[inaudible conversations] ladies and gentleman will go into politics prose i worked here in the store before restarted please silencer phone to have my eternal gratitude just to let you know, we are recorded to make sure your questions are recorded as well for posterity please use the microphone for the question and answer session once the event is overdue was a favor to fold your chairs and youll have my eternal gratitude. Klay favorite description how is the best math teacher you never had her then the former correspondent for the economist had was widely praised for stripping away the economic commentators of those concepts made to be far more secure than they should be in it takes somebody very smart starting with the absurdity of the whole premise when am looking at the reasons why money is good it has looking at economic patterns falling into place at the time when the mechanisms realized on scrutiny the best thing we can do is understand the system to paint the picture when remember all those crumpled pieces of paper can buy books. [laughter] [applause] there is no nudity in this is not about getting rich you may be disappointed although this is known as a naked trilogy. [laughter] in never if you ask me what i have a midget imagine the wrote three books with naked in the title and they say it happens by accident. Naked economics was written as close to by accident as achaean by writing a book i was trying to write a book on the gambling industry and was based at a chicago 1997 and if you go back to the early 90s and to have a bingo game at a church fast according to the midpoint of the tenure and a myriad of other forms of gambling so long other states and indian casinos and other forms of gambling this would be an exciting thing to write a book about the politics of State Government in la was trying unsuccessfully to peddle the book i was hired to teach a class at northwestern about economics and finance with a contribution to the field so all of the things i have used to study economics. So i called my agent and successfully peddling the gambling book said you know, more about the Publishing Industry than i do the rest be a book on economics to express how important these ideas are. This is fun stuff. There was a long pause and she said no. They will write it and i will read it. But it came to fill a void. Although rightabout the time big day decadelong in the statistics classs for those that won the nobel prize and arguably the two worst class as i have never taken in my life. [laughter] and in some ways i was even more frustrated and to have a bowl of soup and see you will know where that takes like so this was borne by accident out of the idea that willfully misunderstood the for example, we have two president ial candidates guinier had endorsed the goal standard. There is an i gm panel a panel it is nice and ideologically diverse and they pulled these economist on issues of the day with manufacturing jobs the bureau of labor statistics but win this panel was asked of the United States to be better off to a Gold Standard, the only time in all the years it was no as every Economist Says no and the candidate that says Something Else so the things that it covers is money it is such a strange concept there are times when i fully understand. Because it is so strange at the end of the day really is an issue of trust and then there is banking that has inherent frailties that will never change about finance basically in with the repurchase market and shadow bank the people who have extra capital are giving it away a woman called me from Time Magazine to say debt is a good thing that means you can buy a house before your 65 ago to college in people with extra capital put in the basement with a zero return. Those who like many would like to get it back now and those who have it cannot possibly payback even if they put it to good use. That is what you need to know about the finance system. Obviously 1929 was fundamentally similar in the history of the United States is at the beginning of the 1700s with the 1830s or 60s or 90s our the panic of 1907. And i did the love that tweet that went out at politics prose give it to last well give you books and exchange there is no Intrinsic Value. You cannot demand gold or silver if you wave that around we may get escorted out of the Building People will gladly take it and give you a predictable amount of goods and services in return it is shares responsibility with the treasury and agencies horror of oversight they are charged with protecting the system at its core has this fundamental weakness so we start by reading a couple of pages from the beginning and i will go to the very end that we have learned from central banking and have time for questions and answers. In 2009 number three it did something unusual combination issued a currency to take two zeroes off the of bill that was declared the equivalent 100 of the old currency. And in 1994 it is an entirely new currency the government announced of 2750 none of this is inherently good or bad they could be swapped for the new currency imagine no dollar bill if they accepted it is not as accepted as legal tender. To the Exchange Rate you can imagine north korea takes its currency would ever though leader says it should be worth most would rather have the dollar the officials Exchange Rate is 35 blackmarket anyone holding large amounts of gold currency are destroyed and that is exactly the point the north korean government is increasingly intolerant of those activities outside the country black market traders were sitting on