Wall Street Week - Full Show (11/05/2021)
Politics from U.S. elections pros from COP 26 and a poetry haiku from the Federal Reserve. This is one Wall Street week. I'm David Westin. This week former Bank of England Governor Mark CARNEY on enlisting the banks to fight climate change. They see a lot of offensive opportunities and always more to come in the future. Former Treasury Secretary Larry Summers on the Fed's calm
attitude toward inflation. I think we're taking a real risk that we're setting up for a very serious problem. And Lazard CEO Ken Jacobs on how his business is changing because of ESG on the asset management side of the business. Absolutely. That's that's changing rapidly.
Just about everyone got their licks in this week from US voters telling the Democratic Party to think again. As described graphically by Democratic strategist Howard Wolfson. I mean it was a bloodbath to European Commission President von der Leyen telling the world it needs to pick up the pace on climate action. We all must speed up our race to net zero. We're running out of time. But in the end it all came down once again to the Federal Reserve and its chair Jay Powell who went out of his way to calm the markets announcing finally that the Fed would begin to taper its bond buying program but that it is in no rush to raise rates or a decision today to begin tapering our asset purchases.
Didn't does not imply any direct signal regarding our interest rate policy. We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate. When we heard from Chair Powell on Wednesday he said our monetary policy ultimately depends on the labor market. And then
on Friday we got surprisingly strong numbers for jobs growth adding over 530000 in October and revising up the numbers for September to over 300000. The markets took the week overall as pointing to risk. The S&P was up 2 percent. The fifth week in a row that's the longest streak in over a year. And the Nasdaq rose even more up 3 percent. But all that equity action didn't hurt the demand for bonds as the yield on the 10 year fell 6 basis points to end under one point four or five percent. To give us an investors perspective on all this we welcome now. If Sonny Beschloss she's founder and CEO of Rock Creek. So Sunny great to have you back with as always is so give us a sense it sounds like right now we can have our cake and eat it too. It's great to be with you today David. It was really interesting because what Chairman Powers said was exactly what the markets
expected. Right. And he said what we have been waiting for a long time with the 15 billion tapering every month. At the same time he made it quite clear that other market expectation that when tapering is done in July we would probably start having the rate increases may or may not be the case. So I think in terms of easing our case absolutely we can continue having growth. We can you know as you said we had the yield curve steep and we had the markets do not up six times in a row. That was quite exceptional. But I think what a lot of people did not maybe pit a lot of attention to is what happened
over in the U.K. with the Bank of England which has I think some relevance to what Chairman Powell may be having in mind as we get into next year. And that was the markets expected interest rates to be increased in the U.K. and that did not happen this week. And they were a lot of people lost their shirt. And I think what term and powerless thing is he does see the one condition of of inflation where he expected it to be which is more than 2 percent. And it is. And there are lots of lots of conversations whether it's going to be higher or not by a lot because of the supply chain problems. But more importantly he
and I think in the past Janet Yellen our two Fed chairman who have really really talked about not just the numbers that we see like the ones you mentioned the five hundred thirty thousand today which by the way had two hundred thousand women in it. And that's very important because women are starting to go back as schools are opening. But a lot of people are still sitting on the sidelines and he talks about maximizing employment. So he's looking at it much more from maximizing employment looking at
lots of different dots. And also we should really watch what they're saying much more carefully. Just like I think we were surprised by UK if I may if you let me. I just was you know reminded of that Stan Fischer coat because he gave this great lecture yesterday at M.I.T. And Stan who was a former Fed vice chair once said that central bankers are it's a dangerous place to be a central banker because they can print money. But he also said central banking is something like a pointless painting. You
have all those dots of data and you're trying to figure out what on earth is the picture. And I think that is the problem. And if you tell us from the sidelines it points to participation numbers which are stubbornly not going up particularly well. But if you're an investor it's not just the yield that's the real yield. You have to take into account inflation. And one of the questions I have is we had Chair Paul masterfully keep the markets nice and calm. Is that really what he wants to do. Is he
