard to implement this stuff. Then there's a bunch of stuff here that's loans. 454 billion through the federal reserve, 46 billion directly to lending to industries. That 46 billion, when you read in the paper that there are loans being made to things like airlines, and cruise ship, and cruise industry, I'm not sure why you would lend them money, and hotels, and stuff like that, hospitality, that's where that is. And then there's the small business loans, which are 814 billion.
Stephen G. Cecchetti:
Now, I should say, and we can come back to this. That loans are not necessarily the right thing to do here. I'm not sure why we're doing loans. But one thing is that this is not enough, even a $2.7 trillion. And it's clearly the case. It's clearly the case that we need to do more. State and local governments are running out of money. They're actually starting to let people go. They're furloughing people. Small business relief is not necessarily getting to where it needs to go. And unemployment benefits are going to run out very soon for a lot of people, unless we do something about it. Now, if you look at this, these numbers are big.
Stephen G. Cecchetti:
Remember I said 21 and a half trillion is the size of the economy. So, 2.7 trillion if you were to include it all, including all of the loans, that's more than 10%. So, if we look at this and say, "Well, what's happening to government deficits?" They're skyrocketing, and not just here. And this is an important point that you want to make sure, keep in mind that this isn't just a local problem in the US, it's also not just a problem in the advanced, or industrial economies. It's also a problem in the emerging market in developing world. And so, everybody's budgets are getting blown up. In the US case, I think that the peak of the budget deficit will almost surely be higher than the world economic outlook from the IMF estimated it to be, which was a little over 15%, but that's from early April.
Stephen G. Cecchetti:
So, those numbers are surely going to be quite a bit higher, I think. And I would say the peak will be over 20%. This isn't an immediate concern, it's the right thing to do. What might be a concern is what's happening to debt. The federal debt is skyrocketing, and federal debt is almost surely on its way to 150% of GDP. Now, you can see that it started quite a bit lower, and even at the beginning of the century, it was probably 30% of GDP. So, there's a question about sustainability. I think that's not a problem right now. It's not likely to be a problem in the next decade, but it could become a problem later. So, that's something to keep an eye on, but again, not a pretty picture. So, that's the Congress, anyway.
Kathryn Graddy:
Yeah. So, exactly how big will the debt be when we finish this?
Stephen G. Cecchetti:
Well, it's impossible to know. But this estimate, which comes from my friend, Jason Furman, who used to be the CEA chair, is about 150% of GDP. So, that would be a debt of $30 trillion approximately. And it's almost impossible right now to know what's going to happen.
Kathryn Graddy:
So, let's say it is $30 trillion. Should we be worried about this?
Stephen G. Cecchetti:
Well, I mean, I don't think so, not in the short-term, because I think the interest rates on that are likely to remain relatively low. Saving rates are going to go up. People are going to be saving for precautionary reasons. And the interest rate is a consequence that the government has to pay is going to be very, very low. Right now, the interest rate is like 1% on most of this stuff or lower. So, that's pretty low. It's well below inflation, for sure.
Kathryn Graddy:
Okay. So, you're not particularly worried, or maybe we shouldn't be worried about the size of the debt?
Stephen G. Cecchetti:
Right. I think not yet. And this is like we're mobilizing, this is the time that we need to run up the debts. I mean, I think, if I was in a emerging market country, I'd be very worried. I think there are going to be significant defaults. There's going to have to be debt forgiveness in much of the rest of the world. I mean, the 30 richest countries in the world will be fine, but the other 170 are not. So, it's not clear what's going to happen there, but they'll be in trouble, but I think we'll be fine.
Kathryn Graddy:
Okay. So, thank you. Okay. We've been mostly talking about fiscal policy so far. What has the federal reserve done?
Stephen G. Cecchetti:
Well, they've done like an enormous amount of stuff. So, everybody's read about this. But so let me just start with a picture that's my favorite picture for looking at what the federal reserve is doing, which is the size of their balance sheet. So, monetary policy and central banks, it's always about balance sheets. It's a financial institution. So, it's really about what they buy, and what they hold. Now, unlike me, or you, or a normal bank, the federal reserve, and all central banks can expand their balance sheets as much as they want. They can just buy stuff and then they create liabilities, in order to pay for it.