a large stashes of cash and with this strong of the pen with the accumulated wealth and with those North Koreans may accumulated large swath of cash this bars news that leaked out of korea led to chaos as the sabres would rush home it only had 24 hours to convert the old currency to a new currency and a defector told a reporter in one day all the money was lost people were taken to the hospital in shock the north korean government had taken its value and rendered it worthless that is a curious power and as a side note there are lots of north korean stories because it is so strange is behans the juxtaposition but over the course of the book in the last time that i saw them to say i am going to north korea, this mayor may not be a good idea the next time we heard from them with the story of how to smuggle it out he did escape with his note with the last i checked. That is even more curious when juxtaposed at exactly the same time. The Federal Reserve was injecting liquidity that concept is explored in greater depth in the book doing a reading in its power to lower Interest Rates that has seized access to credit after the best. To create new money. Where traders literally created electronic money of financial assets. Between january 2008 and 2014 the fed injected 3 trillion of new money into the american economy. One minute it did not exist the next minute they bought bonds to a private institution to transfer electronic funds to new money that did not exist seconds earlier. The sound of a guy sitting at his computer buying assets from citibank. Click click 2 billion more dollars. Of north koreas Supreme Leader was taking money with value to render a loose lot useless the fed was doing the opposite creating money out of nothing neither dollar or currency has an Intrinsic Value neither can demand something tangible in return at least in United States you would not be sent to a labor camp for asking. They could create it because it is just paper or bits and bytes on a computer screen. That brings us to the third whacky thing going on at the same time that United States was creating it the american prisoners were conducting many transactions using mackerel Prison Inmates are not allowed to possess cash instead they have accounts at the commissary or small items can be purchased with no cash the goods sold can be used as currency and as has been the case registry this commerce becomes easier when it is formal agreement such as cigarettes and the pow camps in world war ii that is the Gold Standard for trade in american prison since the federal smoking ban is the approach of mackerel or. Become in a patch approaches and the canso the prisoners to establish another they are portable and storable which is a nice feature curiously it has little appeal outside of prison even at discount retailers put behind bars it outsells tuna and oysters because one pouch will sell for roughly 1 it is easy to think in terms of dollars although it does have Intrinsic Value you can eat it. In fact, if the north korean or american economies ran on mackerel number leader or the reserve could have done what they did he cannot go on television to declare mackerel is worth less as it is natural you may get arrested to trade it the you can keep in eating for dinner you cannot pronounce it worthless if it has worked drew government can confiscate but that is a more difficult task. Similarly United StatesFederal Reserve cannot generate millions of pouches of mackerel nobody can push a bed to have pouches of mackerel show up at citibank. Click click click the sound of no mackerel being created. [laughter] so we have a strange concept of money periodically my head cannot figaro was going on money depends on confidence look at the indian currency any is legal tender as long as as to intact serial numbers. 52 serial numbers is fine the same in india if you have a torn note at an indian bank of the law states the bill must be replaced with a new one but on the streets of dubai you find it very difficult to anybody to except a torn bill even if the numbers are intact therefore nobody that expects will expect except them. Of course, nobody has to schlep them to the bank torn dollar bills or crumpled dollar bills even with his face cut out and i will take it but nobody would accept it because it is torn. But i refuse to accept with bell full beard phenomenon. In the early 2000s the opposite was happening the currency of choice of small transactions was not legal tender. If the central bank had shutdown it is irresponsible for Monetary Policy from the legal standpoint of time showing the same legitimacy as monopoly money it is by a government that a long resisted taken to be an expression of faith there was effectively no government the short answer is they accepted the schillings first they were useful as a meeting for small transactions and the smallest everybody had a pretty good idea it cost it has a strong claim and and kinship system with the social glue to undergird the currency has the economists explained thales need tacit consent to Exchange Bills for actual stuff the individual but clouds the system risk jeopardize interest with himself and finally absence of a functioning government is the value of paper money. Because there is no government to print more that quasi functioning government struggled to stay in power in the ruble introduced in the 1990s partly because of the hair engraved also able to propagate the came from counterfeiters because of the specialized talent and materials needed in for this reason businesses and banks except in the