going to fight inflation by doing that. Because actually financial conditions actually loosened rather than tightened. What he said he would taper. They did and I think he will be much more careful. But again this focus on what he has said very clearly. Employment I think is sort of really really up there for him. And so he will be watching inflation at the same time. But if we do think that with this supply chain problems that are there we will have less
of a problem. One because growth rates will be lower next year in the US and the rest of the world into in Europe and in China. You may not have as big a problem. And so your real yields which is what you're talking about may not may may actually do better because inflation may start going the other way around. So I think that's sort of the way he is implying his thinking is. And that's the way we actually think at Rock Creek do so. So as a practical matter I hear from a lot of people it's just hard to find yield period because there's so much money in the marketplace at this point. We had of course the COP 26 talks that you were ever involved in over in Glasgow this week. And I wonder as an investor what are the opportunities there with
climate. Because I hear a lot of lofty goals being announced at the same time. I'm not exactly sure how it's translate into the real world of investing. By the way at one point we should mention is I think maybe there have been others in the past. I don't know about Jay Powell may be the first Fed chairman who in before he joined the Fed in his
earlier role in the Fed was actually investing in sustainable sustainable climate related investments. So. So I think it's a point that he doesn't talk about too much. But interesting in terms of in terms of investments I think one ought to look at the positive. Obviously there is the most important point that has been highlighted in COP 20 states which is finance is key asset allocation is key. There is so much assets sitting on the sidelines right now as you said earning negative returns in fixed income. So if you have something if you can move that those assets to positive returns and in a sustainable economy will be very very helpful to everybody. And you know we Dry Creek have signed up with a
number of alliances in particular. But as you said it's not signing up and committing. That matters is actually what you're going to do. And we saw with the Oxfam report out right now the 1 percent top in most wealthy people are are responsible for more than 16 percent of the emissions. And that number is expected to go up in the next 10 20 years. So going back I'm positive about opportunities. I'm really concerned it's going to be much much slower. David in terms of putting them into action and maybe making people think they have to get to net zero without giving them a transition plan of how you get to net zero is a big problem which nobody is really talking about. I guess one of my questions about it is if I can put it this way when we talk to all that about all capital going into green investing is it a push or pull. And by that I mean
the opportunity so attractive that people will just be idiots not to go into it. It's just so attractive. Or do they need a push whether from governments or otherwise. I think there is definitely a lot getting done as we speak on the technology and creating new new batteries that will have longer life in a more storage and also potentially other forms of energy. So there is that going on and if you know as we've seen those could have very very high rates of return. In fact David some of the highest return investments in the last twelve months where in venture in in clean energy. So there's certainly a return perspective that we should not forget. At the same time solar energy is very cheap now. So if you invest in transmission
or development in solar the returns are not going to be high. So the question is so long as the positive is it higher than the negative returns that many many bondholders are holding. And can the financial system create tools that allow people to go into it. So going back to your point I think it's a pool and a push. The only thing that I have found has changed in the last year
but particularly the last few weeks around COP 26 is a lot of universities and endowments have changed their tune and they are truly looking at how they can improve the diamond management which was very far behind in terms of climate but also bringing in their scientists and and you know people who are running the university operationally to see how you run a university. On net zero. And they did. They still are looking for answers. So I think a lot of work has to be done on implementation not just pledges. Just very briefly here at the end that's a can we get past energy to things like green steel and green concrete. I think there is hope. I think we will need a lot of investments going into those areas. I'm very optimistic about those areas. I've seen some research going into it that will make it positive. So. So you may be asking the wrong person. Are you
