Transcripts For CSPAN Key Capitol Hill Hearings 20140104

Conversation with some of your points and the points on the panel. You touched a little bit with resource scarcity and the economics of that. They seem to suggest that the increase in immigration is essential, particularly for high skilled workers. The Panel Suggests for every high skilled worker job that is added, teed up to three local jobs for American Workers are toed in that area two three local jobs for American Workers are added in that area. It suggests that americans are not taking the jobs anyway, so the only way to combat the lower skilled workers to bring immigrants. Ants onanted to hear your take some of those points and if you feel like your arguments are matching that conversation. Topliness the easiest response to that is that you should not take the argumentation of employers with needing more immigrants or more foreignguest workers as necessarily representing the factual situation because of the fact that they have a vested interest in expanding both temporary guest workers and immigrant workers. Academice been some ofearch done on the issue the visaorker which is for hightech workers and other professional workers, other professional workers coming in under nafta from mexico and canada, and others come in and there areram in which company transfers. You probably get a total of guest workers coming into the country of nearly one Million People a year. Workers can stay for three years, renewable for another three years, and the transfer visa workers can stay up to five years. Say you multiply one million get about 5you million professional workers in the United States at the present time taking jobs and some done,ic studies that are basically pointing out that we have much higher Unemployment Rate among professional workers than we have experienced in the and that wages for those professional workers are basically stagnant over the past about a decade which would not be true if there were a shortage among there were bidding the employers for those high skilled workers. Endwith regard to the lower , farmers willevel tell you that they have crops that are rotting on the vine, and that is true. There have always been crops regardlessthe vine of how many workers were available for harvesting them. That always happens. Reasons sometimes the crop is somewhat damaged. Sometimes it is simply a resource issue that the workers do not get there at the right time. But it is not true that farmers have to have access to the illegal immigrant workers that they are currently hiring to harvest those agricultural crops. Because there is a visa, h2a visa, which allows foreign guest workers to come in for that isural work unlimited, there is no reason that any agricultural employer somebody illegally in the country to harvest of the work, that they cannot turn to a program to bring in foreignguest workers to do that job. But they do not like to do that. They do not like to do that because they have to pay more visahose foreign h2a workers. They have to pay more for those thatrs because, as part of program, there is a requirement that the employee or furnish , thatr to those workers the employer pay for the transportation of those workers , ande worksite and backe that the employer has to make so thate food resources the worker can buy his own food resources rather than having to buy them from the employer which the employer can use to take advantage of those workers. Those provisions were put into law specifically to stop the wages, the real wages earned by agriculture workers in the United States which are today significantly below the wages that were earned in real inflationadjusted terms two or three decades ago. They have decreased the value of the earnings of those workers because of the abundance of supply of illegal workers that are hired by those agricultural employers. The panel you referred to this morning looking at conference of immigration reform, their interests collectively, while different, were using the narrative of it being in the economic self interest of the country to do ofs, the economic interest the country. They talked about individual pieces of legislation that went to some of the sectors of this highion, like the h1b, tech folks, agricultural interests. Refer to legislation, small pieces of legislation that are speaking to these different , as notf the puzzle being adequate. Saying theyas some would support this if you kept the dialogue going. Is there any legislation that you would support, that your organization would support, no noter how an hour of matter how narrow or broad that told allow for some attempts adjust some aspects of the immigration issue as you are defining it or is that too risky in terms of creating the kind of political dynamic that might wind up being a larger piece of legislation . Well, you nailed the answer to that question with the last part of your question. Insider issuean in terms of congressional process. And that is you need to know that if you have a piece of immigration legislation that , that iss in the house sent to the senate for consideration. In a request for a Conference Committee between the senate and the house to look at the issue of merging the Senate Position which clearly 44, thee at 7 comprehensive approach, with the selected piece of legislation that was adopted in the house. Insider assessment on , in is