highquality counterfeits that had certain mind bending logic and imitation that is already of notional value like of bank willing to except counterfeit money not just take money barely fake money. [laughter] so here is the only picture in the book a real sign that appeared in south africa that is close to zimbabwe with hyperinflation to have it on my desk of 100 trillion note from zimbabwe that i bought for 10 because of the novelty value but the sign says to the paper only no newspaper and no dollars so they are so useless they were better used as with a paper than actual currency so we have reached a paradox that modern money the currency used in every other developed country can be produced in unlimited quantities there fiat currency has value because the government has declared them to be legal tender but one century ago those same countries used commodity many so how was it in the name of progress all the worlds most vibrant nations have moved from the Intrinsic Value to many with no Intrinsic Value . You dont even need quality paper and ink because a lot of the cases of hyperinflation the only constraint on how much money they printed is a they could get enough of a high quality paper so that would be the largest import of argentina with hyperinflation from europe to produce more currency so it is very strange so with a brief the radical detour if we could design the perfect money from scratch obviously to serve those three functions described earlier and we could talk about bitcoin and a store of value if you have wealth will it still be around stuff roughly the same amount next year . And is easy to conduct commerce . So look for commodity portable durable and scarce gold performed admirably but gold has its drawbacks it may make for great jewelry but has limited uses if you are stuck in the basement with your life savings in gold you will not feel rich although the guy with the bottled water and beans will look like bill gates but the supply will not necessarily increase at the same rate as the overall economy if moulting malting vice expose coal deposits that would lead to inflation this happened during the colonial period whenever the new deposits were discovered there would bring it back in the prices would go up. Even if increasing by the right amount stable prices under normal circumstances the gold reserves are in china and russia we would not entrust the foreign powers that are not in line with their own someone needs to ask the candidates on record especially given their positions if they like to turn that money over to commodities. So instead opt for different commodities these are nicely divisible we could fix of portability problem we could imagine a commodity problem where bags are stored in Paper Currency is issued and conduct transactions using the handy Paper Currency but unlike the dollars would be redeemable at the Commodity Bank with Intrinsic Value and predictable unit of account reasonable core values and no risk of hyperinflation but if you really want all of your wealth in rice or wheat . If a farmer invented new technology the lifesaving this is now devalued because the prices have increased dramatically or maybe something was out the stores there is a reason to believe the supply will increase at the same rate that prices will rise or fall relative to other goods. Would you run out one to write a longterm contract if youre not sure how valuable rice would be in 30 years . Fortunately there is an easy fix with the supply of the any single commodity suppose each could be exchanged for a kilo of rice or gasoline or sell one becomes a little more difficult as long as the value remains stable there would be insulated in the supply of any single commodity that currency would have welldefined purchasing power the broader the basket the more stable the value of the currency with growth and the economy overall this is a theoretical exercise so dream his bill was taken to a back women exchanged for predictable quantities of food Energy Electronics cars or bicycles piggybacked by sample of all goods and services you beggarly consume a better yet the purchasing power would not fluctuate by more than a few percent per year you have a very good idea what your money was buying today and well into the future this would deliver all of benefits of a single commodity backed purchasing power steady over time without the drawbacks each year it is redeemable for predictable rate overlong period of time. Here is the mind bending part of the exercise i have just described as the dollar the euro and other currencies they are paper but when the government issues them properly they have a predictable value relative to a broad basket of goods and services there lies the challenge of modern money the banks can create money from nothing and make it go away. Click click click that is the sound of the central bankers shrinking supply and promotes stable Economic Growth they can use the same awesome power and create many so worthless that history has seen some of each i will skip banking but briefly go to the last chapter that is lled to a central banking better it is organized along three principles with the first that we were right. What was i talked about central banking that was confirmed in 2008 . We need a lender of last resort the feds job is to be banker for the bankers to which the finances will step bin there is a whole chapter on 1929 and 2008 i would argue we did a reasonably well. The central Bank Political independence is crucial to the effectiveness because i was taught the reason they need to be insulated