Transcripts For CSPAN Discussion On The Role Of The Federal Reserve 20160509

The supports of various kinds been contracted, and with the creation of large state armies, positionindeed, a re reprivatization. People that study agree this is privatization, and i concur. The independence refers to the decision in the 1990s to pull back from its promise to take care of its own, and, instead, emphasize, in many of its support programs, selfsufficiency, and that came through retooling programs like Family Support into family readiness, for example. Readiness and pulling back then on the amount of support often. It came through a new program called army family team building, which emphasized very much the responsibility of spouses and families to serve the military and know the military, rather than to have a army helping them, and through a variety of other things. I mean, today, i see the echoes of it in the emphasis on resilience, frankly. So, we can talk more about that, because i think we are running out of time, but i think it is a very important seeing in military social welfare. Note, we have to draw this to a close. The conversations can continue at a reception afterwards. Please note the book is available outside for purchase. Join us next week for our final session one albert jones of Saint Anthonys college, oxford talks about crimes against the security of the nation, world war ii, the cold war, and the evolution of mexicos antisedition laws. Thank you to our audience, thank you to jennifer mittelstadt. [applause] [captions Copyright National cable satellite corp. 2016] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. Visit ncicap. Org] on cspan, live coverage of Public Policy in the Nations Capital continues. We will take you to the American Enterprise institute. They are beginning the discussion on the evolution of the Federal Reserve since its inception in 1913. We will hear about what his current role is, and what changes americans can expect that the fed in the future. Not only having worked at the Federal Reserve, but having had lunch, many, many times talking history, i have followed closely over time the message transformation that has occurred at the fed, not only just since the financial crisis, but over my lifetime and before, and to think the first 10 years of my life we were on the Gold Standard, you know, it suggests that things have changed a lot. So, when a friend at the wall street journal, called up to ask if i would review a new book by a Young University of pennsylvania professor called the power and independence of the Federal Reserve, i jumped at the chance because of two things. I really do love the fed. I think it has had a positive impact on my professional life and it is an important place in washington filled with people who want to do the right thing. They sometimes fail, but i love the spirit of the fed. The second thing is i noticed not many people have been writing books on the fed. Wrote two parts of a threevolume history of the Federal Reserve. Hisof the reasons is history is such that comes in the journal. I likened his work to give in, and it is true. Alanou go outside the realm existed in in Federal Reserve history, there is a lot of weird conspiracy history going on. If youre going to start to think critically about the fed and even say hey, this isnt what they were designed to do, you will have a lot of people walking down that path with you that you wish were not there with you. So, i think a must because thinking about is what the fed doing constitutional, is it the case that the founders thought this might what they might be doing as soon as you Start Talking about stuff like that, you can start to look like a crackpot. Peters defense is to write this incredible, scholarly, thoughtful book about what has happened to the fed since 1913, not from the perspective like from, an economist, but the perspective of an attorney and legal historian, who thinks about whether the thing youre doing you have the Legal Authority to do, and so on. So, peter was kind enough to agree to come and to tell us as he spent the last i would guess the last five or six years, it looks like to me, working on his own Federal Reserve history, and after he does that for about 25 minutes, we are blessed to hear from two my former colleagues, the two i couldnt if i were to have a dream came jim team to discuss this if i can get Alan Greenspan to join the panel, it will this is what the dream team would look like. Alex pollock, and of course, etzler. Generalopen up for conversation at 6 30 p. M. We will finish promptly at 7 p. M. , and well have a reception where peter will be sending and sending selling and signing books. With that, peter county brown. Mr. Brown it is such a pleasure to be with you today, thank you, kevin, for organizing this event. When i was last here to talk fed, i joked that you would invite a democrat into your institute, and that was a evencularly lame joke, someone who was going to injuries a talk about central banking. Jokes can be lame and still get a life. Hat is especially lame because aei is a place where can talk about serious things despite the priors, and despite the huge results of the republican primary, i might be the only one voting democrat in this. I had a lot of hilarious donald my good, but taste will counsel toward morse about it. I have a lot more to say substantively about what a Trump Presidency would look like for the fed and fed independence. It is also a special honor because im sharing the day with alex pollock and Kevin Hassett, but also allan meltzer. For a young historian, there is no greater honor than to have my work engaged by professor called theo kevin given of fed historians. Hopefully my buttering up the panel will dull the critiques in the discussion after my talk. This is probably a loss hope. False hope. Metzler, heows alan is not one to pull punches, and we have a few disagreements. Kevin asked has the fed gone too far. I am going to make a somewhat different point, and raise some related preliminary questions. What is the fed today, and what is the best mechanism for mechanisms for ensuring that the fed is the central bank he wanted to be . Reframing this argument, i am following a tradition that started with this man walter badgett. If you get nothing else from the presentation it is how to pronounce this young mans name. Walter bagehot. You are welcome. Thank you for the one person who watches nba basketball. Curry google steph highlights. You will thank me for it. He is famous because of a book that he wrote in the 1860s called lombard street. Sometimes unjustly and mistakingly credited with introducing a novel theory of central banking and its emergency lending funds, but the book is much more in favor of Central Bank Transparency and governance, topics i will have more to say about in todays talk, but in his introduction to this important volume, he starts by talking about the subject of the bank of england, that it inspired a lot of existential certainty among interlocutors. I do not know if you can see that well, but in his words, two the sameal dispute ask are you with us, were against us, and they care for little else. I give you my word that nothing has changed from 1870 32 2016, 2016. 