00:00:00
Frustration. - Yeah.
- Nervous frustration.
00:00:03
I think people feel that we don't
care enough about this.
00:00:06
And I was trying to understand
why not, and what could change that.
00:00:10
And— and I think what—
what I like to say—
00:00:12
that was, without question,
the issue. I think people don't understand
00:00:16
why this is important. Clearly.
People at large. Voters.
00:00:18
Let's put it this way. Politicians
as a result.
00:00:21
And I think— I like to emphasize
this. If this government continues
00:00:26
to ask for $2 trillion a year, we're not
going to have enough resources to do
00:00:31
all the exciting things
that we talk about.
00:00:33
There's just not going to be enough
to keep up on AI investments, on
00:00:36
digitalization and so on. There's
just not going to be enough resources.
00:00:40
Welcome to <i>The Ripple Effect</i>, the podcast
that takes you on a journey
00:00:44
through the minds of Wharton faculty.
I'm your host, Dan Loney,
00:00:47
and in each episode, we'll be diving
deep into the inspiration
00:00:51
behind the groundbreaking research
that Wharton professors have conducted,
00:00:55
and exploring how their findings
resonate with the world today.
00:01:00
Recently, the Wharton School
hosted its Future of Finance
00:01:03
Conference, and the one-day
seminar discussed a wide range
00:01:07
of topics at the forefront of
the conversations going on right
00:01:10
now, including the path of the
Fed, AI and finance, and the
00:01:14
economic impact in conflict.
We're joined right now by Joao Gomes
00:01:19
and Itay Goldstein, Professors at
the Wharton School who were the
00:01:23
leads at the event. And
they join us to discuss what was
00:01:27
talked about. Gentlemen, great
to talk to you again, as always.
00:01:31
Thank you, Dan. Great
talking to you.
00:01:33
It's great to see you.
00:01:34
I'll start out with both of you,
and Joao, I'll let you go first.
00:01:38
What is it about this conference
in this time that makes it
00:01:42
important right now,
do you think?
00:01:44
I think finance is a super
exciting field at this moment. I
00:01:47
think it's something where
Wharton has a unique advantage
00:01:50
of being able to put together,
obviously, great faculty, but
00:01:53
also a distinguished group of
alums and students, even, that
00:01:57
were at the conference to
benefit from some of these
00:02:00
lessons. And of course, Penn
Washington is a fantastic
00:02:03
facility. A lot of what's
exciting in finance is happening
00:02:05
in Washington right now, with
deregulation, and thinking really
00:02:10
big about the future.
Particularly, I think, in AI and
00:02:12
private markets, in stablecoins,
digitalization, but also
00:02:16
a lot of the scary stuff. A lot
of concerns about geopolitics
00:02:20
you mentioned, but also the
debt. What's happening with the
00:02:22
Fed? There's a lot of really
meaningful conversations. And so
00:02:25
this conference, is a
great opportunity to put
00:02:28
together a lot of people to
think about it as we go into
00:02:31
2026. What is it ahead? What are
the challenges? But also, a lot
00:02:35
of exciting opportunities.
00:02:37
Itay, what draws your attention
right now?
00:02:41
So, you know, we had panels on
issues that are currently on the
00:02:45
agenda, and it was striking to
see how crucial each one of them
00:02:49
is. So we started by talking
about the future of money,
00:02:54
because of all this push to
crypto and stablecoin and
00:02:58
digital deposits and things like
that. And then we talked about
00:03:02
the Fed, the future of the Fed,
because clearly there is a lot
00:03:05
going on at the Fed right now. I
led a panel on AI, and we had
00:03:10
other panels on the debt, the
public debt, private assets,
00:03:15
things like that. When you're
looking at each one of these
00:03:17
topics on its own, it seems like
this is just crucial for the
00:03:22
development of the financial
system and the development of
00:03:25
the economy. And then when you
put it all together, you realize
00:03:28
how big this moment is. There are
really a lot of things that are happening.
00:03:32
So your panel was about AI.
Obviously, artificial
00:03:36
intelligence is discussed in
almost every conversation in
00:03:39
every sector right now. Where
does AI in the world of finance
00:03:43
stand at the moment?
00:03:45
So the thing about AI is it is
not really originating from
00:03:49
finance, right? I mean, we had a
FinTech revolution over the last
00:03:54
two decades where there were a
lot of innovations that came out
00:03:59
of finance. Blockchain, crypto,
things like that, kind of trying
00:04:03
to decentralize the financial
system. The thing about AI is it
00:04:06
kind of builds on top of that.
