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Welcome to the LSE Events Podcast by the London School of Economics and Political Science. Get ready to hear from some of the most influential international figures in the social sciences.
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Welcome everyone to the LAC this evening for this event. My name is Ricardo Reuss and I am the A.W. phillips professor at Economics here at the Department as well as the Director of the center for Macro at the lack of this lecture is the first edition of a very special event for us here at the lac. It's going to be it's the first event of the CFMRCM Lecture series which invites former policymakers to reflect on their experiences and to raise challenges and open questions for the many future researchers and students there in the room. We have organized this the center for Macroeconomics in collaboration with Rokos Capital Management because we thought there's much to learn in these interactions between policy and and research and generally understanding of how monetary policy works in its interaction with the real economy and financial markets. And I could not be more delighted to welcome as our inaugural speaker in the series, Klaas Knott. Klaas served as president of the Dutch central bank, the DNB for 14 years, during which he of course sat in the governing Council at dcb. And in this lecture Klaas has been very generous to precisely follow what we're looking for in that he will be reflecting on these 14 years and especially the very rich experience he had going through both the Eurozone debt crisis, the low inflation trap that lasted for a few years, and more recently the high inflation disaster after the pandemic. With a very distinguished career in central bank financial stability, but also being himself an academic, still an academic, I was going to say former academic, but you can never stop being an academic. In a deep thinker about these issues, Klaas will give us very invaluable perspectives on the challenges of managing monetary policy in times of crisis, inflationary pressures as well as the systemic risk in the financial sector. A few housekeeping announcements for those of you who use social media, the hashtag is LSE Events. The event is being recorded and will be made available sub to no technical difficulties very shortly in the LSE website. As usual after classes lecture there will be a chance to put on questions the online audience at any point. You can start submitting your questions in the Q and A feature on the top left of your screen. I will then be managing those as well as calling on questions in the room and I'll give you some instructions on how to do that in terms of microphones going around and so on. But for now, we're going to hear. I am very delighted to hand over to Klaas for his lecture on monetary policy and perspective.
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Thank you. So thank you very much, Ricardo, for your kind introductory words. And indeed, I mean, having been member of the governing council for 14 years, two seven year terms, I think at some point you want to look back, you want to look back on sort of what you experienced during that period. And in essence, as Ricardo already suggested, There were three sort of different distinct episodes in these 14 years. When I came in in July 20, the first governing council meeting I went at was the 76 July 2011 meeting. It was the second of the famous three chair hikes. So we hiked interest rates because we really thought that the crisis was over. And that was, well, it was convincingly argued by ECB staff, etc. And as a sort of newcomer in the Governing Council, I mean, who are you to dissent immediately at the first meeting? Now, I mean, I didn't have any views different from the ones that were presented at that stage. But then only two weeks later, July 20, there was the disastrous EU leaders summit on Greece. And from that moment onward it was all crisis management in the ECB Governing Council. Now that was basically the first two years of my experience until Mario Draghi spoke his famous whatever it takes. In the summer of 2012, when that was resolved, the immediate crisis was over. But then we sort of gradually morphed into a low inflation episode and that was very, very tough to get out of. And I'll also draw a few lessons on that episode until the pandemic. And a cynic could say that it took us a pandemic and a war to finally get out of this low inflation trap. But then immediately we got into a high inflation episode. So our target was 2%. Well, I can assure you there was exactly one month in which it hit our 2% target. That was September 2021, I believe. And then from that moment onward we had a high inflation problem. And obviously that is also an episode that taught us a lot about sort of the conduct of monetary policy. And I will say that I've been a trade monetary economist, I did my PhD in monetary economics at the university, etc. Etc. But the things that I learned in university were of course, little practical value when it came to sort of conducting monetary policy in an incomplete monetary unit. Because that's a theme that will come back at different points during my presentation. We had to think of solutions on the fly. At the moment they were not sort of, these were all innovations that we had to think of at that moment because problems presented itself and warranted a solution. There was a lot of innovation going on and therefore I also think it's useful to look back because these, these were things that had not been done before. There was no sort of, yeah, empirical evidence as to for instance, the effectiveness of asset purchases or refinancing operations or what have you. So in that sense, I also think it makes sense that you do a sort of post mortem every now and then and today what I'll try to do is my personal post mortem. So here's the Beamer I'll talk a bit about 14 years in the Governing Council, the three episodes that I briefly talked about. But before going there, maybe it's useful to briefly recap what was sort of the principal what were the principles on how EMU was formulated in 1999, what was the original architecture, etc. It was clear that this was going to be a monetary union with a single centralized monetary policy and decentralized fiscal policy. A very independent ecb, Bundesburg style focus on price stability. Only as the primary target, clear primary target, and only to the extent to which price stability was safeguarded would there be room for other objectives. The Stability and Growth act was meant to keep the deficits and the public debts in check and that was clearly meant to avoid fiscal spillovers on the conduct of monetary policy. So it was a very one sided approach. And what was also quite crucial, what appeared to be quite crucial was the no bail out clause. So the idea that individual countries had to take care of their own problems and that other countries would not come to the rescue if individual countries arrived into trouble, for instance on the fiscal or when it came to housing market bubbles, private debt, public debt, whatever was the source of the problem. Well it very proof, it very quickly demonstrated that this was not a maintainable proposition because of all the financial interactions etc. In, in the monetary union. But the intuition was also very clear. Keep the central bank credibly committed to low inflation. Avoid fiscal dominance. That's why the stability and growth pact and fiscal prudence by each member state was deemed to be enough to ensure stability. And guess what? In the first decade it looked as if it worked, right? I mean there was strong growth, there was catching up of let's say the poorer countries in terms of GDP per capita. So there were current account deficits in the faster growing countries and there were current account surpluses in, let's say, sorry, current account deficits in the catch up Countries current account surpluses in what was later called the core countries. So that's also what the textbook would prescribe in terms of convergence. But of course the problem was that these capital flows, even though they were flowing in the right direction, they did not end up in productive investment that would raise the growth potential of the economy. But a lot of them and a lot of it unfortunately ended up in the real estate sector. Low interest rate feeding, asset price bubbles and the like. Well, and that went wrong in 2007, 2008. Now, before I can sort of explain what is on this slide, a few very simple notions here. What this slide shows is actually liquidity deficits and liquidity surpluses in the banking sector. So if you take a very simple approach of a bank, it attracts deposits, it extends loans. A bank that attracts more