73 to away,st question, far and when people learn i have written a book about the fed is the same are you for it or are you against it. With todays talk in the book itself is to push past that. One need to only look at the forthof books that poured from Printing Presses to get a sense of this phenomenon. Not all books are given the historys state as they as the history of the Federal Reserve, and i have glad your Kevin Hassett calling out our dear professor metzler in writing three volumes and calling it two. Some have more scintillating scintillating titles the secrets of the Federal Reserve, thisf of conspiracy is actually a good book. Favorite title, do they think they walk on water the fed chairman and the Federal Reserve. Parts most of these equal ignorance and bad writing, there is a sense that the levers of total power the economy and the country, even with very serious, and again, work of the temple is a serious book in journalism. We get other books that are much better regarded. Central bankers are lords of finance. Arguments, i see david here. Central bankers are god, i guess, and in any case, the only got game in town. I will bring a picture that might hurt you a little bit to see and pine for a past that did not become the future senator rand paul would find at least a somewhat receptive audience with a question that kicked off his campaign, anybody feel that the fed is out to get us . Powerful,omething sinister, about the institutions that control our money, and these questions are as old as the republic itself. It was a battle between commerce jefferson and Alexander Hamilton a battle between Andrew Jackson and the lesserknown nicholas biddle, and the commoner William Jennings bryan, and the heartmoney republican, william mckinley. The last one is less remember. Musicalthe hamlet success will lead to a new remake that will focus on the story, but regardless, this idea, this contest, this feeling that institutions control our economy, our institutions political and economic, is a very old one. Now, it is tempting to think just as the question, why does this conspiratorial idea exists it is not just the idea that money is controlled by these institutions that prompts the conspiracies. Maybe it is just because what the fed does is outside of the usual conversations people have day to day. Detective thinks the fed does, the words not roll off the tongue over the dinner table, likewith important things h or threats, forward guidance, quantitative easing what are these things. It is too technical, perhaps. There is a law clerk on the d. C. Circuit we called interacting with the technical jargon of administrative agencies administrative law. It happens everywhere. Two cases in first chambers. Im not sure if judge williams does. They are both on the clean air act, and good grief, i still havent recovered. This multiplies across substantive rounds, whether were talking about securities law, communications policy, the mother lode of them all, federal. Nergy policy the law of bureaucracy is a technical one, so there is nothing special about the fed in this respect. So, to give you another cover of another book, this handsome volume that some of you i hope more of you after the talk is over will have in front of you i think the reason why so much of what the fed does and is inspires smart people to ask questions, and when they do not have the answers, to the nonconspiracy theories, comes in this title of the book both from its extraordinary exceptionalts independence. As powerful, and as independent, as the sec, epa, is, there is a reason why the fed chair is sometimes called the second most powerful person in the United States after the president , or as some have said the second most powerful person in the world after pope francis. It is not power alone. It is independence. Today i want to peel back some of the mystery behind that term, independence, and i want to push back with Walter Bagehot against some of the certainty of the interlocutors, who want to know where each of us stand are you for the fed or against it . Perhaps we can ask carter questions what is the fed, and what do we mean by this term independence. It is ubiquitous in the discussions of the fed. Today, i want to talk more about what that is. We have a standard account. We use it to describe independence and justify it at the central bank. It goes Something Like this that independence is a legal separation between politicians usually talk about a president facing a National Electorate and central bankers usually mean the fed chair and the reason for the separation is so the fed chair can use purely technocratic tools and skills of macroeconomics to keep inflation low. Now, the president also has an interest, sometimes, in keeping inflation low, at least generically, but the president , perhaps, as a bigger interest in reelection, or maintain a legacy. When he or she has to choose legacy,reelection, enough inflation will go out the window. Created to bank is prevent the president and other politicians from goosing the indy the economy. Contractlysses reminding me of odysseus. Comeslysses contract because ulysses decided this desire to hear the sirens without destroying himself, his men, it is ship. Banker oarsmen with beeswax, also made of law and macroeconomics, and we stuff that legal and economic beeswax in their years so they can guide the ship to a land of Economic Prosperity with low inflation. We, the people, by the way, are the sirens in this metaphor. Fast forward to a new millennia, and we get a different, more pervasive metaphor, from the fed chair william martin. He says the fed is in the position of the shopper who has ordered the punch bowl removed just when the party was really warming up. Interestingly, though not inappropriately, given the past decade, it is much easier when you google punch bowl to find people spiking the punch as opposed to taking the punch bowl away, but that is a general idea the fed chair is interested in keeping us in the party, but not letting it get too far out of control. Theulysses chevron model of chaperone model of the fed independence one the law is doing the work, the president is trying to influence the fed, the fed is a single entity, the work of central banking is purely technocratic, devoid of values, judgment, or ideology, and last, the fed is this primarily or exclusively for price stability. This model is wrong. Here is where professor melzers years are perking up and the debate will be joined. Sometimes the model is wrong because it is incomplete. Sometimes it is wrong just because it is wrong. So, if the ulysses chaperoned model is wrong, what is right, and that is what my book is about. First, the fed is a they and not an it. The fed chair matters, no question about it, but the internal governance of the fed reveals there is so much else going on with to set the parameters within which the fed operates with participation from governors, were themselves political appointees, other members of the federal open market committee, reserve Bank President s, not talked to by the feds,nt, and including especially economists and lawyers, especially bank examiners. Second, the president matters. No question about it, but so, too, does congress, bankers, financial markets, academic economists, and many others, focus others. Focusing exclusively on the president as the outside influence or or attempted influencer misses how the fed makes policy. Third, law matters. By law, we mean the Federal Reserve act. Low matters much less than we think. I will give some examples in a moment. The bottom line is the idea that law creates independence is mostly false, and, indeed, law sometimes is the very opposite of what we have been saying it does, as far as insulating the fed from political imaginations. Imaginations. Ideologyleadership and matter enormous amount about the way the fed interacts with these outside audiences. Fourth, the idea that fed independence can only be justified in terms of price stability this is a curious assertion, and it is serious because of the intellectual history of Central Bank Independence and price stability. It arises in a moment of the late 1970s that extends to just before the financial crisis in the mid2000s. The idea of price stability arose as Central Banks participated in a can successful experiment at combating inflation, while simultaneously the intellectual apparatus developed by the great economist, political scientists, macroeconomists, political scientist ironically, at the same time in United