It's not originating from
00:04:09
finance. As you say, we hear
about it everywhere. So I would
00:04:13
say here, finance is just one of
the sectors in the economy that
00:04:17
is affected by AI, just like all
the other sectors. However, it
00:04:20
is important to note that the
effect on finance is probably
00:04:24
bigger. There is some data that
supports that. And this is
00:04:28
because, in general, people in
finance make a higher wage on
00:04:32
average, and AI is affecting
people of higher wages. So it is
00:04:37
affecting finance more, and it
is really broad. So if you think
00:04:41
about all the applications in
finance, it affects asset
00:04:44
management, it affects credit
and insurance, it affects
00:04:49
trading, it even affects
regulation of finance. So
00:04:52
really, everywhere you look, AI
is affecting the way that
00:04:56
finance is being done.
00:04:58
The subhead of your group was
"Opportunities and Risks." So I
00:05:02
think a lot of people
obviously believe there's a
00:05:05
great opportunity here, but they
also realize that there can be
00:05:08
risks associated with this as
well.
00:05:11
Yeah, absolutely. I think there
are huge risks. And I have
00:05:14
emphasized some of this in my
own research, and I think I
00:05:17
talked to you about it before,
but really what we were looking
00:05:21
at is kind of thinking about
algorithms that are trading on
00:05:26
their own in financial markets,
which is something that we
00:05:29
increasingly see, and how AI is
deployed to help them figure out
00:05:34
the strategy. So basically,
you're using reinforcement
00:05:37
learning for these algorithms to
figure out on their own what
00:05:41
they should do, how they should
trade, how they should optimize
00:05:44
over time. And you get all sorts
of interesting interactions
00:05:48
among them that potentially lead
to reduced competition,
00:05:52
potentially lead to financial
fragility. And those are
00:05:56
certainly things that I think
regulators should worry about
00:05:59
when it comes to risks in the
future financial system.
00:06:03
So, Joao, when you talk about
the world of finance, I think a
00:06:08
lot of people also have the
question of, how is it going to
00:06:11
impact our currency? We
obviously have cryptocurrency,
00:06:13
but will we get to a point, at
some point down the road, where
00:06:17
we actually see something like a
digital dollar?
00:06:20
I think that's the one topic
where I think the general
00:06:23
consensus was no. I don't think
so, and I think I agree with
00:06:27
that. I think that the Fed has
been very mindful of the
00:06:31
political sensitivity of
introducing a digital dollar. I
00:06:34
think there's no popular support
for that, largely because of
00:06:36
concerns about privacy. That's
not to say they will not happen
00:06:40
in different countries, that
they will adopt digital— central
00:06:42
bank digital currencies, but I
think in the US that's far
00:06:45
apart— that's very far into the
future, if ever. I think what
00:06:48
we'll have is a continuous push
towards having more privately
00:06:53
issued forms of what I'm going
to call money or deposits. And
00:06:57
how do we ensure that those
things remain relatively stable?
00:07:01
They provide access, they
democratize access to capital
00:07:05
markets in potentially many
different ways, particularly
00:07:07
private capital markets. I think
that was a really interesting
00:07:09
conversation we had. But how do
we make sure we have enough
00:07:12
stability, enough
predictability, enough sort of
00:07:16
safety rail guards around it to
make sure that even in times of
00:07:19
great distress, like what we had
in 2008 or 2020-21, those assets
00:07:24
remain very liquid and very
marketable and provide the
00:07:27
safety that people need?
00:07:29
So since you brought up the
discussion of the Fed, we might
00:07:32
as well dive into that next,
because certainly the Federal
00:07:35
Reserve is drawing a lot of
attention these days from all
00:07:39
fronts. How do you view the path
of the Federal Reserve, Joao,
00:07:43
right now? And I think there are
concerns about where it could
00:07:48
potentially be headed in the
future.
00:07:51
Sure, great concerns. I think it
Itay will have a lot to say about
00:07:54
that too. I think what I like to
say about the Fed is, I think we
00:08:00
are sitting here in the United
States and thinking a lot about
00:08:02
the Fed. I think a lot of these
problems are really global.
00:08:05
Every country in the world is
facing them. And I think
00:08:08
independence is something that
we cherish very much in the
00:08:11
United States, and it sort of
dominated the debate. I would
00:08:14
say that regardless of what we
think about independence, per
00:08:18
se, I think there's a lot of
realities about rising debt and
00:08:23
external pressures, competitive
pressures from other countries.
