Charles Bean, Professor of Economics, London School of Economics; former Deputy Governor for Monetary Policy, Bank of England; former Chief Economist, Bank of England.
Has the experience of the crisis changed your view of the central bank policy toolkit?
Former Deputy Governor Bean: Most certainly. First, the natural real safe rate of interest has been persistently depressed by a combination of high savings, weak investment and portfolio shifts in favor of safer assets. That means prolonged periods when policy rates are at their (near) zero lower bound are more likely, necessitating greater reliance on unconventional monetary policies instead.
Last week, our friend, Harvard Professor John Y. Campbell, delivered the American Economic Association’s 2016 Ely Lecture, the group’s most prominent invited lecture. His topic—a central challenge for policymakers and practitioners alike—is how to make modern finance work better for consumers who lack understanding of the opportunities and risks they face. Professor Campbell discussed how we can take the lessons from behavioral finance and household finance—a relatively new field that he helped establish—to help households manage the choices that they face. The ultimate goal is to foster decisions consistent with economic rationality (hence his title, “Restoring Rational Choice: The Challenge of Consumer Finance”) while minimizing the costs of government intervention.
We take this opportunity to highlight a few important points from Professor Campbell’s presentation (text here and webcast here)...
Switzerland is an amazing place, not least the skiing, the chocolate, and the punctual trains. The latter is part of the country’s exquisitely maintained infrastructure: there are no potholes, and no deferred maintenance of train tracks, tunnels, airports, or public buildings. Few countries go so far, but many can take a lesson: it pays to maintain infrastructure at least so that it doesn’t fail.
We bring this up now because financial markets are telling us that it’s a very good time to build and repair infrastructure: real (inflation-adjusted) interest rates have fallen so low that it has become exceptionally cheap to finance the improvement and repair of neglected roads, bridges, transport hubs, and public utilities. Yet, in the United States, we are doing less public investment than ever: net government investment has fallen to what is probably a record low...
Back in August, we explained the mechanics of how the Fed can tighten policy in today’s world of abundant bank reserves. Now that the first policy tightening under the new framework is behind us, we can review how the Fed did it, if there were any surprises, and what trials still lie ahead.
So far, the new process has been extraordinarily smooth – a tribute to planning by the Federal Open Market Committee (FOMC) and to years of testing by the Market Desk of the Federal Reserve Bank of New York (FRBNY). But it’s still very early in the game, so uncertainties and challenges surely remain.
Former President, Federal Reserve Bank of Philadelphia; former Dean, Graduate School of Business Administration, University of Rochester.
Has the experience of the crisis changed your view of the central bank policy tool kit?
Former President Plosser: I would say that the tool kit has not changed so much but the willingness to exploit it has expanded. Central banks have long had a great deal of power to intervene in financial markets in the conduct of monetary policy. Wide differences, however, have prevailed in central banks' regulatory and supervisory responsibilities over the financial sector...
The goal of every central banker is to stabilize the economic and financial system—keeping inflation low, employment high, and the financial system operating smoothly. Success means reacting to unexpected events—changes in financial conditions, business and consumer sentiment, and the like—to limit systematic risk in the economy as a whole. But as they do this, policymakers try their best to respond predictably to news about the economy. That is, there is a central bankers’ version of the Hippocratic Oath: be sure you do not become a source of instability...
On December 16, the Federal Open Market Committee is poised to hike interest rates, putting an end to the near-zero interest rate policy that began in December 2008. So, it’s natural to step back and ask what this episode has taught us about monetary policy at the near-zero lower bound for nominal interest rates. This is not merely some academic exercise. The euro area and Japan are still constrained by the zero bound. And, in this era of low inflation and low potential growth, policy rates in advanced economies are likely to hit that lower bound again (see, for example, here). How the Fed and other central banks respond when that happens will depend on the lessons drawn from recent experience...
Along with enormous misery, the financial crisis brought an opportunity for long-needed reform. At the top of the list was the clear need for more bank capital. To ensure resilience of the financial system, and protect the public purse, banks’ owners had to have much more skin in the game. That is, potential losses to equity holders had to go way up.
Unfortunately, the 2010 Basel III agreement missed this rare opportunity to make the financial system safe. And now, with the publication of the standards for what has come to be known as total loss-absorbing capacity (TLAC), the disappointment continues to grow. To understand why, we need to step back and address the big question for bank capital: how much is enough...?
Mary and Robert Raymond Professor of Economics at Stanford University; George P. Schultz Senior Fellow in Economics at Stanford's Hoover Institution, former Undersecretary of the Treasury for International Affairs; former member of the President's Council of Economic Advisors; and former Director, Stanford Institute for Economic Policy Research.
Has the experience of the crisis changed your view of the central bank policy tool kit?
Undersecretary Taylor: My reading of what has happened in the years leading up to and following the crisis, and including the crisis itself, is that we deviated from some of the policies that worked well for a couple of decades or more -during the so-called Great Moderation- and that has led to problems...
In 1974, when the Fed faced rising inflation, the U.S. government sought to “Whip Inflation Now” by encouraging people to wear “WIN” buttons. Today, the problem is reversed. Several central banks are having trouble creating inflation. Unfortunately, we doubt that “SIN” buttons – “Support Inflation Now” – will be any more effective than the earlier variety, which served mainly as fodder for late-night comedy.
As has been the case for some time, Japan is blazing the trail into the monetary and fiscal unknown. Today's Bank of Japan's (BoJ) leadership is far more determined to promote price stability than its predecessors over the past two decades. But the deflationary hole that Japan is climbing out of is so deep that the BoJ may need some help...