States, the Federal Reserve act was amended to give the fed would we often call a dual mandate. It is actually triple mandate of price stability, maximum inflation, and lower, longterm Interest Rates. So, when we add that to the mix of its financial regulatory functions, Bank Supervisory function, its supervision of the patent system, Systemic Risk regulation and lending authority, you see that the fed is a multifunctioning entity. Most provocatively to my central banking friends, the idea that central banking is purely the work of technocrats is also false. This is not to say that Technical Training is irrelevant. Very far from it. Point is that the most interesting and indeed questions a central banker will face are also technical apparatus is exhausted. After technical and chronic consensus has broken technocratic consensus is broken down, there is a gap between that breakdown and the point at which decisions are quite. Its raises the question, what fills the gap . You can say central bankers are making decisions because they are where they are stupid, but i think the softer reality and the better reality is that they are making these decisions, not because they dont understand the question as well as you do, but because that gap is being filled by a different worldview, different values. To use a word central bankers hate, a different ideology. The reason i say central bankers hate it, thats the part i hated was the idea that central bankers are doing anything ideological. When im saying they are ideological, i am saying they are human. I am not saying that they are partisan, trying to make the central bank do something to make donald trump or Hillary Clinton when an election. Wayne and election. What they are doing is refracting through their own lenses of experience and influences to bridge the gap between what the phd or other training tells the must must be done, and in scenarios that have been historically defined and what they confront in a world of changing and uncertain conditions. So, that is my book in a nutshell. More interesting than this thought i mentioned that law is not doing the work that people think it is doing. Let me be more specific on two points. About what thelk governors how the board of governors is structured to insulate them from president ial politics in the Federal Reserve act, and how this actually in practice. Second, i want to raise a question recently raised by Presumptive Republican president ial nominee, donald j trump, and whether the president can fire the fed chair. Lets talk about the governors the governors serve one nominal noble nonrenewable term. It makes them look more like federal judges. There is Something Special about the number 14, but that doesnt have any to do with length of service, per se. It has more to do with president ial elections. The idea was to have no more than two vacancies on the board of governors before the National Electric code reconvene electorate could reconvene to determine whether the president s view should be voted upon. Yearep that gap at two intervals, the Federal Reserve act was written so that in the event of early resignation or drug and death, a new governor could fill the term. That was the exception the unexpired term of a predecessor could be, itself, part of a term. So, that is a legal theory. What we would expect to see in this last column here is the number 0. 5. That would mean a president gets half an appointment per year, two at the end of four. Take a look again, and you will see that only one president , john f. Kennedy, had an appointment experience that matched the Federal Reserve acts architecture. For reasons we can discuss in the q a, perhaps, governors simply do not fill their terms. There are even incentives if you do feel your term, but they it feel itl anyway cap with that is meant is the president get to choose their board. The law isnt doing what people think it is doing, but in fact the opposite. That takes us to mr. Trump. My apologies to those serious republicans for whom the idea of this entertainer is a standard error. Bearer. We are going to talk about him because he is raise questions about the fed recently. He was quoted as saying he would most likely remove janet yellen is fed chair and replacer, although he said he favors her policies. Im going to put that contradiction to the side and ask this question could President Trump legally fire, summarily, a fed chair. Here is the way the wall street journal, reports. Once in office, fed chiefs can only be removed for cause, if they commit some sort of wrongdoing or they are found unfit for office. President cannot remove a chairwoman or chairman because of differences of the policy. Besides the first sentence, there is nothing that is true about what the wall street journal has reported. There is nothing at all in the Federal Reserve act that speaks to the president s authority or not to remove the fed chair. This fourcaused protection referenced in the article refers to the board of governors, not the fed chair, and the fed chair statutory roles one is a 14year, termprotected fed governor, and the other is a fouryear termprotected chair. What about the remote ability of the governor that is kind of clear, it says for cause, but for cause is not defined. Here . Oes for cause mean we would rely of the courts to fill the blank. I think this supposition is probably correct, but there are some of judge williams colleagues on the d. C. Circuit that have written in concurrent opinions that they think the protection scheme is itself unconstitutional, and thrown that out. Suppose that is there to stay. Does that mean President Trump could fire janet yellen . I think the answer is yes, legally. There is not a Legal Protection here where we would think the Legal Protection would be most necessary. But keep in mind what would happen if donald trump played that out told donald trump your services are no longer required. She would return and stay on the board of governors. There is a scenario. Truman really hated marionette goals. He said im not going to fire you, but i will offer you the vice chairmanship because i just want to be a jerk. He said no, but rather than doing what truman expected he would do and return to his millionaire banking empire in salt lake city, utah, he just returned to the governorship, and wreaked havoc on president truman from the fed for another three years. That would mean the janet yellen could stick around. It also means that even if there is no litigation janet yellen would pursue in being fired, donald trump would then rely on refer conferred the replacement, and the senate would then have the appropriate decision to say we dont like that tradition, but a tradition it would be, not a Legal Protection. I think that is important. Trump take that risk . I dont think any president making careful political decisions would, which is why have not seen much of what we have saw saw with truman. Asill not go on record saying anything in particular about what donald trump will or will not do, only to highlight just how much tradition is what we conceive of as fed independence as opposed to law. Let me conclude with addressing kevins question head on. Has the fed gone too far . Much of my discussion is not been about history, but about structure and governance. First third about my book of my book is about history, and tom writing a larger volume be potion about four years. I ponder a larger question how the fed today relates to how it was founded. If we were to change the far,ion, as the fed gone the answer would be a resounding yes. Let me give you one quick example i highlighted the book. There was a comic scene in the early history where the members of the what was then called the Federal Reserve board, structure struggled with an awkward question of social protocol. The newspapers dubbed the new board the Supreme Court of finance, which will be