deposits than it extends loans has a liquidity surplus at the end of the day. A bank that extends more loans than it attract deposits has a liquidity deficit. Normally in a normal function interbank market, this is not a problem because at the end of the day the liquidity surplus bank lends its surplus to the liquidity deficit banks. And there's hardly any role for the European Central bank in a well functioning interbank market. Unfortunately that of course changes if you get a banking crisis. Because once there is a banking crisis, there's issues about liquidity insolvency. Banks start distrusting each other and liquidity surplus banks become less willing to lend the money to liquidity deficit banks. But luckily there's an alternative and that alternative is called ecb. So you don't, you don't want to lend out your surplus anymore to your fellow bankers, but then you can bring it to the ECB and the deposit facility rate. Unfortunately that four forces the liquidity deficit banks to also turn to the ECB to do borrowing from the ECB in order to fill up the deficit. So what does it mean that in a crisis, all of a sudden the ECB balance sheet begins to expand and the ECB becomes a sort of central counterparty, clearing excess liquidity on the one part of the financial system and liquidity shortages in other parts of the financial system. And this is exactly what happened. What we saw, what was sort of our lens through which we saw these imbalances in the financial system developing in, in the early years of the crisis. So if you look before we had the liquidity crisis, a fairly normal sort of distribution that you could see that for instance, Italian banks are typically very, very deposit rich, so very green. German banks a little bit Less so And definitely in 2007, 2008, when the sort of subprime crisis started and a lot of the London banks were also involved there. That started already creating some distrust. But then as the crisis developed, what happened of course is that countries arrived into trouble because of the bank sovereign nexus. In some countries, like in Ireland, the banking system went belly up and public debt exploded from less than 30% before the crisis to 130% after sort of the bailouts. In other countries like Greece, it was the other way around. It was the government actually whose finances imploded. And that led also to instability in the, in the banking sector. But what you see in this picture is that from the perspective of the ecb, we saw our balance sheet grow and we saw that the banking systems in these countries became ever more heterogeneous. A concept that one would call capital flight. And that is of course also a thing of a monetary union. Capital flight within a monetary union is much easier than capital flight outside the monetary union because all of a sudden you don't have currency risk anymore. So both big corporates like Ikea, a corporate that has sort of different bank accounts in different countries, they can move around their deposits much quicker in the monetary union than outside the monetary union, small depositors, it's much easier to open a bank account in a different country if it's in the same currency than your own country. So capital flight is also an inherent vulnerability in a monetary union. It becomes much and much easier. And that is what we saw, that is what we saw happening because this slide essentially shows this capital flight taking place. And at the end of the day, when we were really at the height of the, of the financial crisis, after Lehman had failed and etc. You see this in extreme format that you had ample abundant liquidity in only a very few triple A rated countries in, in the euro area. But unfortunately liquidity conditions became tighter and tighter and tighter in the, in the periphery. And that of course became totally unsustainable. Now then you might ask yourself, okay, what is the role of the ECB in this? Why is this a problem for the ecb? Well, that of course has to do with monetary transmission. The ECB sets one single short term interest rate, but that's not the interest rate at which agents in the economy typically borrow. Right, Agents in the economy typically borrow at much longer tenors. And so we have a monetary transmission process along the yield curve. Well, if you get developments like this, and this is the 10 year sovereign bond yields, and you see that one part of the union is faced with much tighter liquidity conditions and therefore also tighter funding conditions, and therefore also higher bond yields. And another part of the union actually is on the receiving end of all these safe haven flows. Particularly Germany was of course seen to be the safe haven. Then you get a massive dispersion of bond yields. But that also means that that one single monetary policy transmits in different ways to different parts of the euro area. So you get heterogeneity in the transmission of monetary policy and not in the manner in which you want to see heterogeneity. The economies in the south were of course, becoming weaker and weaker, but they had to pay the high interest rates. The economies in the north were actually profiting from the safe haven flows and they enjoyed the low interest rate. That is something, and that is an inherent vulnerability of a monetary union where you have a single monetary policy, but you have decentralized debt issuance. That's not the case in the us. In the US you have centralized monetary policy, centralized debt issuance. But in a monetary union where you have decentralized debt issuance, the spread question is never far away, it's always around the corner. And that was the spread question that had we not sort of counted this, this would probably have killed the monetary union, because at some point for these countries, it would have become unsustainable to remain a member of the monetary union and they would have had no choice but to leave. Now, luckily, at that time, we had a president, Mario Draghi, who sort of put an end to this process by his famous whatever it takes, whatever it takes within the mandate. Because this was about the homogeneity of transmission of monetary policy. It was clearly also crisis management, but it was also about monetary policy. It was also about preserving the singleness of monetary policy and the homogeneity of monetary transmission. And that, I think, calmed the markets. There was a. There was. The central bank in such a situation is the only actor in an economy that both has the swiftness of decision making, but even more importantly the size of the balance sheet, that it can expand in principle, infinitely, because the central bank is the only party in the economy that can print money. So if the central bank says stop, and this is the red line, as a speculator, you back off because you can't speculate against the central bank, you will always lose, because the central bank can always bring a few euros more to the table than you can as a speculator. So you back off. And that's essentially what happens after the famous whatever it takes Bond yields converged again and at least the acute phase of the crisis was being resolved by this intervention. So so far this was a little bit of anatomy of the crisis. But now of course the question is, what are the main lessons from this episode? Well, in my view, the first lesson is that before the monetary union we thought that there would be two sources of fiscal discipline. One, the stability and growth pact, and the other one would be market discipline. And market discipline is a euphemism for if sort of the quality of policy deteriorates, you pay a price for it in terms of higher borrowing costs in the market. And such market discipline could discipline policymakers if that was to be a smooth continuous function. A little bit of deterioration in the fundamentals, a little bit of higher interest rates that you have to pay as a punishment. Unfortunately, the crisis told us that this is not the way market discipline in reality works. Shortly before the crisis, Greek bonds were trading 5 basis points over German bonds. Then when, and we saw that in the previous picture when all of a sudden markets did pay attention to heterogeneity, it became a sort of destructive, self fulfilling spiral that was so destructive that there was no policy adjustment anymore possible to deal with these developments. So given the all of or nothing behavior, as I called it, of many bond investors, I don't think that market discipline is very helpful in trying to prevent the buildup of financial imbalances. Secondly, the original architecture, as I sketched it in one of the earlier slides of the emu, was woefully inadequate to deal with a crisis like this. There was no lender of last resort, there was no backstop, there was no esm. The banking system was