that that would effect, and power interests in empower interest in the leadership that appoints the conferees to the house of representatives to name people that would go along with the senate approach so that a form back to theld go house for a vote and it would as i understand it i am not one of our legislative lawyers, but as i understand it, that would probably mean that it would come to a vote in the house which is exactly what Speaker Pelosi has been trying to achieve because she thinks there would be enough republicans that would go along in addition to virtually the entire democratic , andrship of the house thereby pass the comprehensive approach. So those that are potent those that are opposed to the comprehensive approach recognizing that possibility have taken the position that it would be a mistake to adopt any immigration legislation in the tose, because it would lead that type of scenario. It is a shortterm win for fa that no immigration legislation comes to a vote in the 2014 session as opposed to the board of security act Going Forward . Well, that is a very good question. Traditionallyhave in all of our 35 plus years worked with members of congress to get specific legislation introduced in both the house and the senate. That is imagine that going to change in 2014. That was true in 2013. Basically, i imagine, and on this we do not specifically have a position, but i can imagine that were going to be ouruenced in terms of communications with our members in theirt the country contacts with their representatives by what our friends in the house of representatives that we work with most closely recommend that we do in terms of trying to bring about the legislative outcomes that we would like to see. You talked a lot about short term policy goals. I was wondering what the long term policy goals would be to go focusing on the 11 Million Immigrants that are here that probably will not be going anywhere. What are you looking at policy wise in that area . , and is our assessment think that virtually anybody who issueon the immigration in washington, d. C. , would agree , that the primary magnet that drives people you legally into intoountry illegally the country is the prospect of getting jobs. This was basically the 1965usion of congress in systemey set up the i9 requiring employers to gather on their new hires to try to assure that they were legally in the country. , at was the consensus in least the majority, in congress in 1969 when the immigration authorities were told to set up , to set upy system an effective system for allowing employers to verify the work documents of their employees, and it is our assessment and i think the assessment of most members of congress that if the e verify system were made a national mandatory system the way it has in arizona and a number of other states, that the jobfectively reduce magnet that draws people into the country illegally. I did a study of the effects of the arizona legislation that is on our website that documents a precipitous drop in the estimated illegal immigrant population in arizona after adopting the legislation that they did. Medicaidcant drop of births in the state. A significant drop of students in limited English Proficient education in Public Schools in the state. , a larger drop in the crime rate than was true elsewhere in the country. One of the important aspects of the requirement of you verify which we have pushed for a long time is that it makes employers responsible. What is happening at the present time is employers know that they can look the other way when they are presented fake documents because they are subject to prosecution under the law only if they knowingly hire illegal workers. And that knowingly qualification gets them off the hook if they have been shown fake documents because they are not expected to be able to distinguish between fake documents and legitimate documents. If, however, they are required andse the everify system they receive information that the Social Security number is fake or the immigration document is fake or that the individual has overstayed a visa and they continue to employ that person, then they are knowingly hiring somebody illegally in the country. Under the current law, they can be prosecuted. Some people are prosecuted under the law at the present time ago some people are prosecuted under the law at the present time, but very few. It would double the message that it is difficult to get a job in the United States the incentive of employers taking advantage of the press system to hire illegally because they would be exposed to prosecution. With regard to the issue of border fencing, i think there is a lot of sort of a smoke screen with the issue of border fencing. I think that you can make a very good argument that the Border Patrol resources that are currently available for trying to control the borders would be adequate for handling illegal entry into the country if illegal entry were cut down by a very large magnitude as a result of the knowledge of people that they cannot get jobs if they came into the United States. In other words, remove the job magnet, fewer people will come. To itpeople come up increases the leverage of the Border Patrol to control the border. Annot you experience experience would have to show whether or not that would dramatically increase the number of people illegally coming into the country. That