the name of my new book on the history of the fed, and the board thought they were entitled to a pretty high place in the social scale. How i wasnt clear, but William Machen William Machen do, who had to feel these questions, understood that these bankers and bureaucrats that not want to be pal and distant stars lost in the milky way of officialdo. Officialdom. The stated premise and Board Members would sit in line with other independent commissioners or commissions in Chronological Order of the legislative creation. That met meant the fed would follow the smithsonian institute, the panamerican union, interstate commerce commission, and the Civil Service commission anytime there was a state dinner. The price question was taken to assident wilson himself, and the secretary reported, a shadow of a frown came on his face. I could do nothing about it, the president remarked. Im not a social arbiter. The president retorted they might come after the Fire Department. Hedently pleased as recounted the exchange, explained he never told the members of the board with the president said. It would have caused needless pain. You even imagine it today but the president would say come after the Fire Department for all i care . Fed, they not the only book game in town, in said we trust their power is extraordinary indeed. The question, has the fed come far, the answer is a resounding yes, but is it too far . Here, as i write the fed history, i am struck by how vision hashe frames helped sway, not just today, but in each generation that remakes the fed in its own image. The theory of his vision of his vision change that guys my storytelling in this new book is not a frame orfocused vision at all, but one that i think is more realistic and that is that the fed is constantly being reinvented. Sometimes that reinvention comes to formal legislation like the Federal Reserve act, of course, the dodd frank act more recently, a much more often these kinds of changes happen through the everyday decisions of insiders and outsiders that seek to influence its policies. This is why elections matter. This is why appointed appointments matter, and why governance matters. We want to know more about the values to fill the gaps of the technical apparatus is exhausted. Given how much power resides in those hands into more about people whose hands they are. This is another place where professor melzer and i part ways on the inherent stickiness and slipperiness of law, where long can rear its head generations later in places you would least expect it, and the places im talking about is why would be opposed to write enable it to the federal policy act. Table especially tied to things like Interest Rate, output gap, target inflation rates and the like, we should put john taylor on the board of governors, rather than amending the Federal Reserve act. Now, the system as we know it today, is governed by exactly this kind of archaic structure that barely made sense in 1913, makes almost no sense in 2016. It is better, in my view, not to bury the bodies of temporary disputes, where they could cause future generations so many headaches. Im taking of personnel, as opposed to the level of micromanagement. This is why this president ial election is from my perspective of a Federal Reserve scholar, and among those who think seriously about Monetary Policy and financial policy why this president ial election is so much more important and influential than those in the past. Fedmney said were an obama after 2012 whatever the different, even on these Monetary Policy rules, but the differences would be between interlocutors that speak to same language and have most of the same values, and much of the same technical apparatus they are using to evaluate even competing proposals. The same simply cannot be said about the present contest. The sense, i am not sure of appropriate historical antecedent. In this area, as in so many other areas, the Trump Campaign is taking us into monetary tarrying cognitive. [applause] before i mr. Hassett before i handed off to llan, i have one followup the same structure that gives us Alan Greenspan is a person i think of the effectively independent in the way that i think of independent, but arthur and theyld be on, existed in the same legal structure, and that is one of the fascinating parts of the book. He take about how we have tried to guarantee independence. The first thing is can you talk a little bit about arthur burns and how he was an independent, and how the legal structure didnt do anything about it, and then the thing that puzzles me if i were a person trained in you say what i would do we need to modernize the Federal Reserve act, come up with ways to make sure we dont get arthur burns. You just despair of that, it seems to me. Maybe you have learned that loss in this space have no effect laws in this space have no effect. It am a seems like that is what you are saying. Toss a little bit about arthur burns and why is it we should try to think about why we should try to change. Mr. Contibrown arthur burns was a fascinating his best figure in fed history. Many in the room might remember his reign as 10 chair. One of the interesting story that i relate in the book that i found, and this was not hidden, Richard Nixon wrote this book six crises. It was a very big book in the 1960s. Mr. Hassett there are about five hands up. There were six, we would have one for each crises. He talks about how arthur burns, who had been the chair of economic advisers to eisenhower, called nixon and said you need to get the Eisenhower Administration to push the fed toward easier policies, otherwise the election is going to go to the democrats. There are two remarkable about the story one that it happened, we need the administration to aggressively push the martin said, something the Eisenhower Administration had been steadfast about not doing, and that number two, nixon and burns felt so comfortable about this that they wrote it down in a national bestseller. There was nothing to hide about this kind of collusion. It really set the stage for the burnsnixon relationship. Some of this is a new window. There is a book after that is innuendo. There is a book afterward that is selfserving, but arthur burns comes off as the messenger boy, holding up our decisions in her to keep the Nixon Administration politically itself has his diary been published by the university of kansas press, and in it you get all kinds of statements and journal entries where he is saying how much he loves richard defense policies what is good for the fed and the country is exactly identical with what is good for the next administration Nixon Administrations politics. Yes, we have a burns appointment that is completely subservient to Richard Nixon. One of the most important monetary decisions that happen at 20 century, the closing of the gold window in 1971, and finally in 1973. The idea that saddam might that would happen without fed input today is not the idea that something might happen like that today without said input. We see the fed as a jew into the white house and the treasury as tof a a jew didnt the white house and the treasury. Why did i think you cannot legislate that away, and part of tensionthe frustrating between democratic legitimacy on the one hand, and the idea of technocratic competence on the other. We want to keep this technically pure central banker doing things with the beeswax in the years so ars, so they are not influence, and i think that is a mirage. I do not think it can happen. This might sound downright churchill, but it is a bad system to have elections influence central bankers at the identifypersonal, but a better 1 does it have the chairs of all the economic departments weigh in and decided this to be the fed chair . I dont think that is a good system. We want to have the democratic and put it where you get people like arthur burns, and frankly, thees