The text below is a transcript of audio from Episode 23 of Onward, "Debt ceiling crises, with Noreen Harrington."
Disclaimer: This transcript has been automatically generated and may not be 100% accurate. While we have worked to ensure the accuracy of the transcript, it is possible that errors or omissions may occur. This transcript is provided for informational purposes only and should not be relied upon as a substitute for the original audio content. Any discrepancies or errors in the transcript should be brought to our attention so that we can make corrections as necessary.
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Ben Miller:
Hello and welcome to Onward, the Fundrise podcast where you can find out more about what's happening at Fundrise and where you'll hear in depth conversations about big trends affecting US and global economies. My name is Ben Miller. I am CEO and co-founder of Fundrise. My guest today is Noreen Harrington, former Managing Director at Goldman Sachs and Barclays Capital and CEO of DataWhys. There are few financial professionals in the world with a stronger track record fighting to do the right thing for individual investors. Before we get started, I want to remind you that this podcast is not investment advice. It is intended for information and entertainment purposes only. Welcome to Onward.
Noreen Harrington:
Thank you for having me.
Ben Miller:
So, I've known you for a long time. I'm excited to have you on the show. But before we get started, could you share a summary of your background?
Noreen Harrington:
Sure. I'd love to. Thank you for having me, Ben. I started in Wall Street in the early '80s in trading. I traded bank paper and US Treasuries. I worked at Goldman Sachs and I went to London for Goldman to build and run the hedge fund business. In the early '90s, I became a managing director at Goldman. After Goldman, I went to Barclays Capital where I ran fixed income and proprietary trading. For the bank, I was Managing Director there. After six years in London, I returned to New York, my home, and did a couple of high net worth platforms, mostly investing in hedge funds for high net worth individuals, and I'm currently CEO of a artificial intelligence company called DataWhys.
Ben Miller:
She didn't mention you have some extraordinary experiences in your background. You stepped into the fire twice and I saw you do it.
Noreen Harrington:
Yes. I could talk about that as well.
Ben Miller:
Just briefly.
Noreen Harrington:
I'm more publicly known as the whistleblower in the mutual fund scandal of the early 2000s when I was working for the Stern family and Eddie Stern was arbitraging mutual funds in late trading and some other aspects. I reported it to the Attorney General and where they collected over five billion in fines and gave it back to 95 million investors. Right after that, I was CIO of another platform working for Peter Stamos and they wanted to invest in Madoff. As chief investment officer, I looked under the hood and I did not believe the returns. In fact, I called them fiction and I told them I would not go ahead with that investment and I quit over it. The rest of Madoff is history. I defended the victims of Madoff's in multiple depositions to help them get their money back.
Ben Miller:
In both those experiences, people can't appreciate how much pain and suffering you went through to do the right thing.
Noreen Harrington:
It's not always easy to do the right thing. But in the long run, you realize the rewards of it. It's a good feeling to know that you made a difference, both for your industry and for individuals.
Ben Miller:
Yeah. On the first one, the mutual fund late trading, it was billions a year that were essentially costing individual investors.
Noreen Harrington:
Maybe then upwards of 10 billion a year. I think the crime would've kept on going had I not stepped up. The real sadness of that crime was it was people who were already billionaires stealing from 401(k)s of firemen, teachers, policemen, everyday people who the difference in that 401(k) could be life changing.
Ben Miller:
You're a finance person after my own heart. I've always loved our conversations and wanting to get you on Onward for a long time. So, we've been planning this for a while, but little did we know how topical it would be. So, let's get into some of the work you've done so people can understand your perspective and how much experience you bring to bear here. So, you're at Goldman trading bank paper and you work your way up to run the treasury desk there?
Noreen Harrington:
No, I never ran it, but I worked for incredibly talented people, including Jon Corzine.
Ben Miller:
Just before we get into some of the work you did on the treasury desk, can you explain how the treasury market works?
Noreen Harrington:
Back when I was doing it, you had recognized broker dealers and we have an obligation to support each one of the auctions. So, what we did was we worked with our clients to develop a book, and we also took risks for Goldman. We underwrote large positions in various auctions and we distributed that paper to our clients. The treasury market now is so much more open. You can do ETFs. It's much easier for individuals to access through derivatives US treasuries, and it needs to be a deeper market today because we're funding deeper and deeper deficits. As a young person in Wall Street, I thought a billion, $5 billion deficits was large, and how wrong I was.