is pressure from the politicians to create more inflation so in most cases their ability to win the election they print more money they think theyre richer now nothing has changed and that is a story through history but in 2008 there were so much political hostility a lot of the resistance came from those wanting hyperinflation but the Federal Reserve needs to be unencumbered from politics to do what they believe is necessary to protect the currency since then the value past remain stable modest inflation target is better than zero i described in the book but as we have seen even with perfectly stable prices the fed can only cut Interest Rates to zero if you have the inflation target of 2 if they go to zero it is really dash 2 it is worth two less than a was when you bought it so there are many practical reasons the central bank should regulate the institutions as a lender of last resort so there is a metaphorical fire he should have the right to put in a fire alarm is a symmetry there so now what did we learn . There are plenty of affective tools once they hit zero we had a bunch of quantitative easing tools to push down longterm Interest Rates hypothetical crazier ideas the bank of japan tried them first we need to pay more attention to of Systemic Risk a fair amount of people in 2005 had an idea the market was overheated but very few listened or had any sense of how the collapse of the Real Estate Market would spread so viciously throughout the global system so that was of a toxic assets and attaching values that is what happened but nobody saw that coming so the central bank needs to be looking across the system to think if the house catches on fire what happens to the rest of the neighborhood . Whether we have done better just changed the nature transportation matters that the fed one of the most curious things is how opaque and secretive was considered to be a string remember secrets of the temple more secretive and the cia. One of the bad things is the markets trying to figure out what the central bank is doing so why you would hide that from them and second all kinds of conspiracy theories ive done a lot of talk radio you would not believe some of the questions i have gotten the my favorite is to be morgan one of the original architects in 1913 deliberately built and sunk the titanic because the opponents were on the ship and he booked passage of the last minute and apparently there was of a novel that was built and ran into an iceberg and that is ready got the idea and it is true the Federal Reserve killed kennedy there has to be a Conspiracy Theory because he is about to crack down on the central bank so the fact it tries to be more public minded there is room for them to improve the what we are still learning or are not sure as it unwinds of Balance Sheet with all extraordinary measures created all that new money but that is now sitting in the reserves on the Balance Sheets of banks throughout the system the money supply hasnt exploded not because they havent loaded out but they might as it will start to unwind the huge stash of reserves but that is not yet proven so we in New Territory with the aggressiveness that it is acting the American Central Bank is the only one that i know that has a dual mandate charged with protecting the dollar and maintaining full employment so paul volcker would say it is the same thing hillary to maximize fulham pro employment is through deflationary but there are periods when there is room to do things to promote employment that could be inflationary but then it comes into conflict with one another so my daughter starts colleges they work hard have fun most of the time theyre the same but they are not and then does it operate more effectively with the explicit rules or the discretion to act as necessary this is technical and very political debate as current lead the Congress Tries to bring in the fed to explain its decisions on Monetary Policy some of the bills would say they must declare a set of rules and if they deviate have to report to congress on why some of my to take even more control away them that i will stop here that money is important and it is also very political legacy that in the president ial race. I will be happy to answer questions. [applause] that was fast. What about the impact of the fed creation of several trillion dollars with the stock market and other asset prices . This is the trillion dollar question the feds mission is to protect from currencies of many critics warn of hyperinflation which we have not seen yet so by that metric it has not been a pernicious activity the we had a bizarre and unprecedented period the zero interestrate is and that has all these other consequences so as bernanke would say the fact that low Interest Rates make asset prices go up it is one of the three channels that is cheaper to borrow the second is it tied in with your assets deteriorate and other prices go up as a house is cheaper stock prices go up i dont know what is the effect of all the asset prices or increases might be or other related things. The head of the reserve bank of india said monday u. S. Interestrate is so low money goes around the world because they look for yield that is extremely destabilizing in smaller economies i think the jury is out on the impact we have not seen bubbles but the law of unintended consequences is the most important with Public Policy in general and in particular so if we create the next crisis that is what theyre looking for. When i was then law school in the 70s there was a lot of talk about the money supply with the