is one of my heroes, same legislation that takes the secretary of the treasury of the Federal Reserve board coincides with the most subservient Federal Reserve history between 1935 and roughly 1951. So, legislation can really matter. The fence budgetary independence, for example it is not subject to appropriations. The matters a lot. That is a legal difference to be sure, but the idea that we can micromanage that structure by writing ever more technical and verbose statutes that really try to solve the last problem, that leads to an insanitygenerating legalegal work, whack a mole. I think the better approach is to think here is the system we have got, it is flawed, so we should think seriously about politicians we elect that will be influencing the selection of central bankers, but also setting the central bankers vetting the central bankers to such the attention they receive his commencement with the power they yield. Should not see the republic threat to corona the edge of the universe when Antonin Scalia and eyes, but then be so dismissive then how many dies, but be so dismissive about how many vacancies we have had on the Federal Reserve ward since the Obama Administration dashboard board since the Obama Administration. Mr. Ach alan metzler questionalan metzler alan metzler. Prof. Metzler how you turned down an invitation . The reason there are three volumes, to settle that minor problem, is because the second volume was so big the university of Chicago Press decided to publish it in two parts. [laughter] prof. Metzler another reason for being pleased to return to aei to discuss Federal Reserve policy is that iowa tremendous debt to chris i owe a tremendous debt to chris, was the president for the 40 years a community or from pittsburgh. He supported i do not think there is another institution of its kind that would have supported me for 14 years and good extraordinarily Research Assistants to do the legwork of going through the enormous amount of material that there is in the fed records, so debt to my friend kristin used and chris and aei for making the book possible. Let me start with some parts of the book that i like most. The feds political as well as an economic institution. You cannot be in washington without being a political institution. The book, appropriately, is a work in political economy. It gives much attention, especially to the role of the president. The answer to the question that peter just gave which said it is impossible to find ways in which as chairman of the fed is independent as the law might like to make him, i think he is wrong about that. I think Ronald Reagan, jerry ford several president s took the prediction position that interfering with the business of the fed was just not part of their responsibility. So, Ronald Reagan never interviewed with paul volcker. Ash interfered with paul volcker. He agreed interfered with paul volcker. He agreed with what paul volcker was doing. When they would meet on regular occasions, paul has told me what president reagan would do is tell him jokes. So, i believe it is possible. It is not possible with some president s. It wasnt possible in the current administration, and i will come back to that. Surprisingly, though, peter gets less attention to congress. It is surprising because the constitution gives congress the final responsibility for Monetary Policy and money article one, section eight of the constitution that makes congress responsible for what goes on, and the fed is the agent of congress. Congress approved the Federal Reserve and approve this very peculiar structure that peter would like to modify a great a greatn i would deal more than i would. The professor has an interesting chapter he is troubled by a few staff that have had political roles. Ted schuman is one of them. He was sent to mexico and asia on what were essentially political missions. He proposes, therefore, that the senior staff be subject to appointment by the president. What ted schuman did was political, and it should have been done by the treasury undersecretary. It would never have happened to be done by the fed if paul volker was, as he later became, the under secretary of the treasury. So, we need to know more about why he said staffer was used fed staffer was used. I oppose peters idea of having a president appoint Staff Members because it further harms what little remains of the feds independence. Also, there is a good discussion of the rewriting of the rules governing the feds operations. These changes, over time, changed the very central issue that congress discussed. Not how Monetary Policy should be conducted that was the Gold Standard. No one disagreed with the Gold Standard, or at least no one openly disagree with the Gold Standard at the time. What they argued about was who was going to control the printing of money . The bankers thought he should be them, and the politicians thought they were the people most possible, and they argued about that. That held up the legislation for a long time. Woodrow wilson came up with a compromise, which was that there would be a board called political from the very beginning in washington, and there would be regional banks to satisfy the bankers, and the regional banks would be quasiindependent. They would have their own discount rates, and so on. Well, that was a misunderstanding of the economics of what would happen once it was a single Monetary Authority for the country. Bankers lost the ability to have independent discount rates. But the wilson compromise was what initially got the fed act through congress. It immediately set off a fight, and argument, over how the fed was going to be run, and because of strong intellectual ability of benjamin strong, it was the banks that got control of the initial fed operations, and they managed to do that from 1914 until 1933, 1935. Anyway, it is good that peter goes through how these political changes came about and why they came about. From the earliest, d. C. Was seen as the political arm of the fed and the reserve banks more representative of the economy, and that is even more true today. The original reserve banks have shed the influence of bankers. Directors are broadly representative of their communities, including labor while the board of governors has often become a much more political much more political. I agree with peter that the new york fed is something of an exception. It has often been captured by , andankers in new york therefore they were not always acting in the interest of the public. That is not inevitable. There were, as i said, president s strong, who was deftly correctly named. There was volker. I worked in the kennedy treasury. Paul volcker came to be my boss, so i have known him since you you . One, and i assure there were three i can assure you nobody told paul volker how to run the new york fed. There are three issues we disagree on. First is the issue of independence. Andnd is the safety soundness of regulation. The role the u. S. President and what i regard as the increased politicization of the fed. Kerry keep the fed out of politics should we on this issue the professor are far apart. I admit is a separate issue, but it is truly part of independence. Is took says caruso isolate my take the book says the reason is to isolate Monetary Policy from politics. It doesnt go on to say the main reason for the separation is to avoid the use of Monetary Policy to finance the governments deficits. That is what they had in mind to prevent inflation that is what the argument was about who was better able to prevent inflation by an independent Federal Reserve. The congress or the agents of economists in what, or was it the bankers representing the public out in the prairies . Lesson on which bankers, economists in 1913, and mulchedpublic, most of the wilson administration, including the president , agreed. They all except the Gold Standard as a means to that end the extent of the agreement on price stability was much greater than that now. The early fed had two strong provisions to do, to prevent inflation just exactly two. One was a monetary will. The initial role as a Gold Standard. 