that probably is true is the reduction in illegal immigration that happened at the whenf the last decade there was very high unemployment and a very major reduction in Jobs Available in the services and construction industry. Jobs were down, fewer people came. A reduction in apprehension of Illegal Immigrants which indicated a reduction in attempted illegal entry into the country. I think that you perhaps there is a very good chance that you could control illegal immigration, sneaking into the country, with the existing Border Patrol resources if you simply adopted the everify system. Last question. I understand reducing the magnet for immigration, but what are the policy goals for the current undocumented workers that are here . You said you are against amnesty, so i am guessing you of services. Pport are you looking for more deportations . What is your solution . Basically, we would look at the experience in arizona and the adoption of restrictions on illegal immigration. Having the effect not only of deterring new illegal immigration into the country, but also encouraging those who are illegally in the state to leave the state. That obviously does not work effectively for the nation when it is done on a state i state bystate on a state basis. That is the reason we think we need to have National Legislation with regard to the everify process. As happened in arizona, we believe that if you have the situation where you effectively deny opportunities to new people coming into the country illegally and you increasingly make it impossible to those who are already in the country illegally to get a new job if they are a fire if they are fired or if the company goes out of business, they lose the job, or an escalating process of verification of those who are already on the payroll, you will have people who are working in the country illegally who will recognize the fact that the time has come that they will need to return to their home country. And even though the other side of this argument says that this will lead to separation of that whatwe believe we have seen in other areas around the country is that people who are illegally in the country, when they leave the country, they take their children with them. It is hard to imagine parents deliberately leaving the children behind unless they were planning on coming back in very short order to resume their role as parents. That basically is the answer. [applause] [captioning performed by national captioning institute] [captions Copyright National cable satellite corp. 2014] on the next washington journal, paul brandon looks at president obamas relationship with the press and his administrations goals for 2014. Then Jonathan Bialosky of George Washington University Law school discusses how the u. S. Determines its criminal illegal and those apprehended at the border will be removed from the country. After that, Richard Dieter of the Death Penalty Information Center on the use of Capital Punishment in 2013. Plus your emails, phone calls, and tweets. Washington journal live at 7 00 a. M. Eastern on cspan. The c. E. O. Of heritage action, the Advocacy Organization linked to the Heritage Foundation is our guest this weekend on newsmakers. Founded in 2010, he talks about his groups roles and issues in topics dividing conserve tiffs in the republican party. Watch newsmakers sunday at 10 00 a. M. And 6 00 p. M. Astern here on cspan. About 10, 15 years ago, we started looking at the Census Department data, and very strange kind of pops out. When you look at where profits are of multinationals, you know, if you look at europe, you see germany, france, ireland, italy. But if you look at the data on where the profits are, france, germany, ireland. Its just this a unusually disproportionate amount of profit information ireland, so that was one indication that something was going on. More with marty sullivan, chief economist for tax analysts, a nonprofit global provider of tax news and analysis, sunday night at 8 00 on cspans q a. The outgoing chair of the Federal Reserve, ben bernanke, delivered a speech friday in philadelphia, called the changing Federal Reserve, past, present, and future. The fed recently announced it will begin slowing its Bond Purchasing Program this month known as quantitative easing. The senate is scheduled to hold a confirmation vote on monday on chairman bernankes successor. Hes joined by economists. They spoke for about an hour and a half. These are the annual meetings of our association, the association of economists, and its attended by 11,000 or 12,000 cardcarrying economists from around the country and indeed around the world. We gather here not here, but in these meetings annually. We debate high theory. We debate policy. We have discussion groups. And this is one of the sessions that were particularly proud of and is one of the highlights of these meetings. We have the pleasure today of hearing the reflections of ben bernanke. Ben earned his ph. D. , earned his ph. D. From m. I. T. In 1979. And since then, hes been a distinguished scholar and public servant. Im not going to give a long introduction, because most of you know him, but ill just give some personal reflections on his career. His scholarly writers have illuminated a wide variety of areas. Some of them very helpful in his later career, including the credit channel in the Great Depression, the potential role