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00:00THANKS FOR JOINING US. HOPE YOU ARE NOT GRUMPY AS TODAY IS FRIDAY. WHAT YOU TAKE FROM YELLEN'S TWO DAYS OF TESTIMONY? JOHN CO. -- JOHN: WE ARE PAYING TOO MUCH ATTENTION TO EVERY UTTERANCE. I DID NOT SEE ANY GREAT NEWS. WE MIGHT GET SLIGHTLY HIGHEST INCH -- WE MIGHT GET SLIGHTLY HIGHER INTEREST RATES LATER IN THE YEAR UNLESS SOMETHING BAD HAPPENS. ERIK: THERE WAS A LOT OF BACK AND FORTH BETWEEN FED CHAIR YELLEN AND MEMBERS OF THE HOUSE FINANCIAL SERVICES COMMITTEE, AND ON THE SECOND DAY MEMBERS OF THE BANKING COMMITTEE, PARTICULARLY REPUBLICANS, WHEN IT CONCERNS RULES-BASED MONETARY POLICY. YOU ARE FORMALLY -- YOU ARE NOW WITH THE HOOVER INSTITUTION, YOU ARE WITH THE CATO INSTITUTE. YOU ARE DEFINITELY NOT PAUL KRUGMAN. HOW DO YOU FEEL ABOUT THE POSITION REPUBLICANS ARE TAKEN ABOUT RULES-BASED MONETARY POLICY? JOHN: SAYING THAT WE ARE NOT -- WE ARE IN A POSITION WHERE EVERYBODY IS HANGING ON EVERY WORD THAT MRS. YELLEN UTTERS, AND IT IS PRODUCING EXTRA VOLATILITY. WE ARE PAYING TOO MUCH ATTENTION TO MONETARY POLICY. INFLATION IS LOW AND THINGS ARE GOOD AS FAR AS WHAT MONOPOLE -- WHAT MONETARY POLICY CAN DO. THE OTHER THINGS IT DOES -- BUYING ASSETS, REGULATING BANKS, ALL THAT STUFF. ERIK: WHY ISN'T THE MESSAGE GETTING THROUGH TO THE POLITICIANS, WHO IN SOME RESPECTS CARRY WATER FOR ECONOMISTS LIKE YOURSELF WHEN IT COMES TO THESE DEBATES WITH JANET YELLEN? THEY ARE TALKING ABOUT MONETARY POLICY, NOT ABOUT THESE OTHER ISSUES, WHICH ARE VERY REAL. JOHN: IT IS HARD FOR ME TO EXPLAIN WHY THE WHOLE WORLD IS NOT ALWAYS LISTEN TO ME. MATT: WHAT DO YOU THINK ABOUT ASSET PRICES. JANET YELLEN HAS BEEN TRYING TO FIGHT THAT DOUBLES IN SOME WAY. PEOPLE THINK SHE MAY HAVE OVERSTEPPED HER BOUNDS. IS IT FAIR FOR THE FED TO STAY -- TO SAY THAT YOU MIGHT WANT TO STAY AWAY FROM BIOTECH STOCKS, EVEN THOUGH THAT MIGHT CAUSE FALLOUT? JOHN: IT IS A GREAT EXAMPLE OF THINGS THAT CONGRESS MIGHT WANT TO THINK ABOUT. DO WE WANT THE FEDERAL RESERVE TO START WORRYING ABOUT ASSET PRICES? BY CHINA'S CENTRAL-BANK , THAT STARTS INFLATING THE BUBBLE. OR DO WE WANT THEM TO START PICKING BUBBLES? DO WE WANT THE FED TO WORRY ABOUT ALL DIFFERENT ASSET PRICES OR STICK TO WORRYING ABOUT INFLATION AND SHORT-TERM INTEREST RATE AND NOT TRY TO JIGGER EVERYTHING ELSE AROUND. THE LATTER IS A BETTER COURSE, AND THE SENSE -- THAT IS THE SENSE OF THE KIND OF DISCUSSIONS GOING ON. LET'S NOT HAVE THE FED DO EVERYTHING FOR EVERYTHING, CLEAN UP YOUR CRABGRASS, STOP ASSET PRICES FROM DOING EVERYTHING. MATT: ASSET PRICES IS YOUR WHEELHOUSE. WE WERE TRYING TO THINK OF A DIFFERENT WORD FOR WHAT TO CALL THE MARKET IN CHINA. SINCE IT IS NOT A MARKET, YOU'RE NOT ALLOWED TO SELL THE STOCKS 1200, 1700 SUSPENDED. WHAT IS GOING ON THERE? JOHN: WE SEE ALL THE THINGS THAT GOVERNMENTS DO BY ACCIDENT, THEY ARE DOING ON PURPOSE TO TRY TO INFLATE ASSET PRICES. THEY ARE LENDING MONEY TO PEOPLE TO BUY STOCKS AND FORCING COMPANIES TO BUY STOCKS. THEY ARE BANNING SHORT SALES OF STOCKS. THESE SORTS OF THINGS END BADLY. I DO NOT KNOW HOW TO PUT IT MORE POLITELY. MATT: DO YOU EXPECT THIS TO END BADLY? THIS IS YOUR GIG. ERIK: HOW GOOD CAN IT BE FOR CHINA IN THE LONG RUN P REVIEW PUTTING YOUR MONEY AND YOU CAN NEVER TAKE IT OUT? JOHN: WE WILL SEE IF YOU CAN NEVER TAKE IT OUT. KEEPING STOCK PRICES UP FOREVER IS DIFFICULT FOR A GOVERNMENT. THE PROBLEM IS THEY PUT THEIR CAPITAL UP. THEY SAID WE ARE GOING TO MAKE SURE STOCKS DO NOT FALL, RATHER THAN THE WAY STOCK MARKETS ARE SUPPOSED TO WORK. THEY GO UP, DOWN, NO ONE CAN TELL WHAT THEY ARE GOING TO DO. AND THEY LET YOU BEAR RISK. WHEN PRICES GO DOWN, PRICES GO DOWN AND YOU DO NOT HAVE ALSO TO

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Do Markets Pay Too Much Attention to the Fed?

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