1920s, and in the disappeared in the 1930s. The current fed response to noisy, current data, as if it were the gods truth. It will would give the of and marcus better information about future actions. The current procedure increases uncertainty greatly. It sets off a wrath of discussions about will they, one day, are they going to, are they going to wont they . What the hell does that have to do with the price of beings . S . Ry little bean very little. Would people should want to know is where will be one year or two from now when the policies have their affect . With the increased the rate in june . Who knows. They dont know, so how can you know . That is a bad system that creates massive uncertainty we could avoid. The second restriction in the 1913 act was a total prohibition against direct financing of the treasury. In world war i, the fed circumvented this prohibition by lending at belowmarket interest thes to bankers who bought Treasury Bonds to finance the war. Soon after, the fed friend to used to use open market purchases. It can finance the treasury by lending directly because the law prevented that, but it could buy the treasuries bonds in the open market as soon as they were issued. To two prohibitions designed protect the public from inflation or deflation were completely gone by the 1930s, and no rule replace the Gold Standard until the u. S. Agreed after world war ii, and i will come back to that. We can probably accept that financing the two world wars by inflating was exceptional violation of the independence, unfortunately the violations continued. Treasury secretary morgenthaler would not tolerate the slightest interest in market Interest Rates. Peter referred to eccles as the most aggressive or independent Federal Reserve chairman. The opposite was true. Acceptedostly and hisaler demands, frequent threats to use the profits from devaluing the dollar that he would use that to purchase debt in the market and engage in his own open market operations. 0. 08dnt like if it was percent change, he got the earth would shake. He would bite invite members to his house to berate them. And to tell them at the time a quarter point Interest Rate these increase would be disaster for the country. The response to not permit wartime Interest Rates to rise until 1951, five years after the end of the war. It felt, if you read its discussions, it just felt it didnt have the political clout to do anything about that. It later acquired that clout a lot of it with the help of senator douglas, a democratic senator from illinois and a distinguished economist. The martin fed began in the 1950s with a policy of what was called bills only and that was very controversial. The left wing of the political spectrum wanted the fed to engage from all kinds of operations in the longterm government market. Martin wanted at the time the bond market to be able to stand on its own two feet after all the years of nurturing through the war and five years of post war. Didnt want to engage in any operation that involved purchase of longterm debt. And so he, under the influence whitfieldef economist reefer came up with bills only. Sometimes build preferably but by the 1960s, mann martin had a change of heart. He became convinced at the present time of the Kennedy Administration by a political argument that said that Congress Passed a budget and the president signed a budget and therefore he was on bli gated to help finance the budget. Thats the exact opposite of what the Federal Reserve act was designed to do, to keep him from financing the budget deficit but thats what he decided he had to do and the result was he began to build growth money and credit growth. When he left office, they were already in the beginnings of an arthur burns became the chairman. He financed deficits with the and blamed the unions for inflation. Thats what you get when you get a political fed. You get untruths, call them lies, perhaps. That happens. Burns said its the unions that are carving the inflation so he sprinkled a little more money into the system. As a distinguished scholar and former head of the National Brew row for economic research, he must have known better and surely if he didnt, his for very close friend Milton Friedman was would not hesitate to tell so burns gave up Federal Reserve independence in peacetime for the benefit of president nixon and peter quoted some of the relationships between nixon and burns. Burns did things like attend cabinet meetings and he really thought of himself as part of nixons administration. And that continued until paul volcker, an independent cuss if there ever was one, readministrator restored sexinled greenspan maintained it. But the bernanke fed, after avoiding a possible disaster, financed the enormous budget interestat low to zero rates, and as an economist who and burns, rnanke that the two worst chairmen to date have academic independents. Bernanke broke the post war understanding that nations would not engage in competitive currency devaluation. That was the essence of one part of the brettonwoods agreement. There had been competitive this the 1930s that hadnt been working any better than they worked recently but it was the began, the u. S. Treasure continued to ban to get the bleeding central bankers to ban further efforts at competitive currency devaluation. Bernanke called it q. E. But its proper name is currency devaluation and it has now been copied by japan and the e. C. B. To think that central bankers would lie to you . Let me turn to safety and soundness. Professor contibrown, like dodds frank in the regulations pouring out of the fed. He even approves of the Protection Bureau that permits an Administrative Agency to use the Federal Reserve for revenues. Taxpayer money to enforce regulations on which congress has no say. Now, our constitution has two sentences that are hard to misinterpret. One is the sentence that says rticle i, Congress Makes all laws. Another part of the constitution says congress aprorptse all moneys. Prorptse all moneys. Now, you can be a lawyer and you can play with those words but its difficult to get the statement that Congress Makes all laws to mean anything but Congress Makes all laws. But where do these laws come from in our system . From the administrative agencies, not from congress and where does this Administrative Agency, the brieo finance committee gets get its money . From the Federal Reserve. That money, 90 of which goes back to the treasury so its taxpayer money so here we have an agency which makes its own rules and some whoppers that i can mention for you in a minute. And pays for them by simply dipping his hand into the reasury. Our constitution forbids such actions. Thats what cfrb does. It is an outrageous rice violation of the rule of law. My reading to have history of financial cry says is that regulators locked the door against the source of the last crisis. Neither regulators nor others can foretell how the next one will develop. They completely missed the causes of the Great Depression of 1929, the recession of 2008 and much in between. With that in mind, i testified four times on the doddfrank bill. I urged less discretionary regulation with a rule that the banks be required to hold a minimum of 50 equity reserves. My proposal became a centerpiece of the bipartisan bill that i helped to write. It never was voted on. The large new york banks prefer regulation and the corrupt arrangements of the current regulatory system. This permits them to negotiate circumvention to have rules that the fed writes and it penalizes competitors who are smaller than that. Current costly regulation is one of the main reasons a number of