Stephen G. Cecchetti:
The interesting thing about this picture is the spike on the far right. Which is very hard to see, because it's so narrow because it's gone up in two months. So, on the right, just to emphasize, I have the difference between what there was on March 11th, and May 13th. So, that's two months almost exactly, it's I think nine weeks. And you can see that the level of US treasury securities has gone up, $1.7 trillion to 4 trillion. The quantity of mortgage-backed securities that the federal reserve buys has gone to $1.8 trillion. There are these things called swaps, which are hard to see in the picture, but this is the US supplying dollars to the rest of the world.
Stephen G. Cecchetti:
And that's going up, basically ... Oops, there's a mistake there, sorry. It should be 446 billion on the May 13th. And then they've done some lending, which is normally zero. So, the first thing is that they've expanded their balance sheet really, really massively. And they've done this through a series of programs. And on the left, I have all of the stuff they did in 2007-2009. And the important thing there is that they did within a couple of weeks in March, all of these things. Okay? So, they started by just saying, "Look, we have all this stuff on the shelf. Let's do all of this dollar swaps." That's the provision of dollars to the rest of the world, mostly to the Bank of Japan, and the European Central Bank, and some to a few others, the Swiss National Bank, and the Bank of England, which allows them to lend it to their financial institutions, which have huge dollar positions.
Stephen G. Cecchetti:
They've been buying treasury bonds, as I showed you a minute ago. They've been buying mortgage-backed securities. They've backstopped the commercial paper market, money market mutual funds, which are really banks. This was a problem we knew how to fix and didn't. They've backstopped those. Primary dealers are people who make markets in a lot of different kinds of bonds. They've backstopped them by providing them with loans, and asset-backed securities. Now, it's important to realize in a lot of cases, there are legal restrictions on what the fed can do.
Stephen G. Cecchetti:
So, a lot of this is done through special purpose entities that are not actually directly ... Because the fed cannot directly buy anything that isn't government guaranteed. It can only make loans. Now, the new stuff is on the right. They're now backstopping municipal bond markets. They're backstopping corporate bond markets. They're making loans to individual firms through three different programs. And they're helping out with this thing called the Paycheck Protection Program, which was the $850 million being loaned out to small businesses. But it's important always to keep in mind that the fed only lends, and it's not supposed to take credit risk. So, it's supposed to get all its money back too.
Stephen G. Cecchetti:
So, that's pretty restrictive in what they can do. That's really different from the Congress, or the treasury, they spend. So, fiscal authorities, legislatures spend, central banks lend. So, hose are, I think, the pretty different things.
Kathryn Graddy:
Okay. Thanks. Okay. So, they're lending money. The government is borrowing in order to spend, what about households? Will households have to borrow a lot in order to make their mortgage payments, or their rents? And, if so, are we in a good place going into this as far as household debt goes?
Stephen G. Cecchetti:
Right. So, I think this is an enormous risk in a fragility in the system worldwide. So, this picture here shows the ratio of debt to GDP for households in the red line, and for non-financial corporations in black. So, you can see that the numbers were very high going into the financial crisis of 2007-2009 for households, but not so high a little bit, but not huge for non-financial corporations. Now, the problem that we face now is that when you borrow, what you do is you borrow usually to invest. That's what businesses do. And individuals borrow for a lot of reasons. Maybe they're borrowing to buy things. Maybe they're borrowing for education. They're borrowing to buy a car or something like that. People are buying things that have returns.
Stephen G. Cecchetti:
Right now, people are borrowing in order to tread water, they're borrowing in order to meet their current expenses. And so, the concern is that we're going to have huge debts coming out of this. I'm particularly worried about the corporates. I think businesses are shut down, they still have to pay their rent. They have fixed costs. Some of them need to pay electricity. They have to pay insurance, all kinds of stuff. And when they come out of this, are they going to be able to repay it? I think there's going to have to be a lot of forbearance.
Stephen G. Cecchetti:
I'm worried that there's going to be a lot of bankruptcy. I think it's one thing for J.C. Penney, and J. Crew, some of my favorite clothing suppliers, and Neiman Marcus where I never go, but for them to go bankrupt and get reorganized, and besides maybe they were on their way out anyway, it's quite something else for a small business, a dry cleaner, or a small restaurant, or a specialty store to have to declare bankruptcy. They basically disappear. So, I think this is something to be really concerned about that we're providing loans and not grants to people.