Ben Miller:
So, you're working on the treasury desk, you're working for Jon Corzine, and you've said some of the things to me that I always thought were interesting about the things you learn about the skill of deficits and what matters in treasury markets.
Noreen Harrington:
It was interesting. As a young person on the desk, I was on a little bit of a soapbox basically saying these deficits are so large, we're underwriting weekly bills and two year notes every month. It just seemed spending was a bit out of control. Jon Corzine said to me, "You're asking the wrong question. You need to be thinking about can we fund it?" That one statement has been with me my whole career. It's not the amount of the auction you're having if it's 10 billion in two years. It's their demand for that excess of the 10 billion. So, it is about the demand side and I was looking at it wrong. The interesting thing about a career that's gone on as long as mine is the answer to can you fund it in my entire career has absolutely, we've been able to fund whatever the deficit was at reasonably economic terms. That leads into a lot of other areas that I think you'll probably ask me about.
Ben Miller:
Before I get into that, just going back to the last 10, 15 years where the deficit has been, at one point in 2021, I think the deficit went to five trillion or something like that.
Noreen Harrington:
Because of COVID, I think it increased four to five trillion immediately so that they were trying to hope that when we shut down that we would not face economic disasters. So, there was a huge spending in the beginning of COVID.
Ben Miller:
According to the Congressional Budget Office, which I looked up right before this call, total federal US debt is 31 trillion approximately. How is that fundable? I know you're saying that it has been fundable for sure and been fundable at very, very low rates, at times close to zero. That defies my expectations and I think defied yours. What do I not understand about it that makes that work?
Noreen Harrington:
It's interesting because we may be at a point, Ben, where the answer to can you fund it, we might be coming to a wall where the answer may not be as easy as it was before. But the US treasury market is seen all over the world as stable, secure, as good as cash. The US dollar has been the reserve currency of the world. If you look at global savings, which have been growing, the United States has been taking a bigger proportion of those global savings. Particularly, in the period in which you referred to, in 2020 when we went and spent four or five trillion in the beginning of COVID, we were funding at very close to zero rates. So, the US has been able to live beyond its means for quite a while. My whole career. My whole career, the demand for treasuries has been there.
Ben Miller:
Yeah. I don't fully understand. I understand it now where you look at a treasury as yielding a 5% interest rate and I can see the demand for that. But 24 months ago or 36 months ago when it was yielding zero and in Europe, there were negative rates, I never understood a negative interest rate bond. I just don't understand the fundability of it. Who's the buyer at a 0% rate? Why are they buying it?
Noreen Harrington:
What's interesting to me, Ben, is I just said we might be coming to the end of that. The US, we had a positive yield when other people in the world had negative yields, and I too don't understand negative yields. But Japan has had negative interest rates until recently for decades. Japan was the biggest player of US treasuries and second was China. In a way, Japan was funding a lot of the deficits of the world. Europeans had negative interest rates, as you pointed to. So, we still had positive interest rates because again, we were funding so much that our rates had to stay positive. But we were drawing money from all over the world.
What concerns me a little bit is Japan now has positive interest rates and Europe has positive interest rates. What you've seen is Japan selling US treasuries. There isn't necessarily as much a demand to get a yield in the US when you have a yield at home. It also leads into the dollar. As a reserve currency, the demand for dollars has been around in the world, everyone. Whether it's for trading oil, it's trading commodities, everything is done in dollars. So, foreign governments everywhere in the world hold dollars.
Ben Miller:
You're implying that there's risk. I think you and I have talked about it for years. You always knew what to monitor and what you're looking for if the risk was basically warranted. So, as someone who's a deep professional in this, what are you looking at when you're trying to figure out if this fundability is in question?
Noreen Harrington:
I don't think many people look at the stock market. I think they hear that there was a treasury auction, to your notes today, but they don't really look at the granular data that comes out behind that. But there is granular data that comes out [inaudible 00:13:15] that that shows a lot about demand. Let's say it was 20 billion today of two year notes. What was the cover? How many people put tenders in for those two years? Was it double the amount that was for sale? Was it more than that? So, the demand, you can see in each auction. How tight was the auction? Did it come at 4.25 and everyone got billed at that level, or was it dispersed? So, to me that's very important on whether a treasury auction goes well or not because I think there's an enormous amount of information on demand, and that tells me a lot about whether there's a lot of buyers in the world of US treasuries or not. I think that is important. It's one of the things I look the most at.
