Best Quotes from the Hutchins Center on Fiscal & Monetary Policy Inaugural Event

For our January 16 event—Central Banking after the Great Recession: Lessons Learned, Challenges Ahead—we commissioned three papers that were fodder for a lively conversation.  Here are some of the best lines of the day gleaned by research assistant Emily Parker.

Monetary Policy at the Zero Lower Bounds: Putting Theory into Practice
John Williams, president, Federal Reserve Bank of San Francisco:

  • “We did find that about once a century—a hundred year flood situation—you could have much more severe recessions where the zero lower bound would be a bigger issue.”
  • “You can’t just think that what happened in the 1930s or what happened in other countries is irrelevant for the United States.”
  • “But in practice explaining to the public and markets what monetary policy may or may not do in the next few years is very complicated, and often prone to misinterpretation.”
  • “I don’t think that the lower interest rates were an important contributor to the housing bubble. I think fundamentally flawed aspects of our regulatory environment were the key part of that story about the housing bubble. I think the Dodd-Frank and Basel III, and a lot of the other things we’re doing are addressing those concerns in a very important way.”

Martin Feldstein, Harvard University:

  • “The 2007 downturn was not only deeper and longer than the usual recession, but also differed in its origin and structure. It was not caused by temporarily high real interest rates, and therefore couldn’t be reversed by the Fed’s usual rate reduction. Even at a near zero federal funds rate the recession persisted.”
  • “What is clear to me is that a balanced fiscal policy should be part of the response when the economy is stuck with excess capacity at the zero lower bound.”

Regulatory Reform, Stability and Central Banking
Paul Tucker, Harvard University, former deputy governor, Bank of England:

  • “While macroeconomic policy probably contributed to the conditions in which the crises occurred, the ultimate goals of the depth of the crisis was a deeply flawed regulatory and supervisory regime, deeply flawed in design, and deeply flawed in implementation on both sides of the Atlantic, and it would be hard not to do better.”
  • “If too-big-to-fail is the biggest problem confronting Western society in the financial reform arena, a close second is regulatory arbitrage. I believe the banking reforms are coherent and reasonably well conceived, but no one should kid themselves that tomorrow’s problems are going to be located in banks. They may be in banks, but they’re as likely to have traveled elsewhere.”

Rodgin Cohen, Sullivan & Cromwell:

  • “So, in other words, although there is still much to do, we are generally on the right track. Calls for more radical reform of not just the regulatory system but the basic structure of the banking system are both unnecessary and fraught with their own risk.”
  • “One other possible approach is a series of understandings among the key regulators. In my view this is an inferior option as the market may assume that it is not worth the paper it is not written on.”

Federal Reserve Independence in the Aftermath of the Financial Crisis
Donald Kohn, Brookings Institution, former vice chairman of the Federal Reserve Board:

  • “Logic, history strongly suggest that a less independent central bank is less likely to achieve its objectives, particularly it’s price stability objective. And I also suspect that a high degree of independence will be necessary for the Federal Reserve, or any other central bank, to achieve its financial stability objectives.”
  • “The whole discussion of the Federal Reserve and Federal Reserve policy has been caught up in this very polarized political discourse that we’ve been experiencing in this country these days.”
  • “Exit will be complex, with many steps. It will be hard to explain. There will be plenty of opportunities for second-guessing. Exit will have fiscal consequences, raising the cost of borrowing for the fiscal authorities, and reducing, perhaps eliminating, the payments from the Fed to the Treasury at the same time, and that will also increase the focus in the Congress on this.”
  • “I think the best defense of instrument independence is success at meeting your objectives. Exiting too soon because you’re worried about what people were saying, and thereby sending the economy down into recession, or preventing it from recovering, or waiting too long because you’re worried about the political backlash of your exit will undermine your independence over time, because you won’t be meeting your objectives.”

Christina Romer, University of California at Berkeley:

  • “And just as you wouldn’t want to delegate… you wouldn’t want Congress telling your physicist how to build your nuclear arsenal, you don’t want Congress telling the monetary policy-makers how best to achieve price stability and maximum employment. So I think we want monetary policy made by experts because we expect the outcomes to be better.”
  • “But I think the battle needs to be fought much more broadly—by the press, by academics, by ordinary voters. And I think it’s fabulous we have the Hutchins Center, because I think that’s going to be another voice fighting for the importance of expert opinion. Because I think only if we reestablish the value of expertise and evidence-based policy-making, can we squelch what I see as sort of the fundamental challenge to Fed independence, and actually to good policy-making, more generally.”

Kenneth Rogoff, Harvard University:

  • “I have to say my biggest disappointment in the policy response to the financial crisis has not been in either of those. It’s really been in structural reforms. Where is our third arrow? Where are the reforms that are going to generate, you know, more long-term growth in the United States? Simpson-Bowles, I think, had some good ideas about tax reform. Didn’t happen. Dodd-Frank has 30,000 pages, when you do all the legislation, but I think it’s missing high equity ratios, and such.”