f inflation targeting, and the target article of his of my students, which is the global savings glut, which is for all of you who are teachers is a wonderful way to teach open economy Macro Economics. Bernanke, in addition to his other activities, has written about the essence of economists. You might be interested, take notes on this for those of you to explain to your students also, he wrote, he said, actually, in his talk to princeton graduates i think last year, economics is a highly sophisticated field of thought. It is superb at explaining to policy makers exactly why the choices they made in the past were wrong. About the future, it is not so helpful. Most people outside this room know ben from his eight years as captain of the fed. During that period, the country and indeed the Global Economy suffered from a rare confluence of terrible financial and economic shocks, what you might call a category five financial hurricane. This is a category one snowstorm. Fortunately, the captain of the d had historical and analytical knowledge, the creativity and the courage to introduce policies that kept the ship afloat and steered it through the storm. One of the things that i find most impressive as i go back and look at what we thought we is in 2005 or 2006 or 2007 what we might do if we got hit by this kind of storm. Was there just a whole list of things in the closet, on the shelf to pull off, pull out in case of crisis . I think the answer is no. I think all these were very creative and talented steps that the fed took that were not n the shelf ready to go. We know from similar wreckage around the world in storms of this kind in other countries and other storms how damaging it can be, and we understand how fortunate we were to have ben at the helm. So this is a program. Chairman bernanke will talk, give his presentation. It will be followed by commentators ken rogoff, and then depending on before we are in the schedule, we plan to have some questions from the floor. There are two mics. Im afraid that if we took all the questions, wed still be here tomorrow morning. So well have a very few questions, but i would like to resent ben bernanke. [applause] thank you. In less than a month, my term as fed chairman lend. Needless to say, my tenure has been eventful for the Federal Reserve, for the country, and for me personally. I thought it would be appropriate today to reflect on some accomplishments in the past eight years, as well as some uncompleted tasks. Ill cover three areas, the Federal Reserves commitment to transparency and accountability, Financial Stability and financial reform, and Monetary Policy. Ill close by discussing the prospects of the u. S. And global economies. Fostering transparency and accountability was one of my principal objectives when i became chairman in february 2006. I had long advocated increased transparency, and in particular, a more explicit policy framework as ways to make Monetary Policy more predictable and more effective. Our efforts to enhance communication have indeed made Monetary Policy more effective, but is these steps have proved important in other spheres as well. When i began my term, i expected to build on the Monetary Policy frame work that i inherited. My predecessors had solidified the feds commitment to low and stable inflation as foundations of broader economic stability, and they gradually increased the Monetary Policy deliberations and plans. For example, chairman volcker introduced a frame work to help guide the attack on high inflation in the early 1980s, and the practice of issuing a statement after each meeting at the fomc began under chairman greenspan. I believed that a still more transparent approach would make Monetary Policy even effective and further strengthen the feds institutional credibility. In particular, as an academic, i had written favorably about the flexible inflation targeting approach used by the bank of england and a number of other Central Banks. By making considerable information about policy goals and strategies together with their economic forecasts, these Central Banks provided a clear framework to help the public and Market Participants understand and anticipate policy actions. The provision of the goals and policy plans also helped make these Central Banks more accountability for acheeg their stated objectives. I was confident that we could adapt this type of framework to the Federal Reserves mandate to get maximum employment and price stability. Indeed, Central Banks using this frame work were already in practice often pursuing economic objectives in addition to low and stable inflation, hence the term flexible inflation targeting. Because the financial crisis and its aftermath naturally occupied so much of policy makers attention, progress toward a more explicit policy framework at the Federal Reserve was slower than i had hoped. Nevertheless, progress was made. In the minutes of this october 2007 meeting, the fomc introduced its quarterly summary of economic projections, which included projections of key Macro Economic variables, such as inflation, g. D. P. Growth, and the Unemployment Rate. Over time, we added long projections for inflation growth and unemployment, as well as projections of the path of the federal funds rate consistent with each individuals views of appropriate Monetary Policy. These additions have better informed the public about participants views on both objectives to policy and the Interest Rates most consistent with acheefing those objectives. We took another important step in january 2012 when the fomc issued a statement laying out its longer run goals and policy strategy. The statement established for the first time an explicit longer run goal for inflation of 2 , and it pointed to the s. A. P. To provide information about Committee Participants assessments of the longer run normal Unemployment Rate, currently between 5. 