0:00

No, this turmoil isn't over.

0:02

We see it as we're talking today. FRB

0:05

is under great strain. It is

0:07

the case that almost one in ten

0:09

US regional banks would

0:12

fall below their minimum capital levels

0:14

if all of their assets were marked to market.

0:16

I think there's going to be really a wave

0:19

of consolidation. I would say go

0:21

small or go home. This is 20 VC

0:23

with me, Harry Stebbings, and as we speak, the banking

0:25

turmoil continues and there is no better guest

0:28

to answer some of the most pressing questions

0:29

of the day. He spent over a decade

0:32

as a central bank governor, first as governor

0:34

of the Bank of Canada and then as governor of the

0:36

Bank of England. Today, he is vice chair

0:39

and head of transition investing at Brookfield

0:41

Asset Management, one of the world's leading asset

0:43

managers with over 800 billion in AUM. He's

0:46

also a United Nations special envoy on

0:49

climate action and finance. And if all of this

0:51

wasn't enough, he's also on the board of Stripe, PIMCO,

0:53

and the World Economic Forum. Yes, I'm thrilled

0:56

to welcome back to the hot seat, the main man,

0:58

Mr. Mark Carney. And I want to say a huge

0:59

thank you to Mark Evans for making this

1:02

one happen today. Huge thanks for that, Mark.

1:04

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2:59

You

3:02

have now arrived at your destination.

3:05

Mark I am so excited for this we had so

3:07

much to discuss in our first episode that

3:09

we simply couldn't fit it into one and so

3:11

first thank you so much for joining me for a second

3:13

time today. Harry thanks for having me back I wasn't

3:16

sure you would ask me back but yeah there's lots

3:18

to lots to cover. I think this is the perfect

3:20

time to have you back bluntly I have so many

3:22

open questions before we dive into the core of

3:24

the show though I just want to do a cliff notes which

3:27

is really unfair especially

3:29

given your career but what is the cliff

3:31

notes on your career and the core highlights

3:33

you'd dive into? Okay

3:34

quick cliff notes I guess I'd say I've

3:37

worked pretty much at the intersection

3:39

of private markets and public policy most

3:41

of my careers. I started in the city just

3:43

before the fall of the Berlin Wall so probably before

3:45

you were born. I rode the globalization boom

3:47

from the in Asia and New York a bit

3:50

in Canada with Goldman then I became

3:52

a central bank governor in search of a quiet

3:54

life. I figured eight interest rate meetings a

3:56

year and I could spend time with my family and

3:59

my timing was a bit off because I started

4:01

a few weeks before Bear Stearns failed

4:03

and then obviously that cascaded into the subprime

4:05

crisis and Lehman, etc. And so

4:08

I got involved with the financial reforms

4:10

after that to picked up from where Mario Draghi

4:12

left off on leading the financial reforms,

4:15

went to the Bank of England during the Eurocrisis

4:17

Brexit referendum, focused a bit

4:19

on climate when I was there given the responsibilities.

4:22

And now I'm back more on the private

4:24

side. That was a long period on the public side,

4:26

but a public side where working a lot obviously trying

4:28

to fix and reform private markets.

4:31

And now I'm back on the private side focusing

4:33

in a couple areas, most of which relate

4:35

to climate. So I work with

4:37

Brookfield. We have big transition fund.

4:40

We focus on going to where the emissions

4:42

are and funding companies to get them down. I'm

4:44

on the board of Stripe, a great fintech

4:46

company and more. I work with companies

4:49

like Watershed, which help with the

4:51

mechanics, the ERP, if you will, of climate

4:53

to help companies get down. And I do spend

4:55

just back on the public side, I spent about half

4:58

of my time as a special envoy

4:59

for the United Nations. It sounds great for which

5:02

they owe me, I get a dollar a year and they owe

5:04

me $3. They're in the bad debt category. I've

5:06

been doing it for three years. And in that

5:08

regard, I work to organize the private

5:11

financial sector to address climate change.

5:14

But in a way, and last point, which is, I guess, the

5:16

theme of my career in a way that gets the

5:18

power of markets to deliver the

5:20

things that people want. First off, maybe

5:22

I wouldn't be single if I had the title of special

5:25

envoy. This could be the secret unlocks of

5:27

my love. I'm very envious of that. The

5:29

second

5:29

is well done for surmising an incredible

5:32

career in about 150 seconds. But

5:34

I want to start today on a

5:36

call, which is in the last show. I said, Mark,

5:39

I haven't seen a boom and I haven't seen

5:41

a bust and I haven't worked through that cycle.

5:43

I feel like that is changing. And so

5:45

help me, Mark. Where are we now?

5:48

And what follows a bust? Yeah,

5:50

exactly. So I guess in the last time, we were

5:52

in the middle of a boom, or probably

5:54

towards the end of a boom. And for students

5:57

of economic and financial history, they'd

5:59

be familiar with some of the

5:59

something called the Dyminski cycles. It starts

6:02

with something fundamentally good, some big innovation.

6:05

It could have been the productivity miracle in the

6:07

US at the start of the 2000. The

6:09

first bits of financial innovation

6:11

that helped to develop some prime lending is an example.

6:14

Blockchain and DeFi as another

6:16

example. And so these are fundamentally

6:19

good innovations, but ultimately

6:21

the growth turns to boom, turns to

6:24

euphoria, and it turns to the phase

6:26

that we were pretty close to. I think we were just

6:28

on the cusp of. Last time we spoke, which

6:31

is what this guy Minsky, the economic

6:33

historian called the Ponzi phase, which

6:35

is a phase that you recognize is

6:37

a phase where you're lending against

6:40

the asset that's at the center of the

6:42

boom on the assumption that the asset's

6:44

going to continue to rise. And so it's asset-based

6:46

lending with price appreciation absolutely

6:49

built in. And of course, at

6:51

some point there's Minsky moment. You

6:53

turn to panic because the assumptions are removed

6:55

and you lead into despair. You're at that

6:58

phase certainly, I think,

6:59

in the DeFi crypto

7:02

universe.

7:03

And what's interesting about that phase is provided

7:06

you'd avoided getting overlevered

7:09

in the Ponzi phase, what it brings

7:11

is tremendous opportunity because the

7:14

underlying innovation was

7:16

real. It's still there. You've

7:18

seen what works and what works less well.