very much dispersed. You had national supervision still. And therefore this was something crisis management had not been thought about. And there was the idea of the no bailout clause. Everybody takes care of its own problems and we don't bother each other with our problems. But that of course didn't work because this, the ease with which capital could fly throughout the entire monetary zone made that problems very quickly spilled over to the rest of the euro area. And these contagion effects made the enforcement of the no bailout clause in my view unrealistic. And then finally, and that I think is the inherent vulnerability, single currency net national debt issuance, that is a vulnerability that is inherent to an incomplete monetary union that will always continue to be there. And therefore, and that was the ultimate, I think, resolution of the crisis, the ECB had to accept some form of lender of last resort responsibility for bond markets. Before Mario Draghi's famous words, the ECB did not want to assume that responsibility. It was very much thinking in terms of moral hazard and you shouldn't bail out markets and what have you. But I think within an incomplete monitor union like the one we are having in Europe, it's inevitable that there will be situations in which the ECB will have to intervene because of this spread issue that is not there in other monitor unions. Okay, so then the crisis was sort of resolved. Can I have a bit of water, Ricardo? And then we sort of had a few years which looked sort of reasonably calm, but unfortunately the economy was very, very weak and inflation came down and it came down and it stayed low. And there was little sort of movement in inflation. And as you will see in the next slide where I depicted both headline inflation as well as core inflation filtering out, food and energy inflation being very volatile, inflation was stubbornly low. So basically core inflation sort of stabilized around 1%. Headline inflation showed a little bit more volatility, but that was due to predominantly energy inflation, energy prices. And that was the next problem at the desk of the ecb because our sort of definition of price stability prescribed that we should aim for an inflation rate at that time below, but close to 2%. And this was clearly below 2%, but it was clearly not close to 2%. So what do you do if you're faced with an. Well, with a situation where deflation fears, etc. Are popping up and people are talking about deflation risks, etc. Of course, first you try to provide as much stimulus by conventional monetary policy. But you know, rates were already quite low, so there wasn't much sort of monetary space left in interest rates at that time. Initially we called about, we Talked about the 0 lower bound. Gradually we started to talk about the effective lower bound because we had discovered that since there are transaction costs of holding cash that you can actually go negative with rates without people massively taking their money out of the bank. But at some point you hit an effective lower bound at which you can't lower rates anymore before, because otherwise you would destabilize the banking sector, you would have a massive sort of substitution into cash. And that would also impede the effectiveness of monetary policy. So if you can't go much lower with your conventional interest rates, but inflation continues to be stuck at 1%. That is when sort of so called unconventional monetary policies came into play. And I think in thinking of unconventional monetary policy, I always say it is lowering interest rates without lowering interest rates in the sense that again, you use the realization that most borrowers in the economy don't borrow at your overnight rate, they borrow at the 5 or 10 or what year rate. And so what you can try to do is over and above bringing down the policy rate, try to also depress interest rates at longer tenors. And that means you have to depress either the term premium or a credit risk premium, or expectations of future short term interest rates. So that is where forward guidance comes in. Forward guidance is essentially saying not only is the policy rate low today, but I promise to you that it will stay low for an extended period of time. And you can make it contingent on certain developments. You can give a time commitment, there are different variants of it. But in essence what you are doing is depressing this first factor. And then you can do refinancing operations for the banks if you give them longer term funding, of course, with conditions so that the banks do more credit lending to the economy. But some of it also goes into sovereign debt, carry trades, etc. You can do QE asset purchases. And what you do by that is of course compressing the term premium and making sure that this, that there is more and more supply of duration relative to the demand of duration. And that puts down the price of duration, the term premium. And this lowers longer term interest rates along the yield curve over and above the initial effect from the policy rate, from the policy rate itself. And then of course it also affects affected credit risk premia. That is something that I think monetary policymakers are a little bit less comfortable about because typically we like to operate on the risk free curve. But it is also true that if you have different ratings and different types of debt sustainability and credit worthiness in the monetary union, there is also the credit risk premium issue. And QE and our LTOs Delta's also worked very positively on compressing some of these credit risk premium. So that was sort of how it worked. And I think it worked in the sense of driving down longer term interest rates, longer term borrowing cost in the economy over and above the direct effect of the policy rates. Unfortunately, it did not really change much the dynamics in inflation. And now of course you can have sort of a debate about counterfactuals. What would have happened had you not, and that is I think also the debate among economists on the, on the effectiveness of QE on inflation. There is an argument to be made that had not gone through all these unconventional monetary policies that maybe inflation would have drifted down even lower. And definitely that risk was there. If you look at inflation expectations that is the holy grail of monetary policymaking is that you definitely want to make sure that inflation expects expectations remain well anchored around your target. As long as they do the cost of disinflation or the cost of real inflation adjustment is much, much, much lower. And at some point inflation expectations, if you measure them through surveys or the five year, five year in financial market, they started also to drift downward. But it is true that in terms of the enormous quantities of monthly purchases, the effect on underlying inflation is difficult to discern in, in the current chart. And why was that the case? Well, and there I believe fiscal is coming in very simple. If this is your equilibrium and monetary policy is being eased, you drive down the interest rate. What of course you hope for is that then fiscal policy will actually also expand, making interest rates positive again and having a positive effect on output. There's no inflation anyway, so inflation risks are very small. Unfortunately, that was not what happened. Fiscal policy continued to be a domestic responsibility. So fiscal policymakers are accountable to national constituency, to national voters, to national conditions. And many, many fiscal policymakers in European countries were actually quite afraid, having seen what happened to Greece, Ireland, Portugal, Spain and potentially even Italy, that they might be next in line, next in the line of fire of financial markets. So governments were actually consolidating. And also the fiscal rules told many governments because there was a lot of debt around to consolidate public finances. And guess what, at that time this was also debate in the Netherlands and I was supporting that because also in the Netherlands, you know, debt had gone to 75% or so. And you want to restore fiscal buffers for hey, if a next shot shock hits. So countries were individually thinking about restoring fiscal buffers. But what I think received insufficient amount of attention was the fact that if you have 19 or 20 countries all individually consolidating their public finances, that the aggregation of that is a euro area fiscal stance which is hugely contractionary. It's not expansionary as we would have hoped for. Unfortunately it's contractionary. And that is probably what happens, driving interest rates even lower, but unfortunately being deflationary. And this was one deflationary factor. This was of course also the time of globalization. And I would call even hyper