2 and 6 . The statement also indicated that the committee would take a balanced approach to its price stability and employment objectives. We adopted additional measures aimed at clarifying the rationales for our decision, including my quarterly postmeeting press conference. The increases in policy transparency that were achieved proved valuable during a very difficult period for Monetary Policy. As it happened, during the crisis and its aftermath, the transparency proved difficult in a different sphere, name until supporting the institutions democratic legitimacy. The Federal Reserve, like other Central Banks, wields powerful tools. Democratic accountability requires the public be able to see how and for what purposes those tools are being used. Transparency is particularly important in a period like the recent one in which the Federal Reserve has been compeled to take unusual and dramatic actions, including the provision of liquidity to a wide range of Financial Institutions and markets that did not normally have access to the feds discount window to help stabilize the Financial System and the economy. What types of transparency are needed to preserve Public Confidence . At the most basic level, the Central Bank Must be clear and open about its actions and operations, particularly when they involve the deployment of public funds. The Federal Reserve routinely makes public extensive information on all aspects of its activities, and since the crisis, it has greatly increased the quantity and detail of its regular reports to the congress and to the public. Importantly, contrary to what is sometimes asserted, all of the feds Financial Transactions operations are subject to regular intensive audits by the Government Accountability office, the g. A. O. , an independent inspector general, as well as by our own internal auditors. Its a testament to the dedication of the Management Team that these thorough audits have consistently produced assessments of the feds accounting and financial controls that most Public Companies would envy. Trance parns a and accountability are about more than just opening up the books, however. They also require thoughtful explanations of what we are doing and why. In this regard, our first responsibility is to the congress, which established the Federal Reserve almost exactly a century ago, and determine its structure, object tevs, and powers. Federal reserve Board Members, including the chairman, of course, as well as senior staff, testify frequently before congressional committees on a wide range of topics. When i became chairman, i anticipated the obligation to appear regularly before the congress. I did not entirely anticipate, though, that i would spend so much time meeting with legislators outside of hearings , individually and in groups. But i quickly came to realize the important of these relationships with legislators and keeping open the channels of communication. As part of the feds interaction with the congress, weve also routinely provided staff briefings and conducted programs at the board for the benefit of Congressional Staff interested in Federal Reserve issues. I likewise maintained regular contact with both the bush and obama administrations, principally through meetings with the secretary of the treasury and other economic officials. The crisis and its aftermath, however, raised the need for communication and explanation by the Federal Reserve to a new level. We took extraordinary measures to meet extraordinary challenges, and we had to explain those measures to earn the public support and confidence. Talking only to the congress and Market Participants was no longer an option. The effort to inform the public, engage the whole institution, including both Board Members and the staff. As chairman, i did my part by appearing on television programs, holding town halls, taking student questions at universities, and visiting a military base to talk to soldiers and their families. The Federal Reserve banks also played key roles in providing Public Information in their districts through programs, publications, speeches and other media. The crisis has passed, but i think the feds need to educate and explain will only grow. When paul voler first sat in the Chairmans Office in 1979, there were no Financial News channels and cable tv, no bloomberg screens, no blogs, no twitter. Today news, ideas, and rumors circulate almost instantaneously. The fed must continue to find ways to navigate this changing environment while providing clear, objective, and reliable information to the public. For the u. S. And global economies, the most important event of the past eight years was, of course, the Global Financial crisis and the deep recession that it triggered. As ive observed on other occasions, it bore a Strong Family resemblance to a classic financial panic, except that it took place in the complex environment of