Ben Miller:
If you roll back to a while ago when things were more normal, what did a good auction look like in terms of where something would price and how much coverage there was?
Noreen Harrington:
Tight. Really, really tight. Everyone's got to bid at 4.25 and there's double the demand or triple even the demand of the auction size. It shows everyone was interested. Generally speaking, when you get a tiny, we call it a tail, so if you see a tail, so 4.25 is the rate, but they had to move back to 4.27 to get enough to cover the 20 billion, that's a really bad auction and it would make me nervous.
Ben Miller:
So, basically, as the seller, to clear the market, they have to inch up the interest rate. So, what do auctions look like now?
Noreen Harrington:
The demand for treasuries, as I said, we've seen Japan and China as net sellers. The demand has been relatively high because interest rates are much more attractive. I think that there's some fear in the world. But we have a couple of things going on. The Fed is raising rates and we have this debt ceiling. I think the situation with the banks plays in here. There's so many things going on in the moment. But I think because people were very worried about their excess, their deposits in banks, it's created additional demand for treasuries that wasn't there prior to Silicon Valley Bank failing.
Ben Miller:
Before we get into where I think we're headed, which is essentially the deeper implications of the new world, if you will, let me just roll back the tape a minute because I think it's really important for people to understand your background, to really understand your point of view. So, we talked about your background doing Goldman, treasury, and bank paper trading. But you also have another thing you didn't mention, which I think is a really wonderful experience, is that you also traded currencies. I know that you actually were counterparty with Rob Johnson and Stanley Druckenmiller when they were breaking the British pound. You were the person they were calling at points.
Noreen Harrington:
They're incredibly smart people and I know that you just interviewed Rob. But the interesting thing is when I went to London, I had only done dollars and I learned something right off the bat, which is Americans invest very differently than Europeans and other people in the world. Other people in the world look at currency first. So, they make a decision that they have X percentage of their investments they want to put it into the dollar, and then product second, whether that's going into treasuries or equities. Americans don't think that much about currency. Partly, we've been blessed our whole lives with a stable currency. But Europeans really, that's how they invest. Whether it's going to go into equities, real estate, fixed income, it's currency first. So, when I went to Europe, I realized the difference. I realized a big difference in the way Europeans looked at markets, and I don't always think Americans think about currency. I think it's playing a very big role in the markets at the moment.
Ben Miller:
So, what role is it playing in the markets today?
Noreen Harrington:
It's interesting. We saw a lot of international selling the fourth quarter of last year. If you look at the markets this year, international funds have done very, very well. The dollar got to what I would consider the top in value of the dollar or the bottom of the value in euro and the pound. We got to 104 in the pound and parity in the euro. A lot of Europeans who had money in the US stock market in that terrible year last year, because of the profit they made on the currency, they were pretty flat and they went home, and Americans don't think that way. But for them, they made a huge profit in the currency, offset some of the loss they had in the stock market, and they pulled a lot of money, I think, out of the United States.
So, what's happened since? The dollar pound has gone from 104 to 126 and the euro, about the same movement where our dollar has diminished in value. So, they made a very good move. They made a very good move in going home. There's several factors, I think, at play in that. One is that's the only controversy here. One is a little bit of this isolationism that's going on in the world. There's a lot of politics going on. But I think that if you broadly look at the pound just broadly, in my career, you would say 100, 200. In October of '85, it went to 105, 104, and then it went up over two and then it went back down to the bottom of that range, in which point, I think sterling was a good buy.
Ben Miller:
Just to clarify, so $2 per pound or $1.05 per pound. So, you're talking about the exchange rate.
Noreen Harrington:
Yes.
Ben Miller:
The implications to the dollar and treasuries and fundability of the US deficits, I want to get there. I want to build up from your background because I think it really helps us clarify the separate issues they have to understand. So, currency, you've said this to me many times and I still don't understand it, but foreign investors think currency first, product second. So, product, they may say, "Okay, US dollar," and they say, "I want to be real estate," but they may say Japan and they want to be in tech equities. Why do they choose currency first?
Noreen Harrington:
We all know investors who do macro and I think that again, American investors, normal investors here are often dollar orientated and they don't think about the currency. If the dollar's going down or up, it has macro connotations to it. So, think about, let's just go back to the trade that people did at the end of last year. If you were a European fund manager and you brought your money home, you've made a 20% return on the currency, regardless of what you've made, and you've made money on the underlying equities if you bought them. So, again, it really makes sense for investors to think about whether they should be in international funds or not. I think it is a time where international are going to outperform the United States and they haven't been as attractive mainly because the dollar has been very, very strong.