7:21

There are some assets that can be picked up and

7:23

there's much, much less capital

7:25

available to that's competing with you. And

7:27

so this is the time after the boom, we've

7:29

had the bust and this is where opportunity comes

7:32

really into play.

7:33

Can I ask, can you provide me with an example

7:35

of an innovation that went through this cycle,

7:38

experienced this Ponzi realization moment,

7:40

but had underlying value to

7:43

the innovation that then was reborn

7:45

efficiently? Because in my mind,

7:47

it's just like people realize it's a Ponzi scheme

7:50

and never come back. I'll give you an example

7:52

of a financial innovation where that's the case.

7:54

The collateralized loan market, CMBS,

7:57

collateralized mortgage backed securities, the...

7:59

underlying them got taken to ridiculous

8:02

extremes Ponzi extremes the

8:04

price appreciation built into those structures

8:07

in 2006 2007 brought the whole literally the

8:11

house of cards crashing down but

8:13

the core innovation there lives

8:15

on and I think has served the market

8:17

quite well and we've ended up actually

8:20

with a much more robust it's not

8:22

totally robust to be clear but a much more robust

8:25

what some would call shadow banking system

8:27

I would call non-bank finance that's

8:30

providing a different channel of credit and actually

8:32

given what's going on in the banking sector a very welcome

8:35

example of credit I think you're also asking

8:38

though about a fundamental

8:41

innovation that was going up and

8:43

down through the boom-bust cycle and I

8:45

think the example a little closer to home

8:47

for me would be in hydrogen where

8:50

we've had a couple of those euphoric cycles

8:52

the last one was early 2000s

8:54

we're entering another and I think a

8:57

much more solidly grounded one time

8:59

will tell though I can't actually give you

9:01

the example of hydrogen fully deployed

9:03

in a way that's mainstream commercial I

9:06

think it's coming I think it's coming the next few years so maybe

9:08

if you have me back in a few years I'll be able to nail

9:10

that question and I will have a special envoy

9:13

as

9:13

a title by then so we'll both have one I wonder

9:16

what you mentioned that you touched on the banking situation

9:18

let's put it that way we were talking before about FRB

9:21

being in turmoil I just want to understand

9:23

where we are there mark is the banking crisis

9:26

over so you were always

9:28

careful with your words and you started with situation

9:31

you ended with crisis I'd

9:33

put it more in turmoil I guess

9:35

the quick answer to your question is no

9:37

this turmoil isn't over when

9:39

we see it as we're talking today FRB is

9:42

under great

9:43

strain it is the case

9:45

that almost one in ten US regional

9:48

banks would fall below their minimum

9:50

capital levels if all of their assets

9:53

were marked to market so I think it's increasingly

9:56

well understood that one of the challenges

9:58

the number the regional banks the extreme being Silicon

10:00

Valley Bank, one of the challenges they have is they

10:02

have a lot of actually quite high quality

10:05

assets, but very low yielding

10:07

assets. And they have in some cases massive

10:10

franchise problems because of that, because they're

10:12

just unless we go back to a low

10:14

for long world, which I think is extremely

10:17

unlikely, unless we go back to that world, they're just

10:19

going to have very large earnings headwinds going

10:21

forward. So there are a large number of

10:23

institutions, regional institutions

10:26

in the US that have varying degrees

10:28

of this problem and the longer

10:29

higher rates go on and

10:32

the more deposits move

10:34

to safer places, shall we say, receive

10:37

safer places, we're going to see more at a

10:39

minimum of put it politely, we're going to see more consolidation

10:42

in that sector. But and here's the big

10:44

but this is a very different situation

10:46

than what we went through 10 years ago. The

10:48

system as a whole has more than six times

10:51

the loss absorbency it had then it has

10:54

much higher liquidity across the system.

10:56

Central banks are providing much faster

10:59

support

10:59

as needed for those who are impaired. There

11:02

are many fewer, I should say, many fewer interconnections

11:05

between the institutions. In 2008, everybody

11:08

was connected to everybody else and nobody

11:10

knew who was going to fall down next. But

11:12

everybody was convinced that if somebody failed,

11:14

it would bring others down. Those were reasonable

11:17

assumptions, certainly during the panic. That's

11:19

just not the case now. We're seeing individual

11:22

problems. The contagion

11:24

in the system is because of similar

11:26

business models as opposed to interconnections

11:29

that

11:29

cascade through the system. So

11:32

the turmoil, I would say it's turmoil, not

11:34

crisis. No, it's not over because

11:36

we're in a higher rate environment.

11:39

We're going to have a tougher credit environment coming

11:41

as the economy slows. But it's in an absolutely

11:44

different order of magnitude of what we experienced in

11:46

the past. That's quite refreshing in some ways.

11:49

My question to you is, I have Bill Ackman on the show

11:51

and he presented the view that essentially

11:54

we need to guarantee all deposits in

11:56

banks. And once you do that, you'll reinsert

11:58

consumer confidence.

11:59

and turmoil will really be

12:02

quashed in many ways. Do we need to guarantee

12:04

all deposits in banks, Mark? I'll say

12:06

a couple of things. One is that what

12:09

we're seeing is that the

12:11

current structure, which does not guarantee

12:13

all deposits in banks, is proving

12:15

time inconsistent. So under pressure,

12:18

authorities are coming in and on

12:20

a case-by-case basis, effectively

12:23

guaranteeing all deposits in banks. So

12:26

after you have a few of those, you ask the question,

12:28

it's a fair question, whether shouldn't

12:30

you just jump to the end state, which is to guarantee

12:33

all deposits in banks? That's the first point.

12:35

Second point, there is a bit of an issue,

12:37

which is somebody has to take

12:39

that decision. It has to be duly authorized.