disappointed we didn't do it with coal. You know I think it's really disappointing that the US in particular did not sign up for that. And while we had a lot of smaller countries like Vietnam sign up and Indonesia sign up you had you had the US not sign up. So that's you know alongside of course China we did not even appear at the meetings is very very upsetting to the market. We all know there's a shortage of it as we speak but need to to make find jobs for the full people producing call. So I'm working on some work left for Cup 27. OK. Thanks so much TFSA specialist. She's Rock Creek Group founder and CEO. Coming up we'll talk with former Bank of England Governor Mark
CARNEY about his project to enlist financial institutions in the quest to slow global warming. In many respects it's a watershed. Wall Street and in the global financial sector has stood up and said look look look capital behind these solutions. This is Wall Street week on Bloomberg. This is Wall Street week. I'm David Westin the cop 26 meetings were dominated of course by heads of state this week but a lot of the big news came on the financial sector and a huge effort is the financial industry to really support the goals of zero emissions. Those efforts were led by Mark CARNEY the former governor of the Bank of England. He's now vice chair of
Brookfield Asset Management and as important a special envoy the United Nations. So welcome now. Mark CARNEY to Wall Street. Thank you so much for being with us today. Start with exactly how the world changed because of those huge initiatives. I understand you have 450 institutions so like one hundred and thirty trillion dollars and assets represented. But
if I work at one of those institutions an asset management firm or a bank. How are decisions I make today different from the ones I made yesterday. Well first off David thank you for having me on. You know I love the show. You're an absolute institution and I'm going to take it if you will from a Wall Street perspective and what it's going to mean for people working there. And a number of them are already doing this but it's going to go across the organization is they're going to look when they're making a loan or they're making an investment or buying a bond even trading a derivative. They're going to start taking into account the underlying credit the underlying company whereas it on the transition towards net zero because after all what we're here in Glasgow the objective of one hundred ninety five countries is to get to net zero greenhouse gas emissions. And so this is going to become a competitive advantage for companies that are moving faster
towards that companies that are part of the solution. And it's going to be a challenge for those companies who have it. So this lens on climate and climate competitiveness if you will is going to be applied across virtually all assets. And that's going to be part of the skill set of the individuals who are making those portfolio decisions. So you know this industry so terribly well distinguish if you would defense from offense. And this is what I mean by that. It's one thing to say if I'm working for a bank or an asset management firm I'm going to really shy away from some of the fossil fuel companies. I understand that. I call that defense. But does this encourage companies to go on the offense for example to invest in green steel. Look David absolutely. And that's the big shift here. I think
that we've been aware of the risks around climate. And the most obvious ones are you know when New York gets hit by extreme weather event and there's big property losses or supply chains are disrupted by by another event on the other side of the world. And we have those effects and we have to manage those. But there are huge huge opportunities in being part of the solution. And so the offense here is very very broad. It of course it includes and you know in my professional life I do a lot of this at Brookfield when largest renewable producers in the world it included building out wind solar hydro eventually hydrogen and other technologies that produce electricity with no emissions and or part of very much central to our future. But just as interesting and really more valuable is going to
companies that have high emissions today. You rightly mentioned the steel industry or the auto industry or the cement industry the building industry commercial real estate others and helping them get emissions down. Now it takes a lot of capital in order to do that but it's going to pay off in terms of a huge amount of value and so on the range of solutions and investment opportunities here. You have technologies that are just going to take existing activities of whether it's H fact heating
ventilation cooling in buildings or grid optimization for electricity grid and just get the emissions down from existing plant. Next to that he is putting in place new technologies new investment that itself gets emissions much more dramatically down and then farther out. The risk spectrum are those technologies that are very much part of. I referenced green hydrogen a moment ago and that would be a classic example. The more extreme breakthrough technologies put it in venture capital cap our technologies around for example direct air capture or sustainable aviation fuels. So the whole range of the investment spectrum is available. And look your question is very on point. This is much much more about offense. It's much much more about getting capital to solution. And candidly that's why