Ben Miller:
But as a US investor, why do I care?
Noreen Harrington:
Let's go back to treasuries and the demand because I think if foreign investors believe the dollar's going down, then they're going to put their money elsewhere and that will turn off the demand for some of the deficit money, as you said, 31 trillion we need to do. So, again, I think that supply and demand run all markets, and so I think it is a factor then as to what the world thinks about currency in order to make the right allocations.
Ben Miller:
When I think about the dollar in terms of what drives its value, so obviously the headline interest rate set by the Fed drives US dollar value. What else would cause it to weaken? Why is there an expectation that the US dollar is headed towards declines?
Noreen Harrington:
Well, it's a reserve currency, or the reserve currency of the world. What does that mean? It means it's stable, it means we have a very strong central bank, and it means we have a politically strong country. Many, many times, Ben, in my career, I've watched the debt crisis go right to the cliff and we always got it done. So, it was a lot of drama, maybe unnecessary drama, but it was a lot of drama and then it got done. I have to say for the first time in my own career, I'm more nervous now and I think I reflect a little bit of the worldview. I'm a little bit more nervous, or maybe not nervous, less confident on Washington's ability to do basically their job.
But the deficit represents money we spent and money we need to pay back and people believe that we're good for it and that they believe US treasuries are like cash and they believe that the United States will always pay their bills. Some of the rhetoric out of Washington, I think, can have long-term detrimental effects. The biggest cost of the deficit is the interest rate. Our interest rates have gone up, so the deficit's growing much greater than it was when rates were near zero. If we default even one day, I think the ramifications could be on your children and their children, and we have a divisive Congress. This needs to get done, no matter what.
Ben Miller:
We're getting to the heart of it here. So, there's the short-term consequences and the long-term consequences. Let's do the short-term consequences first because they'll illuminate the longer term consequences. 2011 was a debt ceiling crisis. How is this different? Why is it different?
Noreen Harrington:
It's interesting because I was thinking about that. My whole career, why did I have confidence? Why did I think they would get it done? There was always a lot of rhetoric back and forth between Republican and Democrat. But in the end, they did their job and they passed it. This time, they're throwing out alternatives that are a trillion dollar coin, or we shouldn't have a budget ceiling it all and we should just spend money without having this ceiling. I think that it undermines a little bit that we're talking about not getting it done.
In one aspect, we always talked about a deadline in my career, just a deadline, and they can move to the deadline and they could borrow from backdoor ways and the deadline could move. But they were always going to get it done. Now, I'm hearing alternatives [inaudible 00:26:59] a little bit more unsettling that they think we shouldn't have a budget ceiling. Part of the reason people trust us is you have to be fiscally responsible and you have to be able to pay your debts, and people knew US governments as risk-free. It's feeling a little riskier.
Ben Miller:
The US was downgraded in 2011 and I'm trying to remember because it feels recent and at the same time, a decade ago. But the US government shut down. I don't remember any headlines about actually a default in 2011.
Noreen Harrington:
We managed to pay our bills. Again, I think that Yellen has backdoor methods. She can deploy through the Fed to make sure that we don't default. But I think a default go to the long term is terrible. We have the blessing of people putting money in US treasuries because they deem it's free, it's riskless, and it's viewed as cash, a good yield. If you default, will you pay a higher price forever? Again, the largest aspect of the deficit is the interest rate that we pay. If that were exponentially higher because of a credit rating being lower or a default, that would be 30 years of just years and years and years of higher rates. It's a scary situation. It's not the only one that I think is affecting the dollar because I think there's another big macro event going on, which is the dollar as a reserve currency, and I think the dollar will be the reserve currency of the world.
But marginally, that seems to be changing. Saudis took yuan in oil. There's transactions going on where people are now taking other currencies. Will it displace the dollar as a reserve currency? No. But that marginal difference from people holding dollars, again, still comes back to the deficit and the demand for US treasuries. This is, again, the first time in my career that there's a marginal difference on the dollar as a reserve currency. So, there's a lot of crosswinds going on on a macro basis that I think people need to think about, and they have ramifications for quite long periods of time.