globalization. What is globalization economically? A slow moving positive supply shock. So ever more goods and services coming to your market at ever lower prices. So the ECB was fighting two exogenous factors. Globalization being deflationary plus fiscal policy being deflationary. And then I think you should also keep in mind that sort of the effectiveness of, of monetary stimulus is Maybe not linear, right? I mean, the lower interest rates are. Well, once borrowing costs are no longer an impediment for whatever spending decision, you can push borrowing costs even lower, but you won't get much bang for the buck in terms of additional spending. Right. This is what Larry Summers called the sort of vertical IS curve. Here the IS has a sort of downward slope in curvature. But you could argue that actually at very low levels of interest rates, that the IS curve at least becomes concave. And that means that lowering interest rates even further when they are already very low at the outset is probably not going to give you much stimulus. And it was clearly not enough to go against the two headwinds that I just mentioned. So what are my two, what sort of my main reflections from this low, this low inflation episode? Well, with increasing concavity of the IS curve near the effective lower bound, monetary policy is finite and it becomes subject to diminishing returns. If you see monetary policy as a restriction, you can make a restriction ever binding, ever more binding. So tightening monetary policy will always have more and more and more effects. But unfortunately, if you ease policy at some point, the restriction is no longer binding. You can ease it even further. But since it was not binding in the first place, it will not give you a lot of effect on spending, on activity, and thereby have, through a Phillips curve, effect on inflation. That's a fact of life that I think we have been aware of. And it's all the more reason to want to stay away from this effective lower bound also in future episodes. But there is in and of itself a piece of good news, at least analytically. When monetary policy is constrained by the lower bound, its effectiveness may be less than at high interest rates. But fortunately fiscal policy is very effective because if interest rates are low, then there is hardly any crowding out effect from fiscal expansion. So if that is the case, then the euro area fiscal stance gains relevance for stabilization policy. And the idea at the outset of sort of the economic monarchy union was that, okay, let the ECB take care of the euro area sort of cycle euro area stabilization policy, and then fiscal policy can sort of take care of national stabilization policy around the euro area average. Well, at the lower bound, unfortunately that's not true. At the lower bound, you may also need euro area fiscal. Unfortunately, the euro area fiscal stance suffers from a lack of ownership. You can create statistically a euro area fiscal stance, but there is very few policymakers that really feel responsible for that fiscal stance, that manage the stance because these policymakers have a domestic, have a national mandate. Unlike ECB members of the Governing Council, they don't have a European mandate. So this lack of ownership of the euro area fiscal stance I think was a problem and might be a problem going forward now with the pandemic, I think we learned that lesson and I think their fiscal policy and monetary policy worked in the same direction. This lesson was learned there. But clearly in the low inflation episode, this was a problem. Now then, my last point. You will have noticed that there is a new chair recently being nominated from the Federal Reserve, Kevin Wash. He has clear views on balance sheet expansion and qe. What I would say I've gone also through all the motions in terms of thinking about qe. Still the full postmortem, I have not yet seen a fully convincing postmortem. If I think about qe, then I think about sort of the first question you have to ask yourself, what objective do you want to achieve? If it is about market stabilization, if it is about bank recapitalization through the back door, QE is very effective and has been very effective. That was the omt, that was the beginning of the pep. If it is about halting a decline in inflation expectations that are walking away from you, from your 2% or below 2% target, probably the announcement effect of QE is effective. It helps you stabilize inflation expectation. But when you sort of try to sell QE as an instrument to lift inflation from 1% to 2%, I think the evidence is much more questionable. The evidence in the sense that we haven't seen that movement taking place. Now, there are good reasons why, and I have tried to explain, but there I do think that the effectiveness is hampered by this realization that at very, very low borrowing costs, doing a lot of stuff to lower borrowing costs even further is just simply not going to give you much bang for the buck. And if you do a full boss mortem, obviously you also have to think about side effects. And all the side effects that have been mentioned in the context of QE I would argue have materialized even weaker discipline on the governments when it came to fiscal consolidation after the crisis. Misallocation leading to mediocre productivity, growth in the real economy on the one hand, and asset price inflation, massive asset price inflation on the other hand. And then thirdly, what about central bank losses, recyclical central bank losses, precisely at the time in which public finances were under stress already. So if you really do a proportionality assessment of qe, I think there are a lot of arguments still on either side. So it's very state contingent. What do you want to achieve what is the environment that you're facing when it comes to the effectiveness of qe. Okay, so that was the, let's say, the period of low interest rates, basically 2013 to 2020. And then we were hit by the pandemic. Then we were hit by the pandemic. And the pandemic was, of course, also an unprecedented shock. One more unprecedented shock. The last episode was completely comparable to the pandemic was the Spanish flu in the 1920s. Well, there was no economic data available or no policymaker experience to learn from. So again, when you think about a pandemic, the first thing you need to do is get your analysis in order. Because what is a pandemic in economic terms? This was the high, I mean, first, this is the sort of when inflation went up. You had the pandemic in 2020, and in 2022, of course, on top of that, you got Russia's barbaric, I would say, invasion of Ukraine, which led to an explosion of energy prices and thereby a second wave of, of inflation. But in terms of analytics, what is a pandemic? This is simple aggregate demand, aggregate supply in the economy. Okay, the black lines are the lines. In the outset. You are at an inflation rate which is still below target, and you get hit by the pandemic, which is both a negative demand shock and a negative supply shock. Negative demand shock, because we were all prohibited from going to restaurants, going to cinemas, going on holidays, travel, etc. That's a negative demand shock. But it was also a negative supply shock because factories had to be closed, international value chains were disrupted, ships were no longer shipping goods across the globe. So it's both the negative demand and a negative supply shock. Now, the interesting thing is that both negative demand and negative supply shocks are negative for activity, but they have opposite effects on inflation. And if inflation is your objective, then you have to come to an assessment. Which of the two shocks will dominate? Well, in 2020 in phase one of the COVID This is basically 2020, this is basically 2021. This is basically 2020. Do okay, in the first phase, we came to the assessment that probably the negative demand shock was more instantaneous, the decline in confidence, the decline in consumption and what have you. Whereas the negative supply shock would be more staggered since firms were still sitting on inventories, etc. And these effects would be slower. That meant that our conclusion was that inflation would even drift even lower. And we were start already starting from a situation where inflation was below target. So it called for additional stimulus that was the pandemic emergency purchase program, it had both a market stabilization effect because spreads were blowing out again. Now, that part of market stabilization, we knew the trick that was fixed very quickly. After two or three months, I think spreads were back at levels where we would like to see them. But of course, the low inflation element of it was much more persistent. But then in phase two, you had the reopening toward the end of 2020. The vaccines