Paul McCulley: We Are "Unambiguously" On The Verge Of A Profound Change In The Economy

Joe Weisenthal (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

Tracy, sometimes we have guests on this podcast, and my first thought that I always have is, how have we waited this long to talk to them?

Tracy Alloway (0:29)

That is such a humble brag. It is the-

Joe Weisenthal (0:34)

I don't think it's a brag. I think there's just certain people who are natural fits for the type of thing that we talk about, and we've been doing this podcast for years, and it kind of seems crazy that we never talked to them before. It's not a brag.

Tracy Alloway (0:48)

One day we're gonna get Jerome Powell on the podcast, and we'll say, you know, we were thinking of having you on, you're such a natural fit. I can't believe it took this long.

But yes, you're absolutely right. There are people, well, there are people who everyone talks about.

Joe Weisenthal (1:05)

I am gonna say that. I love that. I was like, how did we not think to have Paul on before? I love that.

Tracy Alloway (1:11)

There are people out there who have had a big influence in markets and who consistently think about and write about the subject matter that Odd Lots concerns itself with.

And there are still some that we haven't had on the podcast. This is true.

Joe Weisenthal (1:24)

All right. So obviously very excited about today's guest. We're gonna jump right into it.

He's a former managing director at Pimco. He is the coiner of the term Minsky moment. He even coined the term the shadow banking system.

Currently a senior fellow, currently an adjunct professor at the McDonough School of Business at Georgetown University.

We are going to be speaking to the economist and investor, Paul McCulley. I'm really excited about this conversation. So Paul, thank you very much for joining us.

Paul McCulley (2:00)

Thank you very much, Joe.

Joe Weisenthal (2:01)

Paul, I listened to a speech you gave last year at the Levy Institute. And one of the things, the sort of main theme that you identified is that over the last roughly 40 years, we've had these sort of big turning points, not just in sort of business and market cycles, but in sort of idea cycles and policy cycles. So the late 70s, the rise of monetarism, supply side policies under Reagan, monetary policy dominance under Greenspan and Bernanke.

And so the big question, and it's a big thing that Tracy and I have been talking about a lot lately, is are we at the cusp of a sort of new policy regime?

Paul McCulley (2:49)

The short answer is unambiguously yes. And I want to stress unambiguously yes. For the last 40 years, essentially we've been in a monetary policy dominant world, and it's ebbed and flowed depending upon the cycle, but it has been clearly a world where monetary policy was the dominant lever in the monetary physical policy mix. Sometimes the phrase was used, the only game in town that the Fed could fix anything, and therefore the Fed should fix anything, and the Fed should be in charge, and that actually the Fed should be de facto the fourth branch of government, because that's where the adults were, and they could make technocratic good decisions.

And this messy thing called democracy, which was in charge of physical policy, could be pushed to the side, paid attention to as necessary, but that we were living in a monetary policy dominant world, which also would be a world in which, effectively, capitalism would be superior to democracy and the daily ebb and flow of economic policy making.

Tracy Alloway (4:15)

What do you think makes this crisis different, or maybe if I phrase it a different way, why do you think that change is coming now in particular? Because we had people writing and talking about the breakdown in the church and state separation of fiscal and monetary policy back in the 1980s. So why now?

Paul McCulley (4:36)

Actually, it's interesting that you mentioned the 1980s because that's essentially when the church and state separation became very solidified, as in almost a wall, if you will. In fact, I think back to 1980, I was actually in graduate school, I was in New York at Columbia in 1980, when I graduated in 1981, which was not the most fortuitous time to graduate from business school.

But that's when Paul Volcker was establishing essentially monetary policy dominance. In fact, Mr. Reagan had run on a policy of supply side tax cuts, which were a Trojan horse for tax cuts for the rich.