we needs in like one hundred and thirty trillion dollars to be focused on addressing this issue. So speak to those investors as you describe this what we're calling offense investing in things like green steel and the like. Do investors have to get used to lower returns. As a practical matter. No I don't think so and certainly not on a risk adjusted basis. One of the things now for a moment David I must speak defense unfortunately. Which is one thing investors increasingly will
need to do is think about terminal value. Think about where certain assets are going to lose value and potentially lose value quite rapidly because they're not decarbonising fast enough or they're just not suited for a low and zero carbon economy. You referenced part of the energy sector fossil fuels. There's elements of that which will not either or certainly can't be there if we're going to get to where we need to go. So investors need to look at that. Mark you are part of your spearheading if I could put it that way a major transformation and transmission of the light switch. I can't think of a like in history frankly. You can't have that big a transformation without some costs along the way. There's no such thing as a
free lunch. You say perhaps returns will not be reduced in this area. What about costs. Because as we make this transition there's got to be disruption somewhere. Yeah. Look David they're transforming the energy system. You know it's better to start early in order to have a smooth transition but it's a you know there's a. But we haven't started early. Let's let's be candid. We've left this very light certainly for the one and a half degree objective. So there needs to be a very rapid ramp up in renewable power. But at the same time we need to get it right on the fossil fuel side and have those bridge fuels that are necessary in order to keep the lights on literally and keep the industry humming as as as as we build up the other side. And there's lots of ways to get that
wrong to have too little too early and and have the type of volatility we've seen in energy markets. That's one risk in terms of a bubble. You know another risk is look in terms of this decade. There is a very large number of highly economic technologies where the real issue too is just rolling it out at scale slightly easier said than done. You got to get planning
permission. You need the right companies etc. But it's not yet. It's not technology risk for what we need to do to get emissions down sharply this decade. In the 20 30s it is some technology risk. You know there will be a lot of bets on I suspect on elements of hydrogen that don't work out. There will be some big venture capital effectively
bets on capturing carbon from the air. Direct your capture of carbon that don't work out is as the nature of any RTS. So there will be there will be volatility. And you're right to emphasize the scale of it although last point relative to doing nothing which is more or less the strategy the world has been pursuing up until recently these bumps are nothing compared to the costs that would come. They are really powerful point. Thank you so much for Mark CARNEY. He is the vice chair of Warfield Asset Management. Coming up we take a look at the week ahead on global Wall Street. This is Wall Street week on Bloomberg.
This is Wall Street week. I'm David Westin. It's time now to take a look at what's coming up next week on global Wall Street. Well David this week the spotlight is back on China tech ten cent earnings they could confirm that the worst is over. Of the government's crackdown. Meanwhile Ali Baba puts on its singles day event. Now this is bigger than Black Friday and Cyber Monday combined. The festival is theatrical though looking to be a little bit more subdued. This year is still in China. There are
more debt deadlines facing property developer Eva Grant. Plus we'll have the latest from the APEC leaders summit to Dani Burger in London now. Thanks Annabel. Well it's the second week of the Cop 26 climate conference in Glasgow. They'll be wrapping up negotiations on Friday. They'll likely release a text of those negotiations where we're expecting them to reaffirm some of the Paris agreement climate goals. We also have meetings in Brussels next week from both Ecofin and Euro group meetings. Then there's a large private equity conference in Berlin that takes place all next week. We'll have all of the typical private equity giants fan Bloomberg will be live on the ground for it. It's also a
another week of many earnings. You'll have about one sixth of the stock 600 in Europe reporting next week. It includes pharma giants like Buyer and AstraZeneca as well as some insurance companies like all the arts and music created. Now let's get over to Romaine Bostick in New York. Romain. Thanks Danny. A major milestone ahead that could add fuel to the economy. The United States will open its borders to vaccinated foreign travelers on November 8 marking the biggest easing the
travel restrictions imposed during the Covid crisis. Elsewhere there is some economic data to keep an eye on including inflation numbers. The average estimate of economists surveyed by Bloomberg sees the fastest year over year increase in prices paid by U.S. consumers since 1991. I'm Romaine Bostick in New York. Back to you David.