Kathryn Graddy:
Okay. Why has corporate debt risen so much in the 2000s? Why are we where we are going into this with corporate debt?
Stephen G. Cecchetti:
Well, I think, there's been a lot of debt issuance through ... It's just there's been a difference in capital structure. People were issuing a lot of equity in the 1990s, but then since then they've been issuing more and more debt. It's partially just the tax benefits. It's also the fact that a lot of businesses have not wanted to go public, so they issue debt instead. They borrow.
Kathryn Graddy:
Okay, interesting. So, what do you see? So, going forward, what should the government be looking at? What are the key policy questions that really need to be addressed at this point in time?
Stephen G. Cecchetti:
So, I think that first of all, there are the objectives, and then there are the challenges that they face more broadly. So, I mean, what we're doing right now is trying to cushion the impact, and distribute these really large losses. I mean, we're shut down. We're losing 20% of our output, maybe even more, every day. And we've been doing that for a couple of months. And around the world, a lot of countries have been doing that. And as a consequence, these losses have to be distributed. We're distributing them both across the population right now, but more we're distributing them over time by borrowing from the future. So, we have to figure out how to do that in a smart way. And I'm not sure it's smart yet.
Stephen G. Cecchetti:
We also have to make sure that the financial system continues to operate. The last thing we need is a financial crisis to go along with this. This is bad enough. If it's the case that the financial system starts to collapse, then we're in real trouble. That has not happened at all. And so, the central banks have been making sure that doesn't happen. Now, the other thing is that I think that we need to think about the economy as a set of relationships. So, this is where I think there's a lot of concern. We want to maintain the network that's out there. You want to keep it intact. There are employers, employees, retailers, consumers, suppliers, customers, landlords, tenants, lenders, borrowers. And it's like in some countries, they're doing I think a better job of trying to maintain these relationships.
Stephen G. Cecchetti:
In this country. We have a custom where when a firm is doing badly, we just fire people. That's not what's happening for instance, in some European countries. We're running a task, we're going to see which one works better. And part of the reason is that, it's not clear what we should be doing in some ways. I mentioned already the problem with loans, I think grants, and equity stakes would be way better. I think the government, in fact, instead of offering loans should be taking equity in firms. The question of supporting individuals or firms has to do with what I was just saying with whether or not you do what we're doing, which is to try to provide money to households, and unemployed people, or you provide money to firms to retain their workers. Part of this is a trade off between maintaining that network, or creating flexibility.
Stephen G. Cecchetti:
So, it's possible that if you maintain the networks, and the firm employer-employee relationships, that the economy will recover more quickly, but what it won't do is it won't be flexible in order to change. So, we don't really know what the post-COVID economy is going to look like. I mean, I do know a few things. We're going to have more stuff like this, and I'm probably going to spend a lot less time on airplanes. We know a few things, but we don't really know, I think very well what the structure will be. I mean, how many office buildings are we going to need in the middle of big cities? For instance.
Stephen G. Cecchetti:
Then there's the question of what should central banks be doing relative to the rest of the government? And there's the question of how far, or how fast we should go. So, I think that, there are a lot of issues that are out there, a lot of questions that people need to answer. And so, the question is, are we going to get the answers that are going to help us or not? And I don't know. I'm going to stop my sharing. I think those are all my slides anyway. And I think we go to questions now, is that right?
Kathryn Graddy:
Right. Okay. Thank you. And I'm going to turn it over to Shane who's been monitoring the question box.
Shane Dunn:
Yeah, I have. Thanks to everyone who submitted questions. You can keep submitting them, but we did get several already. So, I'm going to get started. Professor Cecchetti, actually, just give the broad scope of the nature, and the title of your presentation. Can you explain World War V?
Stephen G. Cecchetti:
It's the virus war. Well, it's a play on World War Z for those of you who know about Max Brooks and the zombie wars.
Shane Dunn:
Thank you. We had someone who was curious and I thought it would be worth-
Stephen G. Cecchetti:
Oh yeah. And if you haven't read World War Z, which is an oral history of the zombie wars, I do recommend it.
Shane Dunn:
So, we have two specific questions about the fed. I'm going to try to combine them. One came early on when you were speaking. The first is, why should the fed not be afraid to allow interest rates to enter negative territory? And it seems Jerome Powell is very hesitant to make such a move. And the second is, Chairman Powell mentioned today that the fed is far from out of ammunition to support the financial system, and the economy. Do you agree? So, can you talk a little more about the fed again?