were developed. And of course, we knew that the rollout of the vaccines would go with a certain delay, but we also knew that ultimately there would be light at the end of the tunnel and that there would be a reopening. And the reopening is of course, a reverse of, of the initial shock. But then again, we had to think about, okay, what is the speed with which demand will recover? Because reopening is a positive demand shock and a positive supply shock. But again, for sort of to chart the effect on inflation, you have to come to an assessment which of the shocks will dominate in the short run. And again, what appeared to be the case, and what I think we underestimated was that demand recovered much more strongly than supply. So we had serious issues in, let's say, the recovery of international value change. If you remember 2021, the Suez Canal was blocked. The ships were queuing up outside of the harbor of Los Angeles. There were no workers anymore to unload the ships because they had all been fired. So there were all kinds of sort of supply side constraints, supply side bottlenecks, which made it that demand recovered so much stronger than supply that this was actually the first wave of inflation in 2021. There was a second reason why inflation was strong in 2021, and that was, of course, fiscal policy. Because this time around, fiscal authorities have learned the lesson from the earlier episode that I talked about, the low inflation at. So, and this time around, there was a concerted stimulus from both monetary policy and fiscal policy. And that also led to an enormous, enormously strong demand effect. The moment people were allowed to consume again, there was a lot of pent up demand for goods and services, for travel, for going out to dine again and what have you. And that was clearly the first, let's say, bout of inflation in 2021. Now, interestingly, economic theory prescribes that if inflation in your analysis is coming from the fact that there are supply constraints, do you have to react to it or do you look through supply side driven inflation? Well, the question, of course, is how quickly do you think that these bottlenecks that create the inflation will resolve themselves. Monetary policy is only effective with an 18 to 24 month lag. So all issues that generate inflation but you think resolve themselves within an 18 to 24 month horizon. In theory. You don't have to respond to that as a monetary policymaker because whatever you do in terms of response, you're too late because there is a delay in the effectiveness. And your sort of policy reaction will only take effect after the fact, when already the imbalance will have corrected itself. That was the analysis that all monetary policymakers in the world, the Federal Reserve, the Bank of England, the ECB made in the second half of 2021. And with hindsight that was wrong. The transitory narrative was that, okay, these, the Suez Canal, it will not stay blocked forever and you know, firms will rehire workers and then these ships will be unloaded again. And it's unlikely that these kinds of supply chain disruptions, that they will really last for 18 to 24 months and more. That was the assessment at the end of 2021, but I think with hindsight it was wrong. And also what played a role, particularly in Europe, even if you think that this was the right sort of policy conclusion to take, if you look through an initial and first inflation shock, you of course you assume an open risk position that if you're hit by a second shock, you're toast. And that is what happened in Europe with Russia's invasion of Ukraine in 2022. We were already looking through a first wave of inflation coming from the reopening and the fiscal support in 2021. And then we got the energy price explosion in, in 2022 as a consequence of Russia's invasion of Ukraine. And yeah, then you have a combination of a positive demand shock and a negative supply shock. Both of them are strongly inflationary. And that was sort of the start when too high inflation became extremely high inflation. And then we knew that we were of course on the wrong side of things, that we were behind the curve and that we very, very quickly had to catch up with with reality. This is how inflation developed. It's also interesting, of course, in the euro area, energy was the main factor contributing initially to the inflation wave. But then you very quickly discover that a lot of goods naive is non energy industrial goods and services are actually also produced with energy. So in a second round you get sort of increases in the price level of these goods and services as well. Oh, and by the way, if you have a shortage of gas, shortage of energy and energy prices, gas prices went from €20 to €300, maybe you push on these producers in your economy that use a lot of gas and make phone calls and try to sort of convince them to do a little bit less. Well, what are the main producers in your economy? The main energy. The big energy users in the economy. Well, for instance, in the Dutch economy there are two factories that use around 10% of all energy, and these are fertilizer producers. So fertilizer production is hugely energy incentive, energy intense. But if you cut back on fertilizer production, then of course the price of fertilizers goes up. What does the individual farmer do? Use less fertilizer. But then that has a negative impact on agricultural production. So then in the second round, food prices go up. These kinds of dependencies all manifested themselves during the inflation surge. And I must admit that some of these dependencies I was clearly not aware of before the crisis. But this was also clearly something that you learned. And the reason why I think also we should not have looked through the inflation is that at some point it's not the role of the central bank to weigh against the initial shock, but you have to, of course, to come to an assessment. What is the risk that this will lead to second round effects, second round effects through wages. And if you have such a massive loss in purchasing power as sort of the European citizens were suffering from in 2022, for sure you know that there will be strong, strong second round effects through wages. It's a negative terms of trade shock, usually because we have these staggered wage contracts in the euro area. Labor takes the first hit because wages were still fixed in terms of the percentages that were agreed before the increase in energy prices. But then after a while, of course, trade unions start regroup themselves and they want to be compensated for the loss in purchasing power and that leads to second round, third round effect, etc. And particularly services inflation is very, very wage inflation sensitive. Services are wage intense. So services inflation is very much dependent on what happens, what happens to wages. Now then we very quickly had to phase out our purchase program because mind you, when inflation started to go up, we were still purchasing 80, 90, 100 billion assets bonds per month. And you can't cut back immediately from one month to the other. You have to sort of also take into account of the possible financial instability effects that that might bring to bond markets. So we had to gradually unwind the monthly purchases. And after we had unwound the monthly purchases in the middle of 2022, we finally started to hike interest rates. In 14 months we went from minus 0.5 to 4%. But what is interesting, if you look at 10 year yields, 10 year yields already anticipated the increase in short rates. So the 10 year yields already started to increase around the turn of the year 2122. We only did the first rate hike in July 22. So here you see the forward looking nature of financial markets. That policy was already tightened before we even did the first rate hike, purely on the expectation of US hiking rates in the future. And that of course led to some weakening of economic activity. But I must also say that I would have been very, very much surprised how mild the impact has been of the monetary policy tightening. If you had told me before beforehand, you go from minus 0.5 to 400 basis points within 14 months. First of all, I would have thought that something might break in the financial sector because this is a massive shock to the financial system. But really nothing happened. I mean, there were a couple of second tier banks in the us. There was Credit Suisse, but that was a sort of idiosyncratic case. But clearly the financial reform agenda that we rolled out after the global financial crisis had turned the banks from shock amplifiers into shock absorbers. That was the good news. And also the impact on the real economy was relatively mild. If you compare that to the 1970s when we also had a big energy shock. At that time unemployment sort of went up to 