Thanks to Annabel Danny and Romain. Coming up how do all those zero emissions goals translate into real actions by the people who are doing the deals and managing the assets. We'll talk with the chairman and CEO of Lazard Frere Ken Jacobs. I'd say most civic asset management is investing defensively around and around ESG and I think that's going to shift over time. This is Wall Street week on Bloomberg. Zero carbon emissions. It was all the talk this week at the COP 26 meetings in Glasgow with European Commission President von
der Lyon urging faster action. We all must speed up our race to net zero. We're running out of time. And President Biden saying the United States will lead the way. The United States is not only back at the table but hopefully lead by the power of our example. My administration is working overtime to show that our climate commitment is action not words. But if we're going to
have any hope of making real progress on emissions it will take more than governments will take a massive effort of the private sector. Bank of America's Brian Moynihan says banks like his are feeling the pressure a lot of pressure on banks because our clients are demanding this. You know our investors are demanding this. The politicians the world's demanding this. And Luke Ellis of the Man Group says that with more guidance the private sector and especially hedge funds like his can help get us where we need to go. The clearer the roadmap we can get from politicians about what they're going to do the more that the private capital
markets can actually make the transition happen in the end. There's a lot of good words are going to come from government and regulation is going to come from government. But a lot of the capital that's required to make the transitions has to come from the private market. Lazard for is on the frontlines in arranging acquisitions and mergers also managing nearly 300 billion dollars in assets. So when it comes to figure out how the lofty goals of COP 26 may translate to the real world there's nobody better than Lazard. Frank. We're joined now by the chairman and CEO tsar for years
Mr. Ken Jacobs. Welcome to Wall Street. Nice to have you here. Thank you. It's pleasure to be here. So we've heard these lofty goals. Aries is signing up for them. But what does it mean in the real world as you're doing deals as you're managing assets. Is it changing what you do on the asset management side of a business. Absolutely. That's that's changing rapidly on the
advisory side of the business which is arranging mergers and acquisitions. That's on the come so to speak. We're seeing the beginning of it. But it's but it's not quite there yet. Let me speak to the asset management side to begin with. One has to step back and realize this has been in play now for several years. The first thing that happened is the core demographic that drives activity in the economy started spending their values. That was a couple of years ago. And three four or five years ago in the United States longer in Europe. Over the last couple of years everybody it has shifted now so that the same
demographic is starting to invest their values and that's playing through in the asset owners. And it's really having a big impact on the asset management business. So when you talk about investing in assets is it defense or offensive. By that I mean this. It's one thing to say I don't want to invest for example on a fossil fuels company. Okay I get that. But what
about a formula investing in a green steel company. I think in the beginning it's going to be defensive because at this moment in time there's very little that that kind of ties green performance whether you are your emissions policy or social policies. There's very little that actually ties that to performance in the stock market or cost of capital. That's at its very early stages. But scoring companies is there. So I'd say at this moment in time we're probably doing. I'd say most of asset management is is investing defensively around around ESG. And I think that's going to shift over time. We had we heard from a former vice president Al Gore this week saying that we have something of a thinking called a climate subprime crisis coming because there's trillions of dollars in assets in coal and in fossil other fossil fuels. That may not be worse than actually what we think they're worth because they'll never get used. Is there a looming problem with that in the long run. Yes.
In the short run in the medium term we're going to have many ups and downs. You know a year a year and a half ago when when oil was trading at a negative value would have predicted close to one hundred dollar or oil price a year year and a half away. So I think what we're going to see is a lot of what I would almost describe as uncertainty and cysts and an outlier kinds of experiences over the next several years. I think in the long run he's probably right as we make that transition to the energy transition to renewables and to more green types of energy that will happen. But in the short and medium term we
could have a lot of ups and downs. So what do you do as an asset manager in that circumstance. Because we have a short term supply problem for example natural gas in Europe. And we've seen the prices spike up and we've seen energy company stock actually go up. So in the short run you actually might be able to make some money because the money market may have overly discounted the value of those stocks. Yeah well I don't think it's as black and white today as that. Asset managers can't invest in oil and
gas and energy stocks. I think we're slowly maybe even more rapidly than some would like moving in a direction where becomes less attractive to do that. But at the moment there's still ways for people to invest and make. In the short and medium term on those kind of spikes and movements in price at this point are there enough really attractive alternatives on the green front. Now I'm talking about the offensive part whether it's solar or whether it's new technology. I've talked to some people who manage a fair amount of money and say you know I want to invest a lot of money. There aren't that many good deals to be done.