the 21st Century Global Financial System. Likewise, the tools used to fight the panic that adapted to the modern context were analagous to those that would have been used a century ago, including Liquidity Provision by the central bank, liability guarantees, recapitalization, and the provision of assurances and information to the public. The immediate trigger of the crisis, as you know, was a sharp decline in house prices, which reversed a previous runup that had been fueled by irresponsible mortgage lending and securitization practices. Policy makers at the time, including myself, certainly appreciated the house prices might decline, although we disagreed about how much decline was likely. Indeed, prices were already moving down when i took office in 2006. However, to our expectations about the possible Macro Economic effects of house price declines were shaped by the analogy to the bursting of the dotcom bubble. That earlier buzz also involved a large reduction, but was followed by only a mild recession. In the event, of course, the bursting of the housing bubble helped trigger the most severe financial crisis since the Great Depression. It did so because unlike the earlier decline in equity prices, it interacted with critical vulnerabilities in the Financial System and in government regulation that allowed what were initially moderate aggregate losses to sub approximated prime mortgage holders to cascade through the Financial System. In the private sector, this included high levels of leverage, excessive dependence on unstable shortterm funding, deficiencies in risk measurement and management, and the use of exotic financial instrument that is redistributed risk in nontransparent ways. In the public sector, this included gaps in the regulatory structure that allowed some systemically firms and markets to escape supervision. Failures of supervisors to use their existing powers and insufficient attention to threats to the stability of the system as a whole. The Federal Reserve responded forcefully to the liquidity pressures during the crisis in a manner consistent with the lessons Central Banks have learned from the financial panics over more than 150 years and summarized in the writings of the 19th century journalist, lend early and freely to solvent institutions. However, the institutional context had changed substantially since he wrote that. The panic of the early 20th centuries typically involve runs on commercial banks and other deposit tarry institutions. Prior to the he recent crisis, critics tension progressively migrated outside traditional banking to socalled shadow banking entities, which relied heavily on shortterm wholesale funding that proved vulnerable to runs. Accordingly, to help calm the panic, the Federal Reserve provided liquidity not only to commercial banks, but also to other types of Financial Institutions such as investment banks and money market funds, as well as the key Financial Markets such as those for commercial paper and assetbacked securities. Because funding markets are global in scope and u. S. Borrowers depend on foreign lenders, the Federal Reserve also approved currency swap agreements with 14 foreign Central Banks. Providing liquidity represented only the first step in stabilizing the Financial System. Subsequent efforts focused on rebuilding the publics confidence, notably including public guarantees of bank debt by the fidc and of money market funds by the Treasury Department, as well as the injection of public capital into the Banking System. The Bank Stress Test that the Federal Reserve led in the spring of 2009, which included detailed Public Disclosure of information regarding the solvency of our large space further has confidence in the Banking System. The success of the stress test disclosures, by the way, was yet another example of the benefits of transparency. The subsequent efforts to reform our Regulatory Framework had been focused on limiting the reemergence of the vulnerabilities that pript and exacerbated the crisis. Changes in Bank Capital Regulation have significantly increased requirements for loss absorbing capital at Global Banking firms, including a surcharge for systemically important institutions and a ceiling on leverage. The Federal Reserves review, a descendant of the 2009 stress test, requires that large Financial Institutions maintain sufficient capital to weather extreme financial shocks and that they demonstrate that their internal planning processes are effective. In addition, Public Disclosure facilitates market discipline. The basil framework also includes liquidity requirements designed to mitigate excessive reliance by global banks on shortterm wholesale funding and to otherwise constrain risk al those banks. Further steps are underway to toughen the oversight of large institutions and to strengthen the financial infrastructure. For example, by requiring Central Clearing with Greater Transparency for the trading most standardized derivatives. Oversight of the shadow Banking System has also been strengthened. For example, the new Financial Stability Oversight Council has designated some nonbank firms as important institutions sum to the consolidated supervision by the Federal Reserve. In addition, measures are being undertaken to address the potential instability of shortterm wholesale funding markets, including reforms to money market funds and the triparty