10% and the misery index was very high. The amount of unemployment that you need to bring inflation back by 1% or the so called misery index. Well, in essence, the labor market continued to be strong during the entire tightening phase of monetary policy. And there was no run up of unemployment at all. So it was almost like you disinflated without any economic cost. There was a mild sort of clawback of economic growth, but it was not really a recession. And unemployment stayed where it was and the labor market continued to be very tight. Now why was the disinflation this time around so much more sort of less painful than it was in the 1970s in my view. That of course had a lot to do with the credibility of monetary policy and the independence of central banks. And that is not a self sort of serving argument that as a central banker I like to be independent and I like to do my work independently. Of course I do. But the real reason for central bank independence is that it significantly lowers the cost of disinflation. Because if a central bank is independent and the central bank is seen to be credible in the pursuit of price stability, you get a much better anchoring of inflation expectations. We watched inflation expectations throughout the entire inflation surge very, very closely. So every meeting we looked at the 5 year, 5 year, we looked at the survey, etc. The highest reading of longer term inflation that we saw during this Entire episode was 2.6. That is very mild. If you looked at actual inflation was going up above 10%. Core inflation was going up to almost 6%. Nonetheless, inflation expectations continue to be very well anchored. Had you done the same exercise in the 1970s, inflation expectations were through the roof. There was a total lack of credibility of monetary policy and therefore the central bank had to apply a shock therapy to the economy to bring inflation back to target. Had the Volcker shock in the, in the US that also spilled over to Europe. So central bank independence credibility of monetary policy is really key because it's significantly lowers the cost of, of disinflation. We disinflated basically in four years. If you. In 2021 we first went through our, let's say the 2% target. We were roughly back at 2% in 2025. So we had a four year period of above target inflation. Now with sort of voluntary transmission typically taking the lacks of monetary transmission typically take 18 to 24 months, you can say is that not a little bit a stretch of the definition of the medium term? Could you not have sort of more aggressively bought inflation back? Maybe we could, but then the cost of the real economy in my view would have been much, much higher. So I'm quite comfortable with sort of the balance that we tried to strike here. We accepted that we would need a longer definition of the medium term over which we strive to. We bring inflation always back to 2%. Typically when you talk about, when you hear a central bank talk about the medium term, you think about sort of 18 to 24 months here we deliberately, we knew that this problem was not going to be solved in, in two years time. With hindsight, it took us four years. I think that is a pretty decent track record in terms of. Of being balanced. And then from 2023 onward we could also gradually bring rates back to neutral. Whereas neutral the big question. Well, Ricardo is much better at that question, I think than I am. But I do think that there is a fair bit of consensus that neutral is somewhere. Oh, sorry. That neutral is somewhere in a band around 2% and that is exactly where policy rates are today and also are expected to remain if you look at and both the surveys as well as the market based indicators of future policy rates. So it looks like we have found a decent equilibrium. So last slide, what are my main takeaways from this high inflation episode? Well, first of all, if you are hit, if the economy is hit by a shock that impacts both demand and supply, demand typically adjust much faster density. And this is also a relevant observation. If you think about trade wars, trade wars are also negative demand, negative supply chain. The initial shock is always the confidence shock, the uncertainty that it creates that is instantaneous, that is immediately there. But the supply side of the economy takes, typically takes much longer to adjust. And this may also be the case with respect to the sort of trade tensions that are there. We will get some reconfiguration of global value change, but we haven't seen that much yet. Is that evidence of the fact that maybe the effects will be milder than we think or is there still some something in the pipeline? We just don't know. But I do think that this first lesson should be taken to heart if you have these sort of combined, combined shocks. And secondly, the theory says that okay, if you get a negative supply shock, maybe you should try to look through it. Well, you should be very careful with that. I think you should be mindful of non linearities and you should definitely as a central bank always weigh against second round effect. So even if it's a negative supply shock that creates the inflation, if the inflation is sufficiently sizable, you know that there will be catch up, that you know that there will be second round effects. And then you clearly cannot look through these supply shops. And then finally I didn't talk about it a lot but unfortunately we also found out in 2223 that our models did not really help us in terms of projecting what happened. One of the reasons why we were so late with tightening monetary policy in 2021 was that our models continued to provide us with projections that would neatly go back to 2% in one and a half years. So our staff was telling us you don't have to do anything because yeah, the model showed 2% at the end of the projection horizon. And I think we really started changing course on monetary policy when at some point we, we agreed at the Governing Council table that maybe we should shift our attention away from the projections and just try to focus at gauges of what is the underlying rate of inflation that we're actually witnessing. What are the trends that we're seeing and what are these trends portending to for where we think inflation is, is going to go. Now does it mean that I'm a model basher? No, I'm not. But I think any model can only be as good and as representative as the data and the shocks that go into it. And if you have a model that doesn't include a pandemic and a war in the calibration of the model and you have to gauge the inflation effects of a pandemic and a war, well then maybe that model is not the best tool to make that kind of analysis. So temporarily our model simply didn't work because we simply didn't have that in the representative data that went into the calibration. From 24 onwards, the model started sort of when the direct effects of these shocks started to wane, the model performance improved again. And today I think there's a high degree of comfort reliability again with the staff projections within the ecb. But temporarily we have to put that on hold. Yeah. And then the final conclusion. I think I already dwelled upon that quite a bit. It is crucial for well anchored inflation expectations that the central bank is actually independent and can be seen to take the measures that are needed to bring inflation back to target. If that is the case, it can do so at a much lower economic and social cost to society. Okay, that was basically my weather.
- [56:10]
B
Thank you so much. This was really terrific. I think I speak when the center for Macroeconomics and Rocas Capital Management spoke about organizing a lecture. This is exactly what we had in mind. Something that both looked at an experience of the past, but with really a lot of very important lessons of what I think are going to be the main issues in central banking. Whether they are the lender of last resort, the quantitative easing and the anchorage expectations as well. It's not a think of model. So this could not have been more terrific at this stage. I have some questions, but I do have the privilege of having dinner with you afterwards where I'll ask them. And so given the time, I'm going to open the floor to the audience. A few notes please. If you're online, type short questions. I do get them here and I will ask them. If you're in the audience, please put your hand up and I will call on some of you. Do not start speaking until the microphone gets to you so that everyone can hear you and so on. And do start by just saying your name and affiliation, especially if you're affiliated with the LIC also because it makes it easy for us. And I'm going to collect three or so questions and then open up to Julian. So I'm going to start with this gentleman here and then the lady there.