12:41

And in the US, that requires an

12:44

act of Congress. So the effective

12:46

way to guarantee all those deposits is not

12:48

going to happen quickly. Third, there is

12:50

a bigger argument, and maybe we'll get into

12:52

this, but I'll just put it on the table, which is something

12:55

Andrew Bailey, the current governor of the

12:57

Bank of England, a point. He made a seemingly

12:59

esoteric point, but quite an important point,

13:02

around the nature of money. And

13:04

his point was, in effect, most people

13:07

don't realize that there's a difference between

13:10

money that's created by a bank,

13:12

a private bank, inside money, versus

13:15

the money that when people used to use

13:17

cash, they would see the manifestation

13:19

of money created by the central bank, but core

13:21

outside money. Most people think they're absolutely

13:23

interchangeable, which they are in

13:26

transactions. But they assume they are

13:28

in deposits, or implicitly assume.

13:29

And shouldn't we, the authorities,

13:32

make that clear? Okay. Last point

13:34

I'd make, whether let's say we take the Ackman

13:36

plan, I'll call it the Ackman plan. And

13:39

in the UK, in the US, elsewhere, we say,

13:41

you know what? It's just not realistic that

13:44

Harry VC and people like

13:46

you, or somebody running the corner shop

13:48

who has their deposit in a bank,

13:51

is going to take time out to monitor

13:53

the health of the bank and move that deposit

13:56

when you start to get concerned about the credit

13:58

worthiness. I think that is actually... a realistic

14:00

assumption. It's certainly totally unrealistic that

14:03

individuals do that. Now,

14:05

what we would have to do if we changed

14:07

the system so that all deposits were backstopped

14:10

is to make sure that there is substantial

14:13

capital at risk in the system. So

14:15

somebody, other than the supervisors

14:18

and the central banks are monitoring those institutions.

14:21

And that's why you need to have senior

14:23

debt, non-deposit debt,

14:25

not re-characterized as deposit and backstop.

14:28

And contingent capital or

14:29

AT1 capital, different words for

14:32

roughly the same thing, which is capital

14:34

that is subordinated and would be bailed

14:36

in once the equity holders are wiped out.

14:39

And it's those pools of capital

14:41

and the institutions behind them that's going to

14:43

discipline the system or help discipline the

14:46

system on top of what the boards and the management are

14:48

supposed to be doing. So you need all of those components.

14:50

So help me out here in terms of that contingent

14:52

group that's external to like the

14:55

core savior, which would obviously be government

14:57

led. Is that like a contingent

14:59

of

14:59

JP Morgan, Goldman Sachs, the biggest

15:02

institutions who collectively come

15:04

to rescue the banking system together with

15:06

this guarantee? What does that look like? I'm

15:08

sorry for being so naive. No, no, no, it's

15:11

something we put in place after the financial

15:13

crisis. So I said a few moments

15:15

ago that the system as a whole has six

15:17

times as much loss absorbency as

15:20

it had going into the financial crisis.

15:22

And that's a big multiple. A little less

15:24

than half of that is contingent debt.

15:26

So it's actually, there's various structures

15:28

for this, but in effect,

15:29

it's subordinated debt, which is

15:32

owned by institutions, not

15:34

other banks actually. You don't want other banks to own

15:36

it because that brings contagion. Let's say

15:38

I'll take an extreme example, JP

15:41

Morgan fails and Goldman Sachs owned a

15:43

bunch of their contingent debt, then Goldman

15:45

Sachs is going to be called into question because

15:47

they'll take loss on that. So what you want

15:49

is a different source of capital for it. And

15:52

that to be an insurance company,

15:54

it's pension funds. They're the big buyers,

15:57

straight asset managers as well. They're the big

15:59

buyers of call them 81 securities,

16:01

which is a number of people on the pod will

16:03

recognize. They're the big owners of that,

16:06

and they are very sophisticated. And they do recognize

16:08

that there are scenarios where they're

16:10

going to end up owning equity in a stricken

16:13

institution because it's failed. And

16:15

in one extreme, which we saw with Credit Suisse,

16:18

they discovered that they own nothing,

16:20

at least on the current version of what the Swiss

16:22

authorities have done. So that's the way you

16:24

have discipline in the system,

16:27

and you have an additional level of protection

16:29

before you get back to the state because you

16:31

don't want the taxpayer to be second

16:34

in line after the equity holder to prop

16:36

up these institutions. That was the case,

16:38

by the way, the taxpayer being second in line

16:40

back in 2008. Mark, can I ask you mentioned

16:42

regional banks earlier? What's the future

16:45

of regional banks in the US? Yeah,

16:47

I would say go small or go home. It was

16:49

always the US banking system relatively

16:53

very large number of institutions by number

16:55

in the US. Our bell strategy was

16:57

it was dangerous to be in that awkward middle

17:00

where you're a large regional and

17:02

therefore you have a lot of corporate deposits

17:05

above the minimum. They turn out to be much

17:07

more flighty. What we saw with Silicon Valley,

17:09

what we're seeing with First Republic, that's

17:11

an awkward place to be if you're a narrow

17:13

regional, small, literally close

17:15

to your customers, largely insured deposits,

17:18

more stable funding base, you're okay.

17:20

It's an okay business. You don't have a lot of growth opportunities

17:23

or you're going to get consolidated up into

17:25

some of those very large institutions.

17:27

I think there's going to be really a wave

17:30

of consolidation. Another wave, this

17:32

has happened over time, but will accelerate.

17:35

In part, it's accelerating because the

17:37

competition, not just for the regionals, but

17:39

also for the large institutions, is very

17:42

much coming from FinTech and is a bigger

17:44

picture point. The system is

17:46

moving towards a form

17:48

of narrow banking as a core competitor

17:51

to fractional reserve banks, in other words, banks

17:54

that create their own money and leverage up.

17:57

It's able to do that. The system's able

17:59

to do that because

17:59

of technological changes which make

18:02

things very easy to take customer

18:04

money and back to back it quite efficiently

18:07

into the money markets and provide better

18:09

returns. Okay, so we see consolidation there

18:11

within regional banking in the US. You mentioned

18:13

credit suites earlier. I do have to

18:15

ask and I have to find Mark for this one, but he asked,

18:17

how do you assess the balance of regulatory

18:19

and bank management responsibility

18:22

in the case of SVP and credit

18:24

suites? Yeah, it's a great question.