Ben Miller:
Two big points you're making. Let me just take them in part. So, first one, just to argue it here, the US was downgraded in 2011. Within a few years, interest rates are zero. You default for a day, does it really actually undermine the US as a borrower in practice? Where does that marginal dollar go? How does it actually really drive up the cost of interest?
Noreen Harrington:
You've seen it in real estate, Ben. In 2011, people defaulted in real estate and that used to be, was a big X on you if you had a default in your history. We've managed to minimize some of the events of 2011, and including what happened in treasuries. We did go to zero and people trusted the US would pay them back. So, I might be overstating a little bit the fear of a default. But generally speaking, a default would mean a lower credit rating and a lower credit rating means a higher interest rate that you would not be worthy of riskless. I think that will over time be priced in, and the deficit is exponentially bigger. So, we have a supply side that's exponentially bigger than 2011.
Ben Miller:
It's forecast to go to 52 trillion by 2033. So, 10 years from now. But what's the inside view for somebody who's been on the treasury desk, close to a lot of people who are all on the inside? Every time I talk to you, I hear inside view. So, what about your view, though, is different from an outside view like I would have?
Noreen Harrington:
As I said, I think that most people still ... A betting person would say Congress will get this done. We've gotten to the cliff, we paid chicken. In the end, they get it done. I am marginally more nervous this time because I hear alternatives to getting it done, like [inaudible 00:32:36] or maybe we don't even need budget deficits. But I think in the end, the people in charge will know how bad it is not to get this job done. So, I'm hopeful that even if we have to shut down the government for a day, that we find a way to get through this without much drama. The one other thing that scares me a little bit more about this one is the world is different. We never saw anyone challenging us as a reserve currency. That's brand new. There's one other big natural event going on that I have to throw into the mix, Ben, if you would allow me.
We showed the world when Russia attacked Ukraine what financial warfare looked like. We showed the world and controlled through swift the architecture of the financial infrastructure of the world and we took people's money. We took [inaudible 00:33:51] money. We shut down accounts. There's a saying in the Pentagon that you're always fighting the last war. That can sound negative, but it's actually positive. What you're looking to do is close all the loopholes so nobody can do it again. What I believe is happening in the world is we show them the blueprint for financial warfare and everyone in the world is saying, "Oh, I never want that to happen to me. What can I do?" China is building an alternative to SWIFT and a lot of countries are joining on for that. Again, never in the history of my career has there really been an alternative to the United States infrastructure. But I can see one coming now.
Again, these are gigantic strategic macro issues that I think will play a role over the next decade and the United States needs to think about the size of its deficit in that context of an alternative financial system that may exist, and that there's one more element, and I'll throw more things on the fire here today, but the talk of a digital currency. Here's for the first time again [inaudible 00:35:28] possible alternative to the dollar. I don't want to get into the whole thing of digital currencies, but if you are in an emerging country that doesn't have a strong central bank, you import dollars because we have a very strong central bank. But a digital currency gives you a lot of advantages. More people have cellphones than bank accounts and they deem their money safer transferring it digitally than some of the infrastructure to transfer it from the United States to different emerging countries vs. early on in my career where everybody just trusted the United States and we could just continue to deficit. I'm just wondering if any of these macro events changes that and changes the demand for the dollar and changes demand for treasuries.
Ben Miller:
I agree that the risk of it was underestimated. However, in the counter forces here, China runs some huge current account surplus, they sell more to us than we buy from them, and they have a fixed currency. So, it doesn't actually appreciate. So, they would have to change their entire export-oriented economy in order to not continue to buy dollars. That may happen, but there's no indication so far that they would sacrifice their export industry in exchange for the benefits of a alternative reserve currency.
Noreen Harrington:
I totally agree with you. I totally agree. I think the Chinese economy being weak, they're trying to grow internally more, but they can't. They need the export economy to help them grow. But I think that this alternative system to SWIFT is going to take a while for them to get in place. But I do think that there is movement in that direction that will not stop, and you're right. They've got a fixed currency. One would imagine you would probably have to slope that at some point if this is what you were going to do.
The other thing I would just say is when I worked on the euro, Ben, all I heard was naysayers. Won't happen, won't happen, won't happen, won't happen, and it happened. Won't last, won't last, won't last, and here we are. So, the bottom line is I'm more of a believer in some of this change because I watched it. I watched 11 countries go to one at a weekend, and there were more naysayers in the world than anyone on that. When you think about it, adopting a digital currency is a lot easier than giving up a national currency.