- [57:23]
D
Thank you very much, Mr. Knott. Just to state my affiliation, my name is Levante Carreras. I'm Central Banking's Europe correspondent, so I'm the annoying journalist in the crowd. Sorry about that. My question, I have two questions. About a year ago you, you said that you wanted to see international monetary diplomacy. How have your views evolved since then and what would that look like? And the second question is, do you think QE would have been as effective had there not been an active swap line between the fed and the ECB during the 2010s? Thank you very much lady.
- [57:56]
B
There the other ones who had their hand up.
- [57:59]
A
Hi, I'm interrupting this event to tell you about another awesome LSE podcast that we think you'd enjoy. Lseiq asks social scientists and other experts to answer one intelligent question like why do people believe in conspiracy theories? Or can we afford the super rich? Come check us out. Just search for lseiq wherever you get your podcasts. Now back to the event.
- [58:27]
E
Hi, my name is Khunsi, I'm in my second year of economics at the LLC and I'm also president of LLC Central Banking Society. My question is looking at sovereign bond yields before and after the whatever it takes speech, would you say expectations management mattered a lot more than actual balance sheet expansion?
- [58:43]
B
Okay, and then the microphone is making its way, but it will make it Lorenzo.
- [58:49]
F
Lorenzo Codonio, LSE and lcma. So thank you very much for the fascinating overview of the past 14 years and it was very entertaining and very instructing I would say. I have a very simple question. You mentioned the changes at the Fed. I don't want you to speculate what's going to happen because you won't answer to me, so I refrain from doing it. But suppose that indeed, at least in the view of financial markets, there is an impact on the credibility and the independence of, of the Fed. You might expect some, you know, say factors such as a weakening of the currency or an increase in inflation risk premia or you know, something else. And I wonder whether you can put a weight on what you would expect in case of and and we'll would be the best possible answer by the ECB fasting.
- [59:55]
B
So go ahead.
- [59:56]
C
Well, a couple of quite far ranging questions. First of all, I mean on monetary diplomacy, I do think I didn't pay an awful lot of attention. Now this was very much euro area focused on the international setting. But of course monetary policy always takes place in an international context. I mean there are spillovers in bond markets. There are, there is always the currency that that sort of absorbs. If there are differences in monetary policy between different regions, etc. So I do think that it is, and it continues to be crucially important that we continue to have an open dialogue at the global level and where I am, like you, probably a bit more pessimistic on the prospect of international cooperation than I was, let's say, a couple of years ago. I would really hope, and also to some extent be a bit positive even in an expectation that that kind of cooperation we will continue to maintain in the international central banking community. Because the international central banking community is a bit of a, A brotherhood. Yeah. Unfortunately, gender, it's not gender neutral. It's more brotherhood than sisterhood. But it is, I think, a community where there is high trust among officials. We're a little bit farther away from the political processes, the recriminations and what have you. But for me, it is crucially important for an effective conduct of monetary policy that there is coordination between, let's say, the large blocs of the world. And, and I'm also confident that under the new Fed leadership that that will continue to be the case. Your second question, I find I found a bit more difficult where you were getting at. I mean, you would QE have been effective without a swap line, Is that. Well, I mean, I don't know because again, there was, There were swap lines in place. I do know that a lot of investors that sold us their bonds were actually the foreign investors. So there was the, there was the exchange rate effect, but I'm not aware that this has given rise to very specific sort of liquidity crunches at European financial institutions for which then we would have activate, would have had to activate the swap line. I do think swap lines are crucially important, let there be no mistake about it. But I cannot, I do not see a direct relationship with the effectiveness ofQE on OMT. Yes, I think it was about expectations management. If you are a market participant and the central bank expresses the willingness to, to go against you and uses the word infinite, I think you know what to do as a marketplace. There's only one way to go. And that was the brilliance, I think, of the intervention because it was credible. Not a single euro had to be spent on it. And I think the same is true for TPI in 2022. That also had a very quick spread moderating effect. And yes, of course, you need to make a credible pledge and that means that you need to have an instrument. And that was a little bit awkward with the. Whatever it takes. There was a statement first and the instrument still had to be designed. But what was enough was that there was A willingness to design the instrument and that very quickly. Also the entire governing council, although some of us were a little bit surprised, but that the entire Governing Council coalesced behind let's say the pledge of Mario Draghi very quickly. And that I think helped build the credibility. And when the instrument was finally sort of adopted by the Governor Council, we were already in October. Well by then it didn't have to be activated anymore because the expectation of the instrument becoming active had already produced the effects that were, that were needed. But this is about financial market markets, this is about expectations, management as you say it. And if you can make a credible pledge as a central bank that you're willing to go in in principle in unlimited amounts, there will be nobody speculating against you. So the sort of if, yeah, a bit of a hypothetical question, right, If Fed credibility were to be undermined, etc. I do think that the choice of, of, of Kevin Warsh, I know him as an excellent sort of technocrats, competent colleague etc. And relative orthodox central banker. So I don't think that many of the fears that were in the market before will, will materialize. So let me say that up front. But if credibility was to be on the mind I would think that the prime, the prime instrument where you would see it is probably longer term interest rates. It's probably that the inflation risk premia and inflation expectations. Because on the dollar, yes you could see also a weakening there. But that would probably be a very, very slow moving process because the dollar is still the international reserve currency that is widely being used. Capital markets in the US are so much deeper and more liquid than they are in the euro area. The renminbi is not yet convertible so there's really not much alternative yet to the international role of the dollar. So that will probably cushion I think any effect of undermining credibility of the Fed on the dollar. But I don't think that there will be much cushioning when it comes to inflation expectations and longer term interest rates that will go up. If that were to be the case and it has actually gone up to some extent when there were sort of flare ups of this fear. Very good.
- [66:04]
B
Let me go upstairs and I'm gonna have this gentleman here first. I don't know where the microphones are. Start there and then. Okay, fine, I'll go to the gentleman there with a hat and before the microphones get there I'll ask the first question from the online. So Jamal from Liverpool asks globalization, you mentioned the extent to which there might have been a disinflationary force during stage two. The second part, to the extent that we maybe have a retreat of globalization, the future, is that inflationary or not then?
- [66:36]
C
Yeah, very good question. Let me collect. Okay. For three.