small and mediumsized banks has eclined greatly. Sorry in 2000, there were prosecutor 8,300. The small and medium sized banks are down 30 . Now, those banks are important. Important because they legend to new businesses that are starting up, new companies that are starting new local regions but they dont have careful Balance Sheet and income statements. Local banks do a lot of their lending on the basis of we knew your father and your grandfather and you come from a good family and therefore were willing to legend you money. Allan, a couple of minutes to get to your last point because we have a Big Conversation to continue. The fed has now increased Equity Capital and that makes Bank Management much more concerned about risks and thats a good. And the principal stockholders reinforce the attention to risks. The banks incentive is to work for all kinds of risks. Not just specific risks that the regulators guard against with. Administrative regulation, work prevents costly excessive regulation of the kind that we see in the cfrb. Nothing. We just had the metlife case, a courageous judge looked at the governments case and found it full of opinion and devoid of facts. In support of her opinion, judge collier called the governments case fataly flawed because of the absence of facts to support the government. Wouldnt it be better to have a rule . I think so. Is anyone in authority concerned that hundreds of mediumsized banks have closed. I believe that the father of the constitution, james madison, would be distressed at the constitutional violators of the regulators, for example in cfrb and im answer that in a question period. Xander s jefferson, hamilton and john adams would join in the protests. In is this is naked authoritarian government, more at home in the soviet union than in our country. Finally, proffer contibrown wants the u. S. President to have authority to fire the chairman of the froc. He would remove the reserve Bank President as voting members of policy decisions and in other ways increase politicization of the fed in the interests of what he believes would be greater accountability. I dont think he tries to support his case. I believe the way to greater accountability is to require the fed to adopt and follow a rule of its own choosing. Thats the proposal that jonte lore has made and on which i have signed on to. Greenspan showed by following more or less following the taylor rule, greenspan showed that he could get the best eriod for fed in its first 100year history with low inflation, steady growth, short recessions, quick recoveries. Thats what we want. Thats what we should have and that would be a great improvement over what we have now. Do we have any idea about how 2. 5 d will eliminate the rillion worth of access on its Balance Sheet . What will that cause . No one knows because the fed is moving from daytoday. The fed needs reform. Discretionary judgment has given parts sults, alternating of recession and improvement. The swiss per capita income was a fraction of the u. S. Now the swiss franc is worth more than a dollar, five times what it was worth before. The more cautious, less inflationary, more rule like policies of switzerland. Has it hurt switzerland . Its per capita income is now larger than us. Discretionary policy is costly and has cost our cocountry. The best reform is a rulebased policy of moderation. That would benefit our economy and be a step towards greater Exchange Rate stability. The dollar remains the worlds main currency. The monetary rule would follow others to imilar policies. Thereby increasing stabilization. Thank you very much. [applause] thank you very much, allan. Since weve blown through our time constraints. I wont blow through mine in this book were discussing, peter has discussed a highly wide ranging but also very specific and detailed work of history and analysis. Covering the remarkable institutional evolution, including chum evolution of the shifting of ideas for a complex structure known as the Federal Reserve in a very come flex environment. Among the other evocative effects of this book on me is i keep wondering what new ideas and theories the fed will be trying out on us 10 years from now. Lets address this as peter did, and allan also. The fed has obviously come a long way since it was, as peter describes it, an an scour backwater agency. Thats hard to imagine now and peter told the wonderful story of how the fed wanted to sit in a more prominent place in the state event in wilson said that could come in after the Fire Department. Little did wilson know that the fed would one day become the Global Financial Fire Department and it would be the Fire Department. The fed has made and doubtless will continue to make mistakes. The power of the fed combined with its propensity for mistakes, which is natural when youre dealing with uncertainty makes it, in my opinion, the most dangerous Financial Institution in the world when it comes to the creation of systemic financial risk. Put that together with the idea of independence. Peter, rightly, i think, discusses a lot of factors which impinge on the tenets of the fed ut to the extent the fed has meaningful independence combined with its power and the riskyness of its judgments and its actions, the bigger and institutional puzzle it represents and the more necessary is peters second book, which hes working on. In the famous conclusion of john maynard cains general theory, it tells us that it is ideas which are dangerous for good or evil. I think this is especially true of the ideas which come to dom nate the minds of central bankers. This is something we cant focus too much on. Which ideas are dominating the minds of central bankers and how are those ideas move something of course, the most important minds are those who lead the fed, and this is why, i think peters examination of the shifting ideas that have led the minds to have Federal Reserve is absolutely key. He tells us in the beginning to think that the fed would create fiat money was outrageous. Were fighting words was the word of the book and carter glass has said nothing would be more ridiculous than to say the fed would create currency and today we recognize that the fed is the leader of the current fiat currency system in discussing martin. He says the keeper of the surnssi is the one who has to enforce the commitment not to steal money through inflation. Is the fed formally committed to perpetual inflation . These ideas change around. And as peter points out, it is not the case that for objectively correct answers to the problems of monitor policy and that they are formed with what we cannot unfairly call ideology. In his book, es entral banking practice is plagued by uncertainty. Odern failure, imperfect data. And central banker ideology. Central bankers are adjudicating between conflicting claims, he writes, and con flicting views of that uncertainty. These failures, these ideologies. This may make us think of a great letter which was written to the Financial Times a year or two ago which said in mathematics theres one write answer. In literature, all answers are right and in economics no answer is right. Because the uncertainty is to high, peters word adjudicating while its arguable, might be replaced by the word guessing and i think theres a lot of guessing involved. I mean guessing by knowledgeable and intelligent people but guessing nonetheless. Because uncertainty is high, the natural human reaction is to cluster your ideas, to come up with common ideas and reinforce each others repetition of these ideas. Now, peter discusses what he calls and others have called cognitive capture, but i think a more accurate description is cognitive hurting. Cognitive hurting is the natural human reaction of all those two to great uncertainty. We want to know what the people we respect are doing. Theres so much in book it would be fun to talk about but the chairman