18:26

You start with management responsibility in

18:28

both management boards are

18:29

the first lines of defense. I would

18:32

say in the case of SVP, it pains me to

18:34

say this as a former regulator and supervisor,

18:36

but much higher regulatory and

18:38

supervisory responsibility in

18:40

the case of Silicon Valley bank because

18:43

of a couple of things. One is they changed

18:45

the rules in the US in 2018

18:48

and did away with some very basic

18:50

protections that we apply everywhere

18:52

else in the world. Stress tests, we

18:55

in the Bank of England when I was there and subsequently

18:58

we stress test the banks to a 4% increase

19:01

within 12 months of

19:04

interest rates all the way across the curve. Now, it

19:06

seemed quite extreme at the time. It's more or less

19:08

what has happened because of this inflation,

19:10

but we stress tested everybody. In the US, they

19:12

said, well, now people undertook 250

19:15

billion, which is a very large number,

19:18

don't have to do things as severe as that.

19:20

That's the first thing. They weren't doing that. Then

19:22

they also lessened responsibilities

19:24

around what are called liquidity rules or

19:27

liquidity standards and buffers.

19:29

Some of those actually protect against

19:32

having the extreme mismatches that

19:34

places like Silicon Valley had. Then

19:36

thirdly, in the actual practice of

19:38

supervision, so even if you don't have those

19:40

rules, even if you don't do the stress test, you

19:43

just have to look at the books and the mismatches

19:45

of that bank and say, this is, you're

19:47

responsible, it clearly was and that

19:50

was noticed but not acted on.

19:53

I would say in that case, apart from management,

19:55

it's more supervisory. I would say

19:57

in the case of Credit Suisse, It's

20:00

been a stricken institution for a

20:02

number of years. It's had cultural issues.

20:05

It's had real risk management issues. And

20:07

the authorities there have been

20:09

spending time, and when I was

20:12

at the Bank of England, we spent time on this as

20:14

well, putting in place as best

20:16

as possible ways to minimize

20:19

the risk to everybody else of Credit

20:21

Suisse and maximize the ability

20:24

that if Credit Suisse could make

20:26

it, so to speak, that it could be wound

20:28

down in a relatively orderly fashion.

20:31

And it wasn't perfect, but the

20:34

fact is that when it

20:36

hit the wall, the Swiss authorities,

20:38

the international authorities had many more options

20:40

than they would have had even a few years before

20:43

to manage that situation. And it wasn't a

20:45

great day for Credit Suisse shareholders or

20:48

the contingent capital holders who absorbed

20:50

the losses, but it meant that

20:53

the depositors, the debt holders, and

20:55

the franchise as a whole could be,

20:58

the first two could be protected and the franchise

20:59

could be folded into UBS, which

21:02

would not have been the case, as I say, just

21:04

even a few years prior to that. Incredibly

21:07

unfair question. Is FRB a stricken

21:09

asset with a damaged business book, or

21:12

is it a consequence of

21:14

a wider macro banking turmoil

21:17

situation where really it's

21:19

being pulled into something that it doesn't deserve

21:21

to be? On the balance, it bears more

21:24

responsibility for the situation it is than

21:26

the macro. And let me make

21:28

a macro point, which

21:29

is that if we go back to

21:32

where we were whenever it was we spoke

21:34

last time, 12, 15 months ago, we're

21:36

just rolling into this period

21:38

where the world's moving out of low for

21:41

long interest rate environment, low

21:43

volatility environment, which some

21:45

had interpreted as low forever,

21:47

including low vol forever and had built

21:50

up books of business and in the case

21:52

of FRB and SVP, very

21:54

large books of business that were low

21:57

yielding, assumed low volatility for a very

21:59

long time. long period of time. And it wasn't

22:02

prudent risk management. You should

22:04

have been able to see that at the time. And now

22:07

that we've moved into a different regime, it

22:09

is a huge headwind on the franchise. Nobody

22:11

has an incentive to reprice their

22:13

own loan. They might as well keep the terms that they have.

22:15

They're certainly not going to get them again. It's more

22:18

a victim of its own situation. And you

22:20

could say, I guess that the macro

22:22

situation has changed quite dramatically.

22:24

But one of the things you're supposed to do as

22:27

a risk manager, you're certainly supposed to

22:29

do this as a central banker, as a regulator,

22:31

is think about the tail risks that others

22:34

are not thinking about and what is possible,

22:36

not what's most likely. And it was always

22:39

the case that one of the very likely

22:41

possibilities, one of the fat tails was

22:44

we would eventually get out of the liquidity

22:46

trap, this low for long interest rate world, and

22:48

to assume otherwise is irresponsible. Just

22:51

like now, to assume that we're going

22:53

back to that world after we get through

22:55

this bout of inflation is also, in my view,

22:57

an unrealistic assumption. You're just gambling

23:00

for redemption on that one. That's what I wanted to ask

23:02

you, which is that when you think about

23:03

what's to come and the consequences,

23:06

when you think about the consequences of the banking crisis

23:09

on monetary policy, how do you think

23:11

that will look in the next 12 months? So

23:14

I distinguish between a crisis

23:17

and turmoil, so I'm still going to cling to that

23:19

turmoil term. But it's nonetheless

23:21

serious. Like, it's serious enough that

23:23

it's going to, let's say in the US,

23:26

it'll probably slow growth about a half

23:28

to three quarters of a percentage point. It's probably

23:30

enough if people felt that the

23:33

US economy was

23:33

on the cusp of this narrow path

23:36

between avoiding recession and having a recession.

23:39

It's probably enough of a headwind that there

23:41

will be a recession in the US. So that's material.

23:43

In terms of monetary policy, I

23:46

think what the central banks have done

23:48

is to try to differentiate between

23:51

what they need to do to keep the

23:53

financial system functioning reasonably well

23:55

and what they need to do to address inflation.

23:58

So they provide liquidity. to

24:00

the banks, particularly in the United States, and

24:02

that keeps those who have healthy enough

24:04

business models to keep going, but they

24:06

continue to raise interest rates. But the

24:09

next point is that the

24:11

degree to which they raise interest rates has changed. And

24:14

if we had been talking at the end

24:16

of February, early March before Silicon Valley

24:18

Bank, I would have said something

24:20

to the effect of, I think the Fed may have to

24:22

go to 6% Fed funds. Now

24:25

I think they'll probably stop at five, five

24:27

and a quarter. That's 75 basis points

24:30

at a minimum of shift in the stance of monetary

24:32

policy. And of course, the reason

24:34

for that is that there is a headwind

24:37

from what's happening in the regional banking system.