- [66:39]
G
Sorry, My name is Yoav. I'm a Sigform student here in London. At the very start, you said that the things you learned in university, like during your PhD in monetary economics, were not of specific use to you in your career and in your role. What did your pursuit of academia do to really benefit your career? And if you could go back in time, would you have still, you know, dedicated years of your life?
- [67:05]
C
Yes.
- [67:06]
G
No, no, I'm not, I'm not trying to like. Yeah, it's not personal, but thank you. Yeah, that's the question.
- [67:12]
C
Question. Yeah. Yes.
- [67:14]
G
Is it working? Yeah. Name is Claus van Student here. I had the question. You kept talking a lot about independence of the central bank. And of course we know that's under threat now with the Fed in the US under Trump, what do you think the main risks are in the current kind of landscape in case Trump would get more power over it in the us?
- [67:41]
C
Yep. Okay.
- [67:42]
B
As sure as possible, we can do another round.
- [67:45]
C
Yeah. Okay. I do think that actually if you believe that globalization is a slow grinding, positive supply shock, then yes, de globalization is the reverse. It's probably wherever you erect barriers to the free flow of goods and services, you're increasing costs in the system, you're building more resilience. But the resilience is costly. It goes at the expense of efficiency. So, yes, I do believe that de globalization in and of itself is inflationary. And it is actually one of the reasons that I always mention why at this moment I'm not so afraid that we will move back into this low inflation equilibrium. I mean, we have a symmetric 2% target. But it may well be that in a de globalization environment environment, you will approach the target more often from above than from below. Of course, there are many, many more factors that will go into the inflation outlook. But for me, this is one of the factors. Why I don't directly think that we will very quickly re enter an ELB episode again now on academia. What I meant is that in particular, effective lower bound issues did not feature very prominently. Instabilities in the financial system did not feature very prominently in my macro models. Usually the financial system in most of the macro models is the letter R for interest rate. And that's basically it. And of course, I mean, the financial crisis taught us that sort of financial instability can have huge deflationary Effects huge macroeconomic. So the macro financial nexus I think should be given a lot more development also in academic research. Now luckily my PhD was about the effect of excessive budget deficits on interest rates. So that was still at least something that also manifested itself during the crisis. Because clearly lax fiscal policy was one of the reasons why we had this fragmentation on interest rates and on bond yields in the, in the euro area. But okay, don't overdo it, don't overtake it. And then finally, what will happen in the US if central bank credibility was to be seriously undermined? Well again, I think that would lead to higher bond yields, higher inflation expectations, lower credibility, higher inflation risk premia. So there would be a price to be paid for that. That price would predominantly of course be paid by U.S. borrowers. But since global capital markets are interconnected quite a bit, I think there would be some overflow also on longer term interest rates elsewhere in the world. I must also say that if your question is about could a similar threat to central bank independence also occur in Europe? I think much more complicated. So luckily I think the ECB enjoys probably the best legal protection against undermining central bank independence. The Maastricht Treaty is very, very strong on independence, has all kinds of safeguards. Whereas in the US central bank independence traditionally was not so much based on legal text, it was more based on conventions, on sort of how things had sort of grown during the decades. But unfortunately it didn't have a sound, a legal basis, as is the case in the euro area. So that spillover I'm not immediately afraid of.
- [71:22]
B
Very good. And now I'm going to go to the gentleman there with the glasses in the middle. Yep, exactly. And I'll take a lady there at the end. And those will be the last two questions.
- [71:31]
C
Sorry.
- [71:31]
H
Hi, Tim Williams, Very nice seeing you again. You nicely started out by sketching the challenges of setting monetary policy in an incomplete monetary union, as a result of which it can sometimes fall to the central bank, in this case the ecb, to offer some kind of EC European wide safe assets. Is that a situation that is sustainable in the long run, do you think? Or do you think that at some point a move towards something ally euro bonds is kind of inevitable in this situation?
- [72:05]
C
Well, I think if you let me.
- [72:06]
B
Just get the second one.
- [72:09]
C
Sorry, I'm a lady at the end.
- [72:11]
E
Hello, my name is Marina, I'm doing a PhD in economics at UCL. You mentioned one of the ways of fighting some of the crises last the last decade was for more EU fiscal room and I Was wondering what would be your idea about it? We know the ex governor of ECB has an idea, but we'd like to hear yours.
- [72:37]
C
So I had two questions correct. Okay.
- [72:39]
B
Yeah, because we're over time.
- [72:40]
C
I mean the production of safe assets obviously is something for elected officials, right? I mean they have to decide how to finance public goods, the mix of taxation versus debt instruments, etc. Etc. But what I do believe is that governments are in the business of producing public goods and many of the public goods that citizens expect from their governments can today be supplied more effectively and more efficiently at the European level than at the national level. So think about security, think about fighting climate change, think about trade policy, think about high speed railway networks and what have you. And if you accept that, then I think you should also accept that these public goods will have to be jointly financed. And in doing so, I think it's exactly the same trade offs than you have with national public goods between national taxation and national debt issuance. Also at the European level, you should think about sort of what are the revenues that the EU can generate. Well, of course you have the national contributions into the budget, but that I think is a little bit, I mean it creates an atmosphere that Europe in the national political debates is only about the costs. Because if you're a national politician, the only thing, I mean you're not responsible for the European successes, but you have to pay into the European budget. So that always narrows the national debate on Europe, on costs. And unfortunately in my country that is very much the case. So I don't think that funding the EU in the long term by only having sort of national contributions into an EU budget will work from a political side. I think it will gradually undermine the political acceptance of European integration as it did in this country, by the way, and we know the end result of that. So, but, and then I would say okay, then you leave, you have two options left, either European taxes, European taxation, or own funds as they call it, or European debt instruments. And then I would simply take a rational position there. If some of these public goods are there and also benefit future generations, why would you not borrow against them? And that to me is a, is an avenue into having more euro area common debt and therefore also more safe assets into the financial system. Alternative proposals that you take a sliver of all the national outstanding debts, you pull them into a sort of SPV and you start issuing euro bonds against it. Those I doubt will ever politically fly because these are sort of national debts that were created with very weak fiscal coordination under national responsibilities. And I don't think you can ask your domestic taxpayers to shoulder debts that were originated in other countries completely outside your control and outside your coordination. But going forward, financing European public goods, for me, is the sort of the pathway into creating more safe assets. Very good. Very good.
- [75:49]
B
So, with that in mind, let me again thank Claes, I think, both in my personal behalf, but also on behalf of Rogan's Capital Management and the center for Macroeconomics for what has been a really terrific hour, hour and 20 minutes. And thank you so much.
- [76:15]
A
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