has reminded me they have to move on another along. So two more points. Peter mentioned lots of metaphors and in a great part of the book he discusses martin chesney. Martin, the longtime chairman and what he calls the poetry of central banking. Referring to martins love of metaphors, the most famous being the chaperon at the party and how martin became the feds i rit race. This was appropriate for a fed chairman who studied english lit culture and latin classics at yale. It maybe thinks we need to change the line on cains a little bit to say sooner or later, it is metaphors that are dangerous for good or evil. I think theres a lot of truth in that. The last point is peters discussion that aspects of the fed are arguably unconstitutional. I recommend his discussion of that for your consideration. But to me it comes down to an even more general point. And allan touched on this in his remarks. Of the fed and its relationship to the elected branches, to the executive, which would like to get its deficit budget financed and to the legislative representatives of the people. Peter quotes bernanke has telling janet yellen you have to remember that congress is our boss but i wonder if the fed really believes that. Or do they want it to be that congress is their boss . Thats what, as allan said, the constitution says. And i would just add that the more it is true that the fed has independence from the elected branches and the congress in particular, the more intriguingly alien its structure is to the fundamental constitutional order. And in the opposite case, the less independent it is the more congenial it is to the fundamental order of checks and balances. Every generation wants to reform things and reform the fed among them and peter, thanks for writing such an interesting book to let us think about this i think you are bound to be testifying at the hearings for the federal Research Reform act of 2020something. Thank you. Thank you very much. [applause] and to be fair, i think that kind of might be in peters book the answer to the question i presented to you with. To the extent that we have accomplished an independent fed than then weve designed something that was perhaps not something that was envisioned by the founders. So its almost like an im wade in there and do anything that would be constitutional. With that, we can open it up to questions and answers from the floor. Tucked, please wait for the microphone so the tv audience can hear you as well and please try and make your question in the form of a question rather than a statement. We want to get as many questions in as we can. Ill start over here. Thank you very much. First and foremost for the books and for everything. Today we talk of the idea of the independents and we see the money printing happy. When were happening. Weve had problems about growth but weve never had growth. The fed remit answers increase to the treasury. Not only do we have more printing. The wall street journal reported that 19 billion in the reserve account was taken by the treasury. When we look globally, the swiss, who the swiss franc is basically the dollar lost 80 of its value since they left gold. Now weve left gold printing money. Will this stop in once we see this historically it never stops. What are your thoughts on that . It becomes an essential part of the budge. Its almost half of interest expense right now. Peter rights about writes about that in the book. Something interesting to think about is theres nothing within the Federal Reserve act that dictates those remit answers. In fact, the feds vaunted budgetary autonomy and wonder of this makes not only is the fed not subject to appropriations but it literally creates the money with which it funds itself. Im untroubled by this but constitutionally and as a matter of policy, i think this is a place where an ability to maintain an insulated Monetary Policy is most effective. If the fed is subject to the appropriations process each year then there ends the feds ability the original design the original design, exactly. Spent a chapter on this charging a fee to the member banks for the services the fed provides, including clearing of complex and things like that. It still charges those fees. That accounts for 25 of the feds budget. One idea would be to shrink it down so the fed is only 1 4 of what it is today. An intriguing proposal but its important to keep in mind the s that that very change. And the elimination of Research Bank autonomy has meant that the bank has grown by tradition into the model we have today. Its remit answer back to the treasury where a preemptive move to deep that autonomy. Theres nothing in the law that says that must continue. Thats why these things matter so much, eelection and personnel changes and the like. Would it be more justified if it gave the money to me . Theres nothing that says Kevin Hassett cant return it. Well do a little pingpong to the next fellow and then well look again. Hello, this should be a pretty easy one for you. Earlier you mentioned that donald trump might have a problem with certain policies, i suppose that janet yellen has enforced or i assume created. So can you talk a little bit ore about the contributing between whether a donald Trump Presidency would have a problem with ms. Yellen or have a problem and dismiss her . Donald trump is an enigma to me. Ive read a lot and im not closer to understanding what his moneytary politics are. He praises yellen and the yellen fed not in so many worlds but for low interest environment. Why a Trump Administration looks so different from anything else weve seen in history is that donald trump has identified himself as linking shortterm economic results with his own political successes. He keeks seeks to consolidate power. Hes the boss. So the idea that a central bank would pursue a policy that is not antithetical to shortterm economic interests would seem to be anathema to a Trump Administration. Its not clear to me that he sees anything as the fed as anything other than a kind of piggy bank. Just an hour before we came on i was reading a headline that said theres no such thing as a u. S. Default because we can print our way out. Thats whats so uncomfortable about a Trump Administration. That is like someone who would shoot the shape roane before pulling the punch bowl away who tried to allow that to happen. I have a short comment. I dont think anybody knows what a Trump Administration is going to be like. I thought that donald trump figured out a very clever, unique way to win the primaries, without spending much money. You Say Something extreme every day and all the journals rush to interview you. So he had more tv time than anybody else could afford to buy and that was a great winning strategy. And now one hopes that now that he is going to be the nominee, well see what he actually is going to say about what hes going to do. I dont think hes going to make any judgment on the basis of what he did because those were all statements designed to get himself on tv and be interviewed. Allan, who better than you, leading historian for the fed is it tv case that some president says darn it, i want to fire the fed chairman and then someone says no, no, no, you cant because of this legal technicalty or Something Like that. Did that conversation ever happen . Apparently kennedy wanted to fire martin but didnt have the wasnt willing to carry through on it. Im sure that im pretty sure offered martin, who had one more year as chairman he offered him a offered him a job in the treasure or something in order to get burns into the fed and no. In told him precedence. Hout to determine whether he could fire chez chesney martin. They didnt tell you you if you do, itid, will be hittigated. Trumpn you describe the theory of the fiscal role of the fed, i thought you were describing lyndon johnson. Truman pretty well forced out the chairman of the fed because