Stephen G. Cecchetti:
Yeah. So, on the negative interest rates, I think there are a couple of reasons that the fed has been extremely hesitant. So, reason number one is that they're not sure it's going to work. And it's also not clear. So, the idea of lowering interest rates is that you're going to try and get people to do things that they weren't going to do. They're going to borrow, or they're going to spend. And that's not the problem right now. So, it's not clear that interest rates are the right tool in any case. Now, negative interest rates are a very strange thing. And I mean that in the sense that I think they are very poorly understood. So, we have negative real interest rates, which is to say, interest rates that are below inflation all the time.
Stephen G. Cecchetti:
So, the return to lenders is actually negative. Negative nominal interest rates is just making them even lower. So, we already have negative rates. So, that I think is just an issue of understanding, but it is true that banks and financial institutions have a hard time forcing their depositors, ... So, people with bank accounts, for instance, they have a hard time with negative interest rates. They're charging them. But there's one more reason that I think that the fed is extremely hesitant, and that is, I know that they are unsure that it's legal in this country.
Stephen G. Cecchetti:
In other countries, you can do it for sure, but here the authorization to pay interest on reserves, which is this technical thing, it's not clear the way that the legislation is written, that it would allow them to charge a fee. And this would be construed as a fee. Now, maybe they have good lawyers, and so maybe they can get around it but ... Now, on the ammunition, I mean, it's certainly the case that their balance sheet can continue to increase in size, and they can continue to offer loans. They can offer loans on better and better terms, but that's really all they can do.
Stephen G. Cecchetti:
So, yes, in terms of absolute magnitude, they're nowhere near, they're never going to be out of ammunition in that sense, but in terms of the scope of what they can do, as opposed to the scale, I don't see much room for increasing the scope. They've already offered to lend to almost everybody except for me and you. So, I'm not sure where we go from there. You're muted.
Kathryn Graddy:
You're muted.
Shane Dunn:
Sorry about that. Thanks, Steve. We have a couple of folks who were also curious why the stock market is rallying, and continuing to go up throughout this, or at least has recovered, obviously.
Stephen G. Cecchetti:
I think that there's a couple of possible answers to that. Okay? Answer number one, is I have no idea. Answer number two, is that the economy ... And the stock market's not the economy, it's a small part of the economy. Number three, which is a corollary to number one that I have no idea is that, I mean, I think that the stock market has gotten ... Things are very uncertain, and extremely risky. It makes no sense to me right now to place a bet in the stock market that really is a bet on the best outcome possible. Right? I mean, I think that I would guess that people are going to be disappointed. And I guess, people always like to ask economists if you're so smart, why aren't you rich?
Stephen G. Cecchetti:
And so, I think it's always incumbent if you answer a question like this, to tell people what you're doing, and the answer is I reduced my exposure to the stock market in March. So, a little bit too late, but not grossly too late. But so, I put my money where my mouth is. I think this is not sustainable.
Shane Dunn:
Thank you for that. That was a question several people had about sustainability, generally. But another question we have a few folks curious about is stagflation. Are we at risk of stagflation? Does the fed plan on paying for all of this?
Stephen G. Cecchetti:
Well, I mean, the question is whether inflation is going to go up or not. And I guess, my answer to that is that, well, I do not believe that inflation will go up, but that would be a great problem to have. Central banks have been having trouble getting inflation to rise for quite a long time. And even in this country, the federal reserve has had trouble getting inflation to rise even to the 2% target. It was just barely there. And I think that going forward, people are not going to be too averse to inflation of three or 4%. So, first of all, I think that inflation is hopefully going to rise somewhat, but there's no evidence of that yet. And I think that individuals are certainly absorbing the increase in the fed's balance sheet pretty easily.
Stephen G. Cecchetti:
And the simple way to think about that is that a lot of what the fed's doing is going to banks and saying, "Will you trade your very, very low yield treasury securities for very, very low interest rate deposits at the central bank?" And the banks don't care. So, it's not going to change their behavior. They're not going to increase their lending I think directly as a consequence. And so, standard reasons that inflation would go up are not going to happen. The other thing is that the bank deposits are actually increasing. People are shifting into banks because they view them as relatively safe. And that's probably right. They are safe, the government's going to backstop them. So, again, I don't see any problem with inflation. The second part of that question is really what's going to happen to growth in the longterm.