Well I think that's again I think it's going to evolve as as you start to build in the incentives both from the standpoint of where capital goes. And I mean if as an example there is a real incentive for people to invest in green projects then the cost of capital for those projects goes down and those projects become more attractive to invest in. And I think we're going to see more and more on that as time goes on. Also the investment that's taking place in technology everything from storage to
wind solar that have taken place over the last couple of decades have made an enormous difference in creating opportunities in this area. And I think that's just going to continue. So so as you look at possible assets to invest in how many things do you find that you can invest in that really have attractive returns. Do you have to get used to taking a lower return as a practical matter to accomplish some of the ESG goals. Not necessarily. Again one has to look at on one hand you can look at what's
happening in the electric vehicle space and you can see Tesla at a plus trillion dollar valuation lucid in a couple of the other car manufacturers at 60 billion. This is an area where there's just been enormous investment and just spectacular returns for people over a period of time. I think we're going to see opportunities here for a long period of time. As long as people believe we are really moving to that we're really on a path for energy transition. If on the other hand this reverses itself which frankly I don't think is going to happen because it is what I would call this demographic this economic demographic that's really pushing this. I don't think it's going to reverse but it shouldn't reverse. It changes things. But as long as
people think we're on this path then these technologies then is going to be an enormous investment in these technologies and the payoff is going to be huge. That raises the question of where we are on the path. I mean all of us have learned maybe the hard way that if you can't measure you can't manage it yourself. How do we measure this. How do we know where we are on that path and whether we're making progress even if we really want to badly. Well I think there are some indicators. You know 15 years ago one would have or before the financial crisis it when oil and gas prices were spiking in 0 5 0 6 1 would have said there's no point in investing in renewables. How do you compete in geothermal. How do you compete in solar. How you compete in wind. And prices have come down 70 to 90 percent since that point in time which have made all of those technologies at a much lower oil price in fact at a much lower natural gas price competitive today. Those technologies are very competitive and
that's the kind of investment that's going to take place. You come down the cost curve to tribes that we're likely to see that over the next decade or two around hydrogen. We're certainly like to see that. We're likely to see that around storage over the next couple of years over the next decade as well. So that raises the question in my mind at least about the government because the markets are taking care of that. We don't need the government to do anything or do we need the government to set some of the rules for us. Well I think there's two places the government can be really helpful. The first is in setting the rules. There are going to be standards around disclosure that are just going to be necessary to create a level playing field
for companies and also for investors. And I think the FCC as is is move appears to be moving aggressively around that. The second and along the same lines the accounting standards around disclosure are going to be very important as well. So some standard setting around that is really important. The second thing government can do is it can pick a few areas where no one else to invest can invest efficiently to make a difference. It just as an example in the infrastructure bill there are two areas that that the Congress is focused on an administration is focused on. One is around infrastructure and the second is around the grid. Those are two examples where if you can accelerate that or you
can you make that work then it makes the transition from electric from gas vehicles to electric vehicles just much more efficient much quicker because electric vehicles of course need to worry about the EDI and structure. And ultimately you know the grid is going to become even more important than it is today with electric vehicles. Foreign investor how important is it to be international cooperation on this. I mean because otherwise we're gonna have countries competing with each other in a bad way. Absolutely. There's got to again. There's got to be some standards because you can imagine a scenario where one one geography let's just say the European Union decides look we're going to start taxing carbon differently if on products coming from the United States if they don't have the right policies or from China if they don't have the right policy. So it's so you can end up in a pretty protectionist regime pretty