00:08:25
There is real challenges to how
central banks can operate and
00:08:29
the environment in which they
can operate. We like to talk a
00:08:31
lot about the fact that debt is
going to explode, and that's
00:08:34
going to constrain what central
banks can do everywhere. You see
00:08:37
it in Japan right now. And I
think Japan is a great example
00:08:40
of how you sort of take the US
environment, take the president,
00:08:43
Jay Powell, out of the
conversation, and you still have
00:08:45
the same exact issues facing
other parts of the world. So I
00:08:49
think the Fed is both a
challenge and an opportunity.
00:08:52
It was definitely one of the most
entertaining discussions we had,
00:08:57
as you can imagine. It was very timely.
And I think the Fed has a lot of
00:09:02
big judgment calls to make,
digital dollar being one,
00:09:06
regulation of the
financial system, oversight of
00:09:09
the financial system, how much
the Fed cares about financial
00:09:12
stability. I think this is a leg
of monetary policy being very
00:09:16
much ignored in the past, and is
going to rise in importance as
00:09:20
we go forward. There's a lot of
judgment calls and competence,
00:09:23
which is not a word that we hear
enough when we talk about the
00:09:26
Fed, is going to be much more
important than, I think,
00:09:30
independence, in my opinion.
00:09:32
Itay, how do you view the path
of the Fed right now?
00:09:36
Yeah, so I agree with what
Joao said, generally. I think
00:09:39
there are the long-term issues
and there are some of the short-
00:09:42
term issues. I think what we see
here in the US right now is all
00:09:45
this pressure around the Fed
independence. I came out of the
00:09:50
panel discussion a little
encouraged in the sense that I
00:09:55
do think people were looking at
it in perspective and saying,
00:09:59
you know, at the end of the day,
there is enough stability in the
00:10:02
institution that will help it
navigate forward despite all
00:10:07
these pressures. It's not that
easy to put in someone in the
00:10:11
FOMC that is just acting
completely on behalf of someone
00:10:15
else. And we had people there
that were previous Fed
00:10:19
presidents and Fed governors.
And I think overall, I came out
00:10:22
thinking, "Well, hopefully we can
sustain that." But yeah, I mean,
00:10:28
the path forward has a lot of
issues that need to be thought
00:10:31
about. And I agree with the
point about the tension between
00:10:35
monetary policy and financial
fragility in the economy at
00:10:39
large. And I think these are
issues that the Fed has to
00:10:42
debate going forward.
00:10:44
Obviously, global conflict was
one of the things that you
00:10:47
talked about, Joao. There's
certainly a lot of different
00:10:50
events going on right now.
Obviously, Russia, Ukraine,
00:10:53
Israel and Gaza, Venezuela, what
we've seen go on there.
00:10:58
How are these events having an
impact on the world of finance right now?
00:11:05
I think the biggest impact is—
indirectly, is on the dollar and
00:11:09
the financial system.
Fragmentation of the financial
00:11:11
system and of currencies. I
think that's been very obvious.
00:11:16
It certainly has had more impact on
some of these countries, like
00:11:18
Russia, India, China and so on,
than it has on us. I think the
00:11:22
conversation was interesting
because we talked a little bit
00:11:24
about how countries are
preparing themselves or
00:11:27
insulating themselves from
potential sanctions in the
00:11:29
future, to prepare for future
conflict. That was a really
00:11:33
interesting and a little
disturbing but unavoidable part
00:11:36
of the conversation. I think
that is— that is something that
00:11:39
is not good for the economy at
large, financial markets at
00:11:43
large. Fundamentally, it's going
to make it harder for us to grow as—
00:11:46
as an economy, as a
world economy, because we don't—
00:11:49
we cannot tap that sort of large
pool of resources we used to
00:11:52
just five years ago or 10 years
ago. So that fragmentation is
00:11:55
important. Does that impact the
dollar? Does that impact the US
00:11:58
financial system? I think the US
financial system
00:12:00
is mostly insulated, with
the exception of the US
00:12:05
sovereign debt market, which
depends a lot on external
00:12:08
capital flows. But does it
impact the dollar as the world's
00:12:14
reserve currency? That is a
conversation that is going to
00:12:17
continue for years,
I think.
00:12:18
So Itay, for part of your
conversation— and I know you and I
00:12:21
have talked about this in the
past, is AI and regulation. And
00:12:24
with the conflict that's going
on, how much concern is there
00:12:28
about AI as a tool that can be
used by bad actors, that can
00:12:33
have an impact on the financial
sector as we move forward?