Stephen G. Cecchetti:
And there, I think there are reasons for concern. Again, we don't know what the structure of the economy is going to be coming out of this. And I remember very well, when I started my professional career, which was in the late '70s, and inflation was very, very high, but what had happened then was that oil prices had gone up, and we had the wrong capital stock. So, you had capital that used a lot of energy. And we needed capital that used less energy because energy prices had gone up. Now, it'd be great if we had capital use less energy now, but that's another story. But as a consequence, growth collapsed for a while.
Stephen G. Cecchetti:
Now, is growth going to collapse because we have office buildings that we don't need because we don't want to go into big offices? I mean, if somebody works in Manhattan right now or did work in Manhattan, why would you take an hour each way on a train that's really crowded to go into an office building that's really crowded even for the next year or two? I don't know. And then once you figure it out, why would you bother to go in frequently? Not to mention the cruise ships. I always like the cruise ships, because who's going to go on ... Cruise ships, they're like a petri dish for this stuff.
Stephen G. Cecchetti:
And I think the other thing to realize is that this is one of those things where if it happens once you might want to be ready for it to happen again. And so, we really should have a more robust economy. And that's going to require a lot of investment that isn't necessarily going to give us immediate returns in terms of growth. We're going to be replacing a lot of stuff that just isn't the right capital. And so, I think growth will be relatively low for a number of years to come but inflation-
Kathryn Graddy:
Okay. I'd like to jump in, kind of followup on that question on inflation. I mean, some people have tried to say that this is also partly a supply shock in addition to a demand shock. How does that play into the [crosstalk 00:39:37]-
Stephen G. Cecchetti:
Well, it could drive prices up, but, I mean, we'll see. I don't know. I think that it is definitely a supply shock, right? I mean, if you look, productive capacity is going to fall. So, if you have a restaurant that was just making a reasonable return on capital before, and now you can only have half as many people in it, there's only a couple of things you can do, right? You can either double the price, or you can cut everybody's wages and returns, right? Or somewhere in between. So, I think prices could very well go up, but I think for the reason that you're pointing out, not because of what the federal reserve is doing. Supply shocks drive up prices for very fundamental economic reasons.
Stephen G. Cecchetti:
I mean, we do have trouble measuring this. And I haven't thought this through. I have to sit down and think through the price measurement problem. I think the CPI is really, really screwed up right now. So, I think that our measurement of inflation is a mess. And one way to think about that is that there's stuff that you just can't buy right now, and people used to buy it, my famous cruises, is the price infinite.
Stephen G. Cecchetti:
I don't know. That doesn't seem right. So, I think you're right though, that we do have to worry about this. It is a supply shock for sure. It's decreasing productive capacity. And it could very well end up driving prices up, but that would be a one shot thing. Inflation's a little bit different but I do think that we would be happy with inflation of like 4%. That would be great. I would be happy.
Shane Dunn:
Steve, we had a business school student actually just ask, "Put this in a global perspective, how is the global economy going to be impacted based on what you're saying here in the United States, as the pandemic seems to be tearing the global interaction and our relationships apart?"
Stephen G. Cecchetti:
Well, right. There's a couple of there. The first thing is, is the global economy going to fragment? And so, what's going to happen to global supply chains, and the like? And I think I'm very worried that trade is going to decline, and essentially make everybody worse off. I think what we need are some sorts of new arrangements maybe, but we're very codependent around the world. Some people have some raw materials, and some skills, and some resources, and other people have others. And it's just silly for us to sit here and all want to be self-sufficient. I know that I'm sitting in Lexington, Massachusetts. I have absolutely zero interest in being self-sufficient in my house, and just at the extreme, right. I don't want to have to start planting food in my backyard.
Stephen G. Cecchetti:
But no, but it's a serious point, right? Because for a country, that you could end up with something similar. So, I'm very worried that countries are going to shy away from certain kinds of trade arrangements. And part of it is of course that the US has decided that it wants to be more isolationist, and xenophobic, and that it doesn't care. That's also very shortsighted. And we'll see how far that goes. We're going to either end up with something closer to a United States of Europe, a European Union that's really a union, or it's going to tear itself apart, because of this also.