quickly if you don't have common standards globally. You said when it comes to ESG for Lazard for the asset management side is a little bit ahead of where the merger advisory side is whereas the merger advisory. Well what I would say. Well first first of all. On the asset side we've made huge investments to really position ourselves in this area. On the advisory side we're doing the same thing. We're launching a climate center in December and one of the first areas we're gonna be focused on is
the impact of the energy transition on cost of capital and and ultimately stock price. There's very little evidence in the market today or literature in the market today that really takes and ties those two together. That's going to be critically important in terms of understanding how to value transactions that are either either carbon accretive carbon dilutive in an MFA context. And I think that's going to happen over time. Ken Jacobs chairman and CEO of Lazard for I thank you so much for being with us on Wall Street. Coming up we wrap up the week as we always do with our special
contributor Larry Summers of Harvard. This is Wall Street week on Bloomberg. This is warfare free week on David Westin and we turn once again this week to our very special contributor who's Larry Summers of Harvard to take us through the week. First let's start at the end of the week Larry. We've got the jobs numbers that the United States better than expected pretty robust not just from last month but also revising for the prior month. What do you make of these jobs numbers. Look it it fits the what I've thought for a while now. David we've got a very very strong
economy on the demand side and not a very strong economy on the supply side. And that's risking an overheating. You saw a lot of job creation. You didn't see an increase in labor force participation. You saw a rapid average hourly earnings figure. But if you adjusted for the fact that most of the people coming back were in leisure and hospitality where wages are relatively low it was an even stronger wage figure. I think we're still not running policies that are consistent with the reality of the economy. The reality of the economy is that we've got a interest rate far below the neutral interest rate and we've got a tight
labor market. And that's a prescription for rising inflation not a prescription for falling inflation. So I continue to be very concerned about the outlook going out a year or so as the economy starts hitting supply constraints and hitting them hard. Given all the pressure on demand Larry I wonder if there's a connection between two of the things you referred to the participation rate on the one hand and the increase in average hourly earnings on the other because we've been saying well the parties interest payment rate went down from the pandemic. It's come back some but it's not nearly where it was before. At what point does that continues out. Does that become a structural change that actually could have longer term effects on inflation
particularly wage inflation. So I think two points David. The first is that until 2017 the Fed thought the normal unemployment rate the natural unemployment rate was four point seven percent or more. So we may well just be there looking at the level of unemployment. And it's clearly headed down from here not up from here. With respect to participation I don't think anybody can gauge it. But if you take more mental illness you take some concerns as people reassess their lives as you take super high
level of structural change in the economy as you take some people because of their fears of Covid or distaste for mandates moving away from work. If you take the early retirements that probably aren't going to be reversed if you take the more not more generous childcare benefits and apply the estimates the progressives have traditionally used that's likely to have some discouraging effect on employment. If you take all that together I don't think we've got a strong basis for thinking that participation is going to rally in a major way. It might not. It might happen. But for that to be the major planning assumption seems to me to be taking a big risk. Look that up if you can with what we heard from the Federal Reserve this week in particular from the chair Jay Powell he certainly seemed to say in the news conference that really when it comes to the question of tapering has begun but particularly rate hikes that's going to be determined by what happens with the labor force. Easy right about that. Is it possible for it actually to be too gentle in the message it is sending to the markets. Because certainly the financial conditions did not
tighten at all. Look what the Fed controls is financial conditions. You look at financial conditions as measured by real interest rates. You look at financial conditions as measured by asset prices. They are looser than they were before Jay spoke on Wednesday. They are looser than they were a month or two ago. We've got rising inflation and we're not tightening financial conditions. That's why I fear that we are on a risky course. Now the argument that thoughtful people like my friend former classmate Paul Krugman make is that there's some risk aversion principle that we've got to do this because it would be so catastrophic to run a recession and inflation is a manageable problem.