Ben Miller:
We didn't cover this, but so you helped run the convergence of all the currencies for Goldman.
Noreen Harrington:
No, I was at Barclays Capital at the time, but I worked on the group that was working to ultimately make that happen. It's interesting because I would say Americans and Brits, it was project management for us and we didn't really have any luggage. We didn't have a national currency we were giving up. The German, the French, the Italians, it was a lot more emotional for Americans and Brits wasn't emotional. It was the job we had to get done. But it's tremendously interesting to me that it got done. You're talking 2000 and here we are in 2023 and for global trading, for a lot of reasons, the euro has flourished. So, at the end of the day, I'm not really a naysayer when they say that these big things can happen because my career says differently.
Ben Miller:
Why isn't the euro the alternative reserve currency? It seems it has all the attributes of stability, political stability, it's more politically neutral globally. As opposed to the yuan, the renminbi does not meet any of those qualifications.
Noreen Harrington:
I agree with you on that and the euro's doing better right now. But I think the euro, again, marginally could displace the dollar a bit. I think both the pound and the euro, I think they're both [inaudible 00:40:26] higher relative to the dollar.
Ben Miller:
Isn't there a world, or at least I heard this argument, so maybe you can take it apart, but there's a world where people argue the US should give up its dollar reserve currency. It's actually forcing ongoing militarization. We should pay our way and higher costs of funding our deficits will force us to cut budgets. So, we're gaining cheaper cost of capital, but it's not free.
Noreen Harrington:
It's not free. The interesting thing about the argument that's underway at the moment, Ben, is well, Congress wants pork for spending on projects, they argue. But now we need to pay for those programs, and I think that there has to be some cutting back. We've gotten to a deficit that it's mind-blowing. It's a mind-blowing number and we keep on spending more militaristically, and there are people that say if we cut back our spending, we'll have less to spend on these conflicts. I don't really think that argument is going to win the day, but I really think that this country needs to think about the size of this deficit and try and make some constructive changes to get it down because it isn't free and it's not going to be free if we keep spending like this.
Ben Miller:
Just to, again, either clarify or take an argument to you here, the budget was approved by Congress and the Presidency. This is a separate legislative action for a budget that was approved by both Houses and the President. So, they do have a budget setting process. The debt's ceiling is a separate mechanism that in some ways, it should be done in the budget setting process. It shouldn't be done in the borrowing process.
Noreen Harrington:
I agree with you. I do agree absolutely with you on that.
Ben Miller:
So, the debt ceiling crisis that may happen, it's a consequence of a budget that straddles a new control of one of the chambers. So, it's historically 2011 and '94, that's when there were the most serious debt selling crises because that's when there was a different party of controlling in Congress than it was in the Presidency, and that basically sets up a new budget process, a resetting of the budget that would have been previously approved. So, it's a political process.
Noreen Harrington:
I actually think the passing of the budget, the passing of the debt ceiling should not be cliff diving, chicken, all these things. We spent the money and we need to pay, and it's a lot of political theater for two sides that disagree with each other. But at the end of the day, the United States, we have a budget. As you said, this is the budget they came up with and it requires the debt ceiling to be raised. It's playing all over the world, this political drama, and I believe the implications are not good in the long run. I hope that we do the right thing in Washington and simply pass this debt ceiling and continue to work to get this deficit down.
Ben Miller:
How should investors operate or invest during the next 30 to 90 days, for example?
Noreen Harrington:
Consciously. I think that short-term rates in the United States are very attractive. Whether you look at bills up to two year notes, they're paying very good yield, and I think the banking crisis has driven money to treasuries. The banking crisis to me represents old school, what I went through early on in my career where big banks fail. So, there used to be a direct relationship between Fed and the banks. So, if the Fed raised rates, it took money away from the banking system, then for no loans and it directly slowed down the economy. After running market mutual funds were created, it's a little less direct, and the Fed was raising rates when Silicon Valley Bank failed. But every bank is defending liquidity right now in their banks. So, they are not [inaudible 00:45:47].
So, all of a sudden, the Fed doesn't need to do so much. They probably would've had to do higher longer. But the banks have done the job, I think, for the Fed at this point. So, I don't feel the Fed has to raise rates much more. The economy is slowing, but it's slowing from the banking system, not lending. So, I think treasuries at these levels, particularly in the front end, are a good place to be. I still at the end of the day hope Congress stops the drama and passes a debt ceiling and I think you'll be fine there. The other thing that they need to do is clarify depositors and change the levels in which some depositors are guaranteed. That will help the banking system have the liquidity that they need as well.