Stephen G. Cecchetti:
So, I think it's a very, very risky point. And we're at a risky point that I think is going to be driven more by politics than it is going to be by economics, and by concerns, whether they're valid or not about certain security issues.
Shane Dunn:
You mentioned the politics. Someone does have a question regarding how is the government messaging this. Is it affecting or could it affect the recovery? How do you think about that?
Stephen G. Cecchetti:
Well, I think it goes well beyond messaging. I mean, I read the same news sources as all ... We now are up to like 180 people, I read the same news sources everybody else does. Although, I try to not read them 24 hours a day. I got over that a little bit, and like just only try and read them early in the day, and late in the day. And there's like a quiet zone in the middle. But I think that the messaging of the government here is obviously quite confusing, and has confused a lot of people, because it's so decentralized. I think that in countries that have more central messaging, and more centralization of the authority, and more trust, you're getting much better outcomes.
Stephen G. Cecchetti:
So, we're going to see what happens in Germany, but Germany so far has been great. I talked to people who live there and say, "This has just been a great place to be because the messages are consistent, and the central government is running the show." And that means that things are going where they need to go, and people are doing what they need to. Here on the other hand ... Of course, the United States is hardly monolithic and uniform. But I was reading about Eastern Washington State, and the Upper Michigan Peninsula, and places like that where I fortunately don't live. And those people, they don't believe that there's a problem. And they don't want to do anything about it. So, that's too bad.
Shane Dunn:
You know, next to the politics question is the policy question. What do you think about the government's ability to implement the stimulus, recovery programs? Is it going to help? Is it going to hurt? Is it too soon to tell?
Stephen G. Cecchetti:
Well, first of all, I think that some of it's quite complicated and they're not doing a great job. I think that the main policy though is that they have to get away from this idea of loans, and not losing money. So, the federal reserve has a legal responsibility, but the treasury secretary said last week that he thought that the government on its loans should not lose money. And I think that's crazy. I think that they're going to be losses, and they should be booked by the government. And that's fine.
Stephen G. Cecchetti:
So, I'm worried that people still don't have the right approach, and the right attitude towards what needs to be done. The other thing is that ... And we're starting to see this in different states. I mean, some activities are just way, way more risky ... We know this ... Than other ones. And so, we shouldn't be going to bars, and nightclubs, and music concerts, and stuff where people are tightly packed together. But it's okay to go to a car wash, I think. Especially, if you stay inside of your car. So, I'm hoping that we're going to start opening up in a sensible way. I'm worried that we're not.
Stephen G. Cecchetti:
And I'm worried that the government will, as a consequence, make it worse. But in the end, what really is going to matter is what happens to the infection rate, and whether or not we get a second wave or what are the next three or four months really going to look like as we start to open up?
Shane Dunn:
Steve, we at the business school were hoping to have a business of climate change week earlier this semester. We still did some of it, but it wasn't what we had planned, and anticipated. But we have some questions here around where's greenness, climate change, and all of this in your mind?
Stephen G. Cecchetti:
Well, we've had a climate change. It's just not the right kind. Well, first of all, obviously, if you have cars off the road and airplanes out of the air, we have way cleaner air as a consequence of this. So, that's really good. I would hope that we can take advantage of the need to rebuild a lot of things, to rebuild them in a way that's green. So, I think that there's an advantage in all of this. And that these things can actually become ... There can be a synergy between the recovery from the virus, and having some move towards reducing the problems of climate change.
Stephen G. Cecchetti:
I mean, we're obviously very far along the road. I'm not a climate scientist. And obviously, I should have also said I'm not an epidemiologist. But I think that in terms of the economics of it, I think that we may actually do better with the climate change coming out of this than we were going in.
Shane Dunn:
We have someone who commented, who I know works in the space. He said, "ESG is on pause. Corporates don't have money to pay for it."
Stephen G. Cecchetti:
Well, but they're not doing anything. So, the fact that they're not doing it doesn't ... The question is what are they going to do when they start investing again? Right? Right now, they're not using their capital stock for anything or they're going to run it down. But I do think that the question is then as we start to reinvest, do we start to reinvest in things that are more green than we had? And I think the answer to that is yes, but I could be wrong.
Shane Dunn:
So, we have just a couple more minutes. I want to ask one or two more questions. One is, obviously, this has been very hard. It's been an economic disaster caused by global health pandemic but are there any possible economic disasters that have not yet happened that you are concerned about could happen in the near future?