24:39

It is half of consumer lending

24:41

plus its three quarters of the

24:43

lending into commercial real estate. It's

24:46

material for commercial and industrial lending

24:48

as well. And the price of

24:50

that lending is changing, but actually the

24:52

very availability of that lending is, in

24:54

many cases, coming to a stop, and the Fed has

24:56

to react to that.

24:57

Mark, was the speed of rate

25:00

hike, was it irresponsible?

25:02

It was unparalleled to any other rate hike

25:04

supposedly in the recent

25:06

times. I think it was necessary. It

25:09

has consequences. I think one

25:11

of the assumptions that economists,

25:15

not always financiers, but economists

25:17

often make is that things move in a linear

25:20

fashion. Whereas certainly technologists

25:22

know that things get disruptive. There's quantum

25:24

moves. And in finance, there

25:27

are situations

25:27

where it isn't the case

25:30

that when you move from, certainly

25:32

in this case, when you move from zero interest rates

25:34

to 5% interest rates in a short

25:36

period of time, it doesn't mean the cost

25:38

of credit moves up lockstep with

25:41

each of those moves. You get to positions

25:43

where the availability of credit just stops

25:45

from certain channels. We're seeing that in

25:47

the regional banking sector. We'll see that

25:49

in other leveraged parts of the system. I guess

25:52

we saw it at the very start of this move.

25:54

We saw it in leveraged crypto, which wasn't

25:57

macro significant. So I think the

25:59

response responsibility of the

26:01

authorities is to recognize that

26:04

the faster things go, the more likely

26:06

there are to be these, to put it politely, non-linearities

26:09

or sudden stops. And that needs to be taken

26:11

into account. Yeah. Mark, if I put you

26:13

in charge of the Fed, what would you have done differently?

26:16

Well, so what the Fed did, when

26:18

we're in the depths of the pandemic,

26:21

it effectively tied its hands. And

26:23

it said that we, the Fed, are going to target

26:25

average inflation and we will not raise

26:28

interest rates until we

26:30

have the prospect of getting unemployment

26:33

back to the level it was prior

26:35

to the pandemic, including in various

26:38

socioeconomic groups. And it

26:40

also had an inflation condition as well. So

26:42

instead of anticipating where inflation

26:44

was going, it changed its decision rule

26:47

to a backward-looking decision

26:49

rule. That meant that they lost six

26:51

to nine months probably of tightening

26:53

time that could have been spent, initiating

26:56

a more gradual tightening, squeezing

26:58

out some of the excess which built up in

27:01

these late stages of a cycle, you get

27:03

the excess building up. So there would have been less

27:05

of that. Now the big forces

27:07

on inflation, the big global forces

27:10

that helped drive inflation to the high single

27:12

digits, they still would have been acting. So

27:14

we wouldn't have seen an appreciably different level

27:17

in the short term of inflation. It would have been lower,

27:19

but wouldn't have stayed at 2%. But we

27:22

probably would have had fewer of these strains

27:24

appearing in the financial sector. We'll never know.

27:27

Mark, before we move to climate, which I do have to discuss,

27:29

is there anything that you think is

27:32

very important that you don't think enough people

27:34

are spending enough time on are aware

27:36

of a concern by when you

27:38

look at the banking crisis in the last six

27:41

months, six to 12 months? I'll answer

27:43

that. I think there's two consequences,

27:46

which might seem slightly inconsistent.

27:48

I'll say them anyways. And one maybe

27:51

a little controversial, which is I

27:53

think this probably

27:55

puts a silver bullet into stablecoins,

27:58

even though this is a banking crisis.

27:59

because that model,

28:02

and there's a lot of value in the link,

28:04

obviously, between the core of the central

28:06

bank balance sheet and the DeFi world

28:09

or the NFT world and all that, I totally get

28:11

that. But that model relies

28:13

on absolutely flawless asset

28:16

liability matching, not just 24-7, 365, but

28:20

for decades. And what we see

28:23

is that small deviations

28:26

from that over time get

28:28

caught out and can lead to a panic.

28:30

We also see that the authorities have

28:33

not been able to oversee money market

28:35

funds, which is a version of this, twice

28:37

in the last 15 years. We've had huge

28:40

money market fund crises in the US, haven't

28:42

been able to oversee relatively simple

28:45

banks like SVP and FRB. And

28:48

it just, when you put those realities

28:50

together, the likelihood that there

28:53

would be an accident over time with

28:55

a stable coin is pretty high. And

28:57

the risk of that is unacceptable because

29:00

it would be at the center of the payment

29:02

system. So it wouldn't just be a question of who had

29:04

a deposit, it would be everybody would be

29:07

affected by it. And of course, the only way

29:09

that you can protect against that is

29:11

to, in effect, staple the

29:13

stable coin to the central bank balance sheet,

29:16

which is, in other words, that its

29:18

whole asset side is matched

29:21

one for one. In that case, that's really

29:23

a central bank digital currency by another name.

29:25

So that's one consequence of it. I think the other

29:28

consequence, and the reason why I try to say it's a bit

29:30

inconsistent, is that I do think

29:32

what this does lead to though, is

29:35

the system moving more towards

29:37

wholesale finance, narrow banking in

29:39

different pockets, and that the funding

29:42

of banks will over time become

29:45

more wholesale, less retail, more

29:47

volatile, more credit differentiation.

29:50

Monetary policy will end up having more traction

29:52

for what it's worth. And the consumer,

29:55

whether it's your fund, your companies, or

29:57

you as an individual, you're going to see actually

29:59

better rates.

29:59

as a consequence better service as

30:02

a consequence of that but it's a pretty big change that

30:04

will come from it. That is a pretty big change

30:06

and I was like yeah just leave me on and I'm

30:08

like thanks for that Mark. I do

30:10

want to make sure though that we cover climate because

30:13

you spend a lot of time on it and there's a lot of questions I

30:15

just want to touch on which is first what

30:17

is new in net zero? What's new in

30:19

net zero is that we're getting on track

30:22

actually and that's not something I ever I didn't

30:24

think I would be saying this early.