I agree that we've got to guard against risks. But here's my view. My view is if we let inflation accelerate there's almost no proven ability of the central bank to engineer a soft landing. And so in order to squeeze out an extra bit of hope for labor market tightness I think we're taking a real risk that we're setting up for a very serious problem. You know if you'll look ahead of you. And you see that there might be all the traffic stopped. You start breaking your car as
early as you can. Even if it means that it's going to slow you down in the event that there is no traffic jam. And that's I think the right way to think about the central bank's problem right now. Learn another big development through the course of the week was with respect to the infrastructure bipartisan infrastructure bill as well as the so-called build back better plan. It's not quite there yet. It's not finalized but we have a pretty good sense of where it's going. What do you make of what we're seeing both on what we're spending side and how we're paying for it side. Look I hope we get this done. I hope both
bills pass the bipartisan infrastructure bill and some version of the so-called reconciliation bill. Sure. A lot of effort going into building. Better build that build back better. And I hope it works out. I also hope people are going to keep a very very close eye on this since at the very last stage that's when abusive provisions or miss provisions are sometimes put it. I'm glad to see that the provisions on assault deductions look like they're being modified somewhat. It would have been a real tragedy gave it I think if the provisions ended up being written in a way where people in the top tenth of a percent of the income distribution got a substantial tax cut. I think we're moving towards fixing that. But look these are investments that
our country should be making. It's also not too early to say that it's not the amount of money we spend and the nobility of the cause you spend it on. But it's how well you spend the money that matters are infrastructure projects going to produce a better infrastructure. Or are they just going to help the businesses that provide infrastructure services. It's going to be really important both in terms of the effectiveness of the investments
and in terms of the American people's confidence in government that this money be spent well as well as being spent on a significant scale. Larry one last one. Last week you and I talked about the Cop 26 talks which were upcoming Glasgow. We've now had them. You expressed some concern even doubt last week that they would be able to do enough to really get us on the course we need to go. Did they. I'm still I'm still worries. David you know I I learned as a fundraiser that when people wanted to say a really polite. No what they would do is talk about a much longer horizon and a much more ambitious goal. And I felt like there was a fair amount of that going on in Glasgow. And I'd like to judge things a little more by what people are actually going to get done and
committed in the next five years rather than the aspirations they're going to set for decades from now. It's such an important lesson. Just briefly at the end what do we need to do to have concrete things to be done in the near future. I think how rapidly we move we're moving to a very supportive way replace coal fired power plants with renewables is going to be an absolutely critical task. I think globally we are still spending trillions of dollars on fossil
fuel subsidies. And the single most important thing I would be looking at is not the credits that we give to renewables not the penalties we impose on fossil fuels but just the pace at which we reduce those fossil fuel subsidies. Such an important way to look at. Thank you very much. That's Larry Summers. He's our very special contributor right here on Wall Street Week.
Coming up one more thought. When is the Magic Kingdom not so magic. That's next on Wall Street week on Bloomberg. Finally one more thought. Hotel California moves to Shanghai. None of us anticipated how long this Covid thing would last. Certainly President Trump didn't when he talked about getting rid of it in April of 2020. Looks like by April you know in
theory when it gets a little warmer it miraculously goes away. That's true. But coming up on two years later it feels sometimes like this will never end. We've now lost over seven and fifty thousand people in the United States and around 5 million around the world. While the economic disruption just continues right to the present day as Fed Chair Jay Powell admitted again just this week we were on a path to a very different place. Delta put us on a different path and inflation. Well Kristalina Georgieva of the IMF says it's really just a vaccination problem preferably recent see tempering inflation. And how can we do that. Well focus on reducing these divergences. Vaccinate the world. Vaccinate the world so we can see production everywhere sticking
up. Nothing could compare with the loss of life and the economic dislocation. But let's be honest. There's also the sheer annoyance is still having to deal with it all the wearing the masks that leads airline passengers to become violent. And as Ed Bastian of Delta tells us get banned from travelling permanently. We've had a few incidents not a lot on Delta but anyone that that doesn't want to wear a mask and they're onboard. You know we give them the option to either wear the mask or they're taken off the flight and put on our no fly list. And we've had about 2000 people that we've put on the no fly
list the permanent no fly list. Over the course of the pandemic. But as frustrated as you might be you can take heart. You probably don't have it as bad as thirty four thousand people who went to visit the Disney theme park in Shanghai. They all went with their small children for a magical day. But one person tested positive for Covid. They closed the park wouldn't let
anyone leave until every single one of the 34000 people had been tested. It took until about midnight. You can imagine what that would have been like with your five or six year old child. And to add insult to injury in the end no one else tested positive. I guess better safe than sorry. But life at Hotel California you can check in but you can never leave. At least not until you had yet another Covid test. That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.
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