00:12:37
I think there is huge concern
about that. It didn't come up so
00:12:41
prominently in the panel. But I
think if you talk to other
00:12:45
people in other contexts, this
is something that people think
00:12:48
about. I mean, first of all, it
doesn't have to be bad actors to
00:12:53
create a lot of damage. So you
could take your hedge funds of
00:12:56
today, and the financial
institutions, financial traders,
00:12:59
and they start using those AI
algorithms, and those AI
00:13:03
algorithms just create some
damage. So it might be that this
00:13:07
is something that is not
intended and can still create
00:13:11
damage. But as you point out,
there is also a concern about
00:13:14
bad actors that can potentially
use the US financial system, or
00:13:18
any other financial system, to
create damage. So you know what
00:13:22
prevents someone from just
deploying an AI algorithm and
00:13:26
trying to manipulate financial
markets? Especially these days,
00:13:30
I think, with the rising
prominence of prediction
00:13:33
markets, which is a topic we
didn't touch on so much, but I
00:13:38
think is quite important. But
with prediction markets, you can
00:13:42
more easily manipulate them, and
full prediction markets have an
00:13:45
effect on mainstream financial
markets. And when you couple
00:13:48
that with AI algorithms, I think
there is quite a lot to think about.
00:13:53
Joao, I know you led the
discussion on the issue of debt.
00:13:58
What was the general consensus
on dealing with what has been,
00:14:02
at least from the US side, just
a massively growing level of
00:14:06
debt, that we have?
00:14:08
Frustration.
00:14:10
Enormous frustration. I
think people feel that we don't
00:14:13
care enough about this. And I
was trying to understand why
00:14:16
not, and what could change that.
And I think what I like to say—
00:14:20
that was, without question, the
issue. I think people don't
00:14:23
understand why this is
important, clearly. People at
00:14:26
large. Voters, let's put it this
way. Politicians as a result.
00:14:29
And I think— and I like to
emphasize this. If this
00:14:33
government continues to ask for
$2 trillion a year, we're not
00:14:37
going to have enough resources
to do all the exciting things
00:14:40
that we talk about. There's just
not going to be enough to keep
00:14:43
up on AI investments, on
digitalization and so on.
00:14:46
There's just not going to be
enough resources. And I think if
00:14:49
we don't address that, all these
rosy pictures we have about the
00:14:53
future don't come to fruition.
So there's a lot of frustration.
00:14:57
Let me finish up with this as
kind of a wrap up of the
00:15:00
conference— and Itay, I'll start
with you. When you think about
00:15:03
all that was discussed during
this seminar, what do you hope
00:15:08
came from it? Is there— is there
one theme that you left that
00:15:11
maybe is sticking with you as
you move forward here?
00:15:14
Well, I think there was really a
punchline that came out of each
00:15:18
one of these panels. I would say
one thing that caught my
00:15:22
attention in the AI panel at the
end of the day, you know, one of
00:15:26
the big issues with debate on AI
is, what is this going to do to
00:15:30
the labor market, and is this
going to just replace humans?
00:15:35
And I think there was a bit of a
sense of optimism coming out of
00:15:38
it, that even though AI is
increasingly used, from Anthropic,
00:15:44
for example, they told us that
they are still hiring more
00:15:49
engineers. More computer
scientists. So there is still
00:15:52
room for collaboration between
AI and humans. And hopefully
00:15:56
we're going to— we're going to
see that. As I mentioned, I think
00:16:00
the Fed panel was also
particularly illuminating in
00:16:04
kind of trying to think about
all the scenarios and how the
00:16:07
Fed can still be resilient
despite all the
00:16:10
pressures. But there was, there
was a lot more.
00:16:14
Joao?
00:16:16
I'd say overall, there was quite
a bit of optimism, excitement. I
00:16:19
think there's— there's a sense
that this is a really
00:16:22
interesting time to be in this
field. There are issues and
00:16:25
challenges. We talked through
them. But I think even there,
00:16:27
the general sense is we could
navigate them. And so I would
00:16:32
say, yeah, it was a very
positive— this is an exciting
00:16:35
time to be in the field,
particularly the next two or
00:16:37
three years. I think we'll see a
lot of transformations, really
00:16:40
revolutionary transformations. So
I would say that that was the, I
00:16:43
think, the undercurrent through
the entire set of talks.
00:16:47
Gentlemen, I appreciate your
time. All the best. I look
00:16:50
forward to talking to you both
throughout 2026. All the best.
00:16:52
Okay, thank you very much.
- Thank you, Dan.
00:16:54
Thank you. Wharton Professors
00:16:56
Joao Gomes and
Itay Goldstein.
00:16:58
Thank you for listening to
<i>The Ripple Effect</i>.
00:17:00
We hope you found this episode
informative and engaging.
00:17:03
Don't forget to subscribe
and leave us a review
00:17:06
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00:17:09
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