30:26

I'll give you some headline numbers which is seven

30:29

years ago when they

30:29

had the Paris Accord the world was headed to three

30:32

and a half degrees when we had the Glasgow

30:34

summit just under 16 months ago 18 months ago.

30:37

It was less than two and a half degrees now with

30:40

the country commitments that are in place since

30:42

then it's 1.8 degrees but

30:44

what we have with the US IRA with

30:46

the European response the Canadian response

30:48

to the European and the American response what's

30:51

happening in Japan Korea on

30:53

and on is that a number of

30:55

countries have put in place the policies

30:57

to get on track the key way station

31:00

between now and 2050 net zero

31:02

which is the end of this decade 2030 and these

31:05

are orders of magnitude of 40% to 50%

31:08

reductions in emissions. To

31:10

back that up I'll just give you two data

31:12

points one is that the level

31:14

of clean energy investments so renewables

31:16

and other investment has tripled over

31:19

the course of the last five years it's

31:21

on course to quadruple again

31:24

but over the course of between now

31:26

and the end of the decade and then if you look at what's

31:28

happened in the auto sector and

31:30

the rise of these three four years ago

31:33

about four percent of new auto sales were

31:35

EVs this year it's looking like it's

31:37

going to be closer to 20% worldwide

31:40

that it those are huge numbers and in

31:42

most advanced economies it's likely to be

31:44

more one and two by the end of this decade

31:46

so the new thing is that

31:49

the inflection point that we need

31:51

we're living through them right now and I'm

31:53

not blasé I'm not pan glossing about it but

31:56

it is pretty significant what's going on I'm

31:58

gonna play devil's advocate here not

31:59

which is incredibly bold of me

32:02

considering the size of your brain and considering

32:04

the size of mine, but I'm gonna do it anyway. Number

32:06

one, when we look at kind of size of impact,

32:09

Xi Jinping and China play

32:11

a pivotal role. The man has spent his

32:13

entire life climbing the greasy

32:16

pole of Chinese politics, which is a

32:18

challenging pole to ascend.

32:20

He needs to focus on growth.

32:23

What China does not have, where

32:25

we are seeing millions of Chinese people being sent

32:27

back to rural communities in a bid

32:30

to them to find work. China

32:32

is in trouble.

32:34

He doesn't give a shit about climb. He

32:36

needs growth. Do you agree and can we make

32:38

headway with China not

32:41

really being? I disagree with that.

32:43

I'm gonna disagree with the premise. Maybe I won't

32:45

disagree with the what he cares more about

32:47

as a leader. He cares more about growth and

32:50

short-term climate. But he's he in

32:52

the country have made a very big bet

32:55

on future growth relating to decarbonization.

32:58

That's its growth for China and I'll come back

33:00

to why it's growth for China, but it absolutely central

33:03

to the competitiveness

33:05

of the Chinese economy over the course of the next 25 years.

33:09

Decarbonization and the

33:11

two big drivers of competitiveness

33:13

for China. And I'm gonna back

33:15

this up in a second, but I'll just make the

33:17

core point, which is one of the pennies

33:20

that has dropped for other major

33:22

economies is that he's right. Xi's

33:25

right about those drivers of competitiveness.

33:27

What's motivating the IRA

33:30

in the US, which is the big for those who haven't followed

33:32

it, the big climate bill, which is enormous,

33:35

enormous in its impact. What motivated

33:37

that, what's motivated responses in places

33:40

like Canada and others. Yes, it's climate, but

33:42

really it's about jobs and growth. It's

33:44

about these industries. If you just

33:46

tarken back to what's happened in the auto sector

33:49

and what is happening in the auto sector,

33:52

if you're not building out an EV

33:54

supply chain and you're an auto manufacturer, you're

33:56

dead. That train is leaving the station

33:58

to mix my metaphor. and you

34:01

need to be there so climate goes in. So in terms

34:03

of is that really manifest? China

34:06

accounted for half of clean energy investment

34:09

last year, about 550 billion US of the 1.1 trillion, so

34:13

half in effect. Their renewable

34:15

investments grown at 50% a year. They

34:18

have more than 50% of the EV market

34:20

in terms of the flow there. They are one of the

34:22

biggest, in fact, the biggest source

34:25

of the clean tech finances in China,

34:28

and they're the dominant player in

34:29

solar and wind, the supply chains

34:32

for that. So he's getting growth

34:34

out of that to personalize it. China's getting

34:37

growth out of that. That's why he

34:39

cares, and it's having

34:41

the spillover effect on other countries who

34:43

are realizing they need to care about it as well. Yeah,

34:46

Mark, what a statement to say he does that.

34:48

I say he cares better.

34:51

Okay, so I asked this question of Mr. Mark Evans,

34:53

and he gave me a fascinating, and this was this week,

34:56

so I'm going to compare your statements here. And I know,

34:58

I said to him, you can long,

34:59

you can invest in the future of one, the

35:02

US or China, out of a 10 year

35:05

period. You'd invest in the US, I'd

35:07

invest in the US. Why would I do that? Partly

35:09

that the, okay, we've got a

35:11

track record and past performances and an indicator

35:13

of future, but the main components

35:16

of what has driven American

35:18

exceptionalism over over decades,

35:20

more in the century, still are there, still

35:23

partly because of immigration, but it's still

35:25

the case that the quality of skills is amazing.

35:28

The financial ecosystem, yes, it has the

35:30

B and FRB, but it also has the

35:32

whole VC complex. I won't take myself

35:35

by only naming one or two of them. Of course, you're by

35:37

extension, my host here is part

35:39

of that. It has still the best

35:42

mechanism of creative destruction in

35:44

the world. I think there's some argue

35:46

your European competition policy is now stronger.

35:49

I'm not totally convinced. I noticed

35:51

that US competition policy has just been reinforced

35:54

and it has, it has an ability to, but has

35:56

a huge market and has ability to get market access.

35:58

So it has all of that. and

36:01

they've just pivoted. America

36:03

when it moves, moves big and

36:05

so in this space in climate which

36:08

is one of the big drivers of growth

36:10

going forward, the US in

36:12

this space of the time since we last spoke

36:15

has gone from well behind Europe

36:17

for the UK amongst the major

36:19

industrialized countries in addressing

36:22

climate change to putting in place the

36:24

measures and now driving

36:26

with the investment that they will overtake

36:29

in the course of a few years.