Chicago School but you never hear about that anymore. The Federal Reserve abandon the money supply as a tool because Milton Friedman later conceded it did not track with prices as he had predicted more money leads to more inflation he is famous for saying inflation is ever wear but shortterm it does not track because of there is an increase of the money supply and people spend less than velocity goes down the you dont see a spike in prices so it is hard to track the money supply to know exactly will happen to prices when paul volcker beat inflation will singlehandedly he abandoned the money supply as a tool and focusing just on Interest Rates and prices those are more directly direct tools with the prices being imperfect but better than money supply. One time there used to be discussion on fiscal policy and Monetary Policy almost regarded as but it seems like there is relatively little discussion managing the economy through fiscal policy with the executive branch that all sorts of demands have been placed on Monetary Policy as they have been regarded. Monetary policy and fiscal policy that can be used to this amy fax you can lower Interest Rates can spend more with fiscal policy with tax cuts or spending infrastructure to stimulate demand even before 2008 economists said it was preferable because it was faster and easier and that is where we have ended up selling it gets near zero we should turn to fiscal policy at a minimum as to press on the gas of Monetary Policy. And the evidence is not unanimous but quite compelling so all that happened is the politics to have any coherent policy at the beginning of obamas term. Is almost a followup. Obama really wanted to do a major stimulus than some economists said we should be rebuilding the infrastructure blah, blah, blah and as you noted the banks who received huge amounts of money with no obligation. No Strings Attached so they just lined their pockets and sap on the money and nothing happened. As they understand they argued we cannot put strings on it i am not sure the arguments of why. But i would like your opinion. This is a great question. I dont know. I am not a lawyer. One thing that was strange is many of the banks were not given a choice of you have seen these movies you said you need the money so nobody will know which if you are in trouble then to make that more debatable if i can limit bonuses or handed out. I do know they botched t. A. R. P. For also the Federal Reserve that people had variable understanding why this was done and if we had better acronyms by the way it has been paid back every single loan it has made it all assets have been paid back. But i concede your point part of what were seeing with donald trump and Bernie Sanders that people are really angry at the pain suffered on main street and what they perceive as overly generous bailouts. People are not wrong they just not clear there is a better alternative. I have learned how close we were to the financial abyss than the more scared day were so to encapsulate dash the senator from New Hampshire was seen on the Budget Committee was summoned to the capital 9 00 on wednesday night which mcconnell said the fed share will be here in a few minutes listen to what he has to say Ben Bernanke Roxanne and says we have 72 hours to do something or the global system may collapse. So when i sit down to write the book that one too fact check the story i said this is my recollection he said its alright except the last sentence he said if you dont do something it will collapse he is not an alarmist so we were really close there is a story about the bill of Northern Rock he was called out of the meeting his staff said the have to figure out what to do what if i dont do anything to say you havent left me much choice and locale that it was. With the economics in general when it comes to money and banking a psychological creation even under the Gold Standard to have a nickel on hand so any currency with a completely wrong headed rumor so it is extraordinarily important but it is also true i would argue discipline has gotten much better that people are automatons to embrace of shakespeare that were jealous and shortsighted so that is the greatest developments of psychology and economics to watch people make decisions is said the feds rule was a regulatory bottle now what is the feds role and had is a restrictive action . But the dollar is not a great reserve currency but if we go to the euro or the yen or china where there isnt much transparency or capital controls are still in place. That is a lack of good options that allows more leeway with the reserves in dollars looking at fiscal policy to create some very bad habits and they come back to bite us. That is a discussion for the other day. I praised the feds response but it is also true the failings was also on the fed and it was clear by 2008 that the lending standards were a total force. My dog was preapproved for a credit card with an 18,000 credit limit that was a sign things were out of control. But they missed that regulatory about but have they fixed the problem . The radically as support everything dodd frank tried to do because if theres a problem and spreads then there is a compelling reason that if you are smoking in bed then it is your problem if you live in georgetown it is our problem so there is a layer of things that we can do to say you cannot smoke in bed. You may think he will do it anyway see also have to have sprinklers so we can still contain the damage so feeling that to contain the damage and last is that risk is in control that is in place