market. Of course, in a highly integrated global Financial System, no country can effectively implement the financial reforms that i described in isolation. The good news is that similar reforms are being pursued throughout the world with the full support of the United States and with International Bodies such as the Basil Committee and the Financial Stability board providing coordination. More brooled, the approach to regulation and supervision at the Federal Reserve has evolved to include a substantial macro or systemic coordination, in addition to the focus on individual institutions. For example, the Federal Reserve has created the office of Financial Stability policy and research, which coordinates system efforts to monitor the interactions of Financial Institutions, Financial Markets, and economic developments to identify emerging vulnerabilities and systemic risk. Enhanced monitoring of this type is especially important as the changes in regulatory structure and financial innovation may lead risks to manifest in new ways or to migrate outside the perimeter of the current regulatory structure. Much progress has been made, but more remains to be done. In addition to continuing the efforts ive already mentioned, including the full implementation of new rules and supervisory responsibilities, the agenda still includes further domestic and International Cooperation to ensure the effectiveness of mechanisms to allow the orderly resolution of insolvent institutions and thereby increased market discipline for those large institutions. The evaluation of potential tools that might be used to address emerging financial balances is another high priority. For example, the new basil regulatory capital framework includes a cyclical buffer, which may help build additional resilience within the sector during periods of buoyant creation. Staff members are investigating the potential of this and other regulatory tools such as cyclically sensitive requirements for mortgages to improve Financial Stability. A number of countries, including both advanced and emerging market economies, have already deployed such measures, and their experiences should be instructive. Although in principal, Monetary Policy can be used to address financial imbalances, the presumption remains that tools together with well focused traditional regulation and supervision should serve as the first line of defense. However, more remains to be done to better understand how to design and implement more tools and how these tools interact with Monetary Policy. While Liquidity Provision and other steps were critical to stemming the financial panic, a rapid shift in policy was necessary to counteract the massive economic blow delivered by the crisis. The fomc reduced the target federal funds rate from 5. 25 in the summer of 2007 to a range of zero to. 25 by the end of 2008, a very rapid easing. The federal funds rate has been there ever since. To provide additional Monetary Policy accommodation, despite the constraint imposed by the lower Interest Rates, the Federal Reserve has turned to two alternative tools, enhanced Forward Guidance regarding the likely path of the rate and largescale purchases of longerterm securities for the Federal Reserves portfolio. Other major Central Banks had responded to developments in 2008 in roughly similar ways. For example, the bavepk england and the bank of japan have employed detailed Forward Guidance and conducted largescale asset purchases by the European Central bank has moved to reduce the perceived risk of sovereign debt, provided banks with substantial liquidity, and offered qualitative guidance regarding the future path of Interest Rates. The shortterm rates near zero expanded guidance about intentions for future policy has helped to shape market expectations, which in turn has eased financial conditions by putting downward pressure on longer term Interest Rates and helping to support Economic Activity. Forward guidance about the shortterm Interest Rates supplements the framework that i described earlier by providing information about how the committee expects to achieve its stated policy objectives despite the complications created by the zero lower bound on the policy Interest Rate and uncertainties about the cost and the efficacies of the available policy tools. Beginning with qualitative guidance, the committees communication about its anticipated future policy has evolved in several stages. In december 2012, there was guidance, announcing that no increase in the federal funds rate target should be anticipated so long as the employment rate remained about 6. 5 , inflation between one and two years ahead was projected to be no more than half a percentage point above the committees longer run goal, and longer term Inflation Expectations continue to be well anchored. My colleagues and i have emphasized that the conditions stated in that guidance were thresholds, not triggers. That is crossing one of the thresholds would not automatically give rise to an increase in the federal funds rate target. Instead it would signal only it would be appropriate for the committee to begin considering based on a wider range of indicators whether and when an increase in the target might be warranted. Largescale asset purchases also provide accommodation by lowering longterm Interest Rates. Working through the portfolio channel, asset purchases reduced those