Stephen G. Cecchetti:
Well, I mean, the quip about crises is that you never know where the next one's going to come from. And this one certainly qualifies as nobody ever knew where this one was going to come from. I guess, I still think that if we're not careful ... So, I'm generally an optimistic person. I don't like to be a pessimist. I'm not a very good conspiracy theorist. I would be a terrible risk manager because I don't have nightmares every day, new worse nightmares every day about what could happen.
Stephen G. Cecchetti:
But the one thing that I do worry a lot about, and I did worry in 2009, and when we were working on the regulatory reforms, for the years going from 2009 forward was that if there was another financial crisis, if it was the case that the financial system needed to be bailed out again in the next 25 years, and we're certainly inside of that, that I was worried about the populous revolution. So, I think, I still see a real concern that there will be populist upri ... And I mean real populist uprisings. I mean, maybe Hungary counts, it's pretty close, where somebody has taken over.
Stephen G. Cecchetti:
But I really worry. I worry about the survival of liberal democratic society, and trust in market-based capitalist systems. If they can't recover from things like this without looking like you're subsidizing a bunch of people who were really well off to begin with. And I think that's a concern again because I'm worried that it's happening again, but we'll see. I also figure in this particular crisis, it's still early innings.
Shane Dunn:
Steve, one more quick policy question I should have asked earlier is about unemployment. Are the unemployment benefits likely to extend or increase the rate of unemployment?
Stephen G. Cecchetti:
Well, the unemployment benefits clearly increase the rate of unemployment, somewhat. They keep people from looking for jobs, maybe. But there aren't a lot of jobs out there right now. So, I think the critical thing is going to be to make sure that the unemployment benefit, that people have an incentive to go back to work when those jobs are available. I'm very worried about the unemployed. We were at a point in the last few years where people who had been having a hard time for years and years, like a decade getting jobs were finally getting jobs. And those were of course, the first people to go. And so, now the question is, are those people going to be able to find jobs?
Stephen G. Cecchetti:
And I think this is one of the things that Chairman Powell was talking about a little bit yesterday when he was speaking. I don't watch these things on television, but it was on Face the Nation or something. It was on some television show. Anyway, I read them later. So, what he was saying was that he's worried that the recovery will be quite slow, and if that's right, and I think that probably is right. Then I think that the unemployment rate could easily remain double digits for quite some time all the way through next year. And the hardship that that's going to create is going to be pretty serious. And there won't be unemployment benefits extended through 2021. That's not going to happen.
Shane Dunn:
I'm going to pause there with the questions. We had some others, but I want to be cognizant of time. So, Professor Cecchetti, and Katy, do you have any final words before I close it up?
Kathryn Graddy:
I'd just like to thank Steve for participating. This was super interesting for me, and I'd like to thank everybody else for participating also. Thank you.
Stephen G. Cecchetti:
Yeah, I'll just say it was great. It's fun to see a lot of ... I can see a lot of your names, and I recognize many of you. So, thanks for tuning in.
Shane Dunn:
Good. Well thank you to Professor Cecchetti. A reminder, when we reminded you about this event, and also the invitation included a link to some of Professor Cecchetti's work on this topic. We will be happy to share that out in the email that comes out in the next day or two as well as the survey. Also thank you to Dean Katy Graddy for joining us tonight. This was a really great event. This is the biggest virtual event we've had for the business school so far. And as many of you Brandeis alumni know there've been some excellent events that the Brandeis Alumni Association has hosted in recent weeks, and those will continue.
Shane Dunn:
So, please keep an eye out on your inbox, and on social media. This event has been recorded, it will be archived. The Brandeis Alumni Association website will have it, imminently, not long after this event. And specifically, for the international business school, our next virtual event, with a topic of interest, currently, will be on June 3rd at 12 noon Eastern time, with an alumni, Barbara Clark, and Professor Debarshi Nandy of our finance department, with a focus on the survival of small businesses during this time.
Shane Dunn:
So, I hope those of you who have the time and interest will listen in, ask questions. And if not, you can always watch the recording after. So, be on the lookout for more events in the future. And of course, whether you are ending your day with us or just starting it, be well, take care, and thank you for supporting Brandeis. Have a great night or a good day. Bye-bye.