36:30

And then with respect to China, yes

36:33

massive market, yes they've got all

36:35

these components, yes they're going to do well in this

36:37

but what comes with that is issues

36:40

around property rights, consistency

36:42

of government policy in some cases.

36:45

They're just probably better off

36:47

leaving it in the why the US

36:49

is so positive than enumerating

36:52

a bunch of issues in China but I think it's

36:54

a simple choice. Can I ask you for

36:56

Europe? Is Europe weaker than that? No, I don't think

36:58

it is actually and on

37:00

the face of it it's obviously there's a massive

37:03

shock with the war and the energy hit

37:05

that comes with that and there's reason to

37:07

think that it might be but I'm gonna

37:09

take the other side of this. The first is

37:12

that the financial system, this is unusual,

37:14

I don't think I've ever been in a position in my career

37:16

where I've been able to say the European banking

37:18

system is in better shape than in most

37:21

other countries and certainly the US in this

37:23

case but that is the case so their financial

37:25

system is solid. I know credit suites

37:27

failed but had relatively unique

37:29

circumstances and the core of the system is

37:31

strong. The second is to say that they're

37:34

using most of the levers of policy

37:37

now so fiscal policy is not a permanent

37:39

headwind to growth there. Thirdly,

37:42

they've got a pretty good framework

37:44

in place for the net zero transition

37:47

so the US is going to catch up. I think

37:49

pull ahead but Europe's been doing pretty

37:51

well there and that's driving investment.

37:55

I don't think they're weaker and

37:57

it's more than initial because it's been longer than

37:59

a year.

37:59

I think the European response

38:02

to the crisis being the war has

38:04

actually made them stronger. It

38:07

will make them stronger in the medium term. It's accelerated

38:09

some things that they needed to do. Can I ask

38:11

Mark a really unfair one? And again, I'll blame Mr.

38:14

Evans for this one because I can. Which

38:16

governments and big corporations are acting

38:18

more than they're talking?

38:20

Acting more than they're talking.

38:22

Look, I would say a company like,

38:25

and they talk about it, but a company like Walmart,

38:27

in terms of, Walmart's got, I'm

38:30

not going to do them justice, but it's certainly

38:32

well over a million SKUs in their

38:34

various stores. And as a retailer,

38:36

you ultimately take responsibility for what

38:38

are called scope three emissions. So the emissions all

38:40

the way through the value chain, which means you need

38:42

to know what the emissions are of all those products

38:45

that you're putting on the shelves at Walmart. And

38:47

they are rigorously

38:50

going through that and then working with

38:52

their suppliers to optimize those

38:54

and get them down. And I don't know that given the

38:56

complexity and scale of that business, you could talk

38:58

enough about it and still, given what they're

39:00

doing, they're saying less about it

39:02

than what they're putting in place. In terms

39:05

of governments, this is recency bias.

39:07

I was in Australia a few weeks ago, and

39:10

I'd say that the shift at all

39:12

levels of government in Australia is underappreciated.

39:15

And that's a pretty can do country. So when

39:17

you have a decisive shift, what we're

39:19

seeing is pretty big shift in

39:22

activity there. We'll hear a lot more about it. And

39:24

you're talking more than they're acting. On

39:26

the company side, I think big

39:29

oil is talking more than they're acting. I don't

39:31

think the scale

39:33

of investment in the energy

39:36

of the future, the relative investment

39:38

there, which is a relatively small

39:40

percentage of overall cash flow, is consistent

39:43

with where the energy sector is going. They all

39:45

have a lot of talk, but where the money is actually

39:47

being put is not consistent with that. I'm

39:49

going to give an example. I'm going to give it, it's a slight free commercial.

39:52

You can edit

39:52

this out, but I'll give an example on this, which

39:54

is that the reason I was in Australia is that

39:57

Brookfield

39:58

company I work with is leading a bit. on a company

40:00

called Origin in Australia. And it does

40:02

a couple of things, but one of the core things that is the

40:05

biggest generator and a retailer

40:08

of electricity in Australia, so it's got about

40:10

four and a half million customers. But most of its

40:12

generation is coal, and then

40:14

they buy on a merchant basis in a bunch of gas

40:17

generations. As a whole, it's a meaningful

40:19

proportion of Australia's emissions, 7% of

40:21

Australia's emissions as a whole. And Origin

40:24

basically had a shareholder base

40:26

that liked the dividends that came from that

40:29

core, steady business. But in

40:31

effect, it's a transition trap because

40:33

what they need to do for where Australia

40:35

is going is to invest about 20 billion

40:38

plus Australian in building

40:40

up clean power, shutting down the coal,

40:43

and operating for another 50 years, not another 10,

40:45

15 years. So we've

40:48

been able to come in, we've made a bid at a substantial

40:50

premium to the undisturbed share price, 50%

40:53

premium. And we're

40:55

gonna not have a dividend, we're not gonna take a dividend

40:57

out of it, and we're gonna invest

40:59

in that transition, the 20 billion plus,

41:02

shut down the coal, move forward, and give

41:04

the thing a future and make a good return

41:06

for our investors accordingly. I

41:09

bring that out in part because it's an example

41:11

of the value of going to where the emissions are

41:13

and the scale of what that. But also to

41:16

try to illustrate the broader point, I

41:18

think there are a number of companies that aren't moving

41:20

fast enough for where the world's

41:23

going. And part of the reason is they have shareholder

41:25

bases that have a different

41:27

horizon and could get to

41:29

the point

41:29

where the terminal value of

41:32

the enterprise has been affected. And so

41:34

what appears to be a good yield in the short

41:36

term is actually quite a poor yield over the medium and

41:38

long term. No, no, the subsequent question is very

41:40

much the same as in technology then, is will

41:43

those incumbents embrace innovation and

41:45

move fast enough, or will we see innovators

41:48

embrace distribution and engage

41:50

with distribution fast enough to challenge

41:52

the incumbents? Where does the value accrue

41:54

there in your mind? The history would

41:56

say that it's more likely to be the

41:59

latter.