Ben Miller:
I'm seeing on the ground the pullback in lending from the consequences of the banking collapses. It's not in the federal data yet. It's not in Fed data. Rates are going to stay five at least through the end of the year. There's a lot of institutions that actually can't survive that long with rates over five. Then whether those banks or potentially non-banks, how do you think about that risk and that effect on markets and the economy?
Noreen Harrington:
I think that's going to have the biggest effect on whether we have a recession, how long, how deep, and which is really what we care about. The market's currently telling you not long, not deep. To your point, Ben, I think you're absolutely right. You're seeing it on the ground already. Banks are not lending. They're trying to hold onto the liquidity. There're still runs on banks. I think we haven't seen the full effects. I think we're in the first or second inning of the bank story playing out, and non-banks as well. But I think that holds the key on whether they have the liquidity to lend and whether they lend as to the effects on the economy, much more so than Fed. I think the Fed is nearly done.
Ben Miller:
I don't have the duration of experience you do. From what I've seen, the financial system basically breaks every time there's a recession or every time there's a downturn, financial system is a source of instability and problems, and inflation's been surprisingly persistent. So, how do you imagine the financial system breaking basically as it has already been? Let's just say it goes as bad as you could forecast. What does that look like?
Noreen Harrington:
I kept asking the question. In '94, we raised rates 300 basis points, and we had raised four 50 and I kept saying, "Why is no one failing?" I was looking for a failure. I thought it might come in the non-bank lending because a lot of that second tier debt I thought looked very vulnerable, and it ended up coming because of regulations being removed into the regional banks. But I think we could see more failures. It could be a harder landing if the banks continue not to lend or those non-banks fail. This came off of the great financial crisis. We're a little bit more forgiving of failure. So, I think that in real estate markets, I think you will see walkaways, people walk away from projects, and I think people are not re-upping for new project. You can see it on the ground already. We just haven't really seen it in the financial data. But I think the things I look at tell me things are slowing and that's why I say the Fed is done.
Ben Miller:
But in some ways, that's a soft landing compared to some financial crisis. So, I think about it as an insurance company blowing up or some other source of risk that people aren't paying attention to. But if that doesn't happen, you're talking about a recession, and the market's right. It is somewhat short and somewhat shallow, probably mostly impacting people who have assets rather than people who have jobs.
Noreen Harrington:
I think if you have liquidity, it'll be an unbelievable opportunity coming for you to have rescue capital because I think the people without liquidity, like in every crisis, they're going to be the ones hurt. But I just don't think we're going to get out of the woods quite this easy. A couple of banks fail and it's over. I just don't see that. I think we have a little bit more wood to chop in this bank story.
Ben Miller:
Well, just to wind it up here, you've been through many different downturns and upswings. You've had your share of interesting experiences.
Noreen Harrington:
Good and bad of finance.
Ben Miller:
Good and bad of finance. So, for the rising generation, what are the lessons learned? What's the advice for the next generation?
Noreen Harrington:
One of the things we didn't touch on that I actually feel very proud of in my career, Ben, is with four other women, I started 85 Broads, which was a women's network to encourage and mentor women in finance. It was bought by Sallie Krawcheck and changed its name to Elevate. It's really encouraged women to get in financial markets. I feel very blessed by my career. I feel I never really had a job. I loved what I did, and despite the ups and downs. The one thing I would have to say is it's not always an easy path, but you have to believe in yourself, trust your gut, surround yourself with really good trusted advisors and mentors, and I think that if you do that, you'll be successful.
Ben Miller:
Coming from you, you would know. Well, thank you for coming to Onward. It was wonderful.
Noreen Harrington:
Thank you for having me, Ben. You've been a good friend for a long time. I really appreciate it.
Ben Miller:
You've been listening to Onward, the Fundrise podcast featuring Noreen Harrington, former Managing Director at Goldman Sachs and Barclays Capital and CEO of DataWhys. My name is Ben Miller, CEO of Fundrise. We invite you again to please send your comments and questions to onward@fundrise.com. If you like what you've heard, rate and review us on Apple Podcasts, sure to follow us wherever you listen to podcasts. For more information on Fundrise sponsored investment products, including relevant legal disclaimers, check out our show notes. Thank you so much for joining me. We'll see you next episode.