41:59

time and time again in technology. We

42:02

saw it in the steel sector, a classic

42:04

example. It has a fancy name,

42:06

the innovator's dilemma, Clayton Christensen's

42:09

work on that. There are exceptions to

42:11

this. Netflix is an exception to

42:13

this. Amazon was an early days, Amazon

42:15

was an exception. Microsoft, I guess in

42:17

technology would be an exception. So it's

42:20

not destiny, but you really

42:22

have to fight against it. In effect,

42:24

you do have to cannibalize your business. You ultimately

42:26

have to take the cash flows from a very nice

42:29

business. And

42:29

invest on something that's not a sure thing.

42:32

And it's hard to do. Final part of that question,

42:34

which governments are talking more than

42:36

they're acting? God, this is, I am the United

42:39

Nations special envoy. So, it's

42:41

gotta be nice to my governments. Just to remind

42:43

you, Ari, I'm- I just wanna remind you exactly,

42:45

I'm just very special. I would have said the

42:48

US, but I can't say that anymore. I

42:50

think it's a relative game. So,

42:53

I'd now say that the

42:55

time has come for the next

42:57

phase of what the UK is going

42:59

to do.

42:59

Maybe that's the best way to put it. So, it's

43:02

like anything, you can be out in front, but then

43:04

others catch up to you, start to laugh.

43:07

I think the UK has had a good track record, but

43:09

I'll quote the climate change

43:11

commission, which is this independent body

43:13

that does an assessment of the government. It

43:15

says that more than half, it

43:17

does not yet have everything

43:19

in place in order to reach its medium

43:21

term targets and has given 300 different

43:24

recommendations of what's necessary to do it. So,

43:26

I guess that would fall into the talk more than

43:28

act. Well, that's good.

43:29

I'll ask Rishi on the show when he

43:32

does come on, ask him about 300 different

43:34

recommendations. That must be fun. I wanna

43:36

move into a quick fire round, Mark. So, I said

43:38

a short statement. You give me your immediate thoughts.

43:41

We're gonna start with one that I love

43:43

to, I can't wait to hear this. What do you

43:45

miss about not being a central

43:47

bank governor? I miss, I guess

43:49

I put it, I miss being at the center. When there's

43:51

things like what's going, what we've been talking

43:54

about, banking turmoil, other things. Being

43:57

in the room, being able to influence it more directly

43:59

for good or wrong.

43:59

and certainly during the time I was

44:02

central bank governor at the center

44:04

and I like being there if I can be. I'm

44:06

gonna be cheeky but I feel like we have

44:08

a roof where I can be. Why

44:10

are you not in politics Mark? You seem

44:12

like a gifted politician.

44:15

Look, I'm trying to help

44:17

break the back on climate and I'll do that

44:19

by whatever means possible. I've

44:22

got seats at the moment where I can influence

44:24

it. So I would say politics if necessary

44:27

but not necessarily politics. What

44:29

do you not miss about

44:29

being a central bank governor? I

44:32

don't miss when the center doesn't hold. The center

44:34

not holding. I don't miss when

44:36

things are spiraling out of control and

44:38

you're not on top of it. What do you know

44:40

to be true that others do not agree

44:42

with? A lot of people don't like to think

44:45

about nuclear and think that there's an easy right

44:47

to shut it down. But in fact we have to grow

44:49

it by another 50% between now and 2050 worldwide. What

44:53

have you changed your mind on in the last 12 months

44:55

Mark? Fusion power will be commercialized.

44:59

I'll give you three

44:59

but it's a common thing. There's a guy I worked

45:02

with when I was at Goldman Sachs named Craig Broderick. He

45:04

was the head of the credit department. When I was a central

45:07

banker I would say Mario Draghi. Now

45:09

that as an investor Bruce Flatt

45:11

is the CEO of Brookfield. I think the

45:13

common thing of all three of those individuals

45:16

is that you have to both

45:19

sweat the details and see the big picture. The

45:21

challenge in whether it's managing

45:23

risk or conducting policy

45:26

or investing. It's not enough just to

45:28

get the tectonic forces in the direction

45:30

right. You actually have to have to do the work.

45:33

Penultimate one, if you could change one thing

45:35

in climate what would it be? We started taking

45:37

it seriously when you were born. I would say

45:39

we need a big pool of capital, concessionary

45:42

capital to shoulder particularly

45:45

foreign exchange risk in emerging economies. Let

45:47

me explain that quickly which is that two-thirds

45:49

of the emissions in the world now come from the

45:51

emerging world. Now that includes China's about 30%

45:54

of global emissions. But you've got 35% plus

45:57

of emissions coming from countries that...

46:00

most private investors never visit,

46:02

don't have exposure to, don't want to

46:04

know about, and would be taking quite large

46:07

currency risks and it's unhedgable. And

46:09

that means that a lot of the capital

46:11

is uneconomic to get there. Now there's other risks and

46:13

there's other issues, but we need to

46:15

have a big pool of capital that will hedge that

46:18

out. It's not going to come from the private sector and

46:20

given the time horizons, so we need to design

46:22

that. It's one of the things I work

46:25

on the side. Number one, we do this

46:27

again in 2028, so five years out.

46:29

Where's Mark then? God,

46:32

that's a good question. I would like to think

46:34

I'm no longer a special envoy because

46:37

what the objective is, so I could

46:39

have divided the negative, I'm no longer a special

46:41

envoy because I'm tired of not being paid

46:43

by the UN, but more seriously, because

46:46

the kind of things I'm working on are just so

46:48

run of the mill, they're mainstream, that everybody

46:51

does it. And that's when you have successes

46:53

that this is just carbon competitiveness

46:56

is just part of the value equation, it's part of the way

46:58

things are analyzed and capital flows

46:59

naturally. And so then at that point,

47:02

what am I doing? I'm an intern at

47:04

Harry VC by that point. That'd be fantastic.

47:07

Mark, listen, I've loved this. I'm actually

47:09

a special envoy in five years' time, so

47:12

alas, your job has won. I've

47:14

learned immensely and you've been a star,

47:16

my friend.

47:19

Again, a huge thanks to Mark for putting up with my

47:21

very diverse and prying questions. If you want

47:23

to see the full episode in full on video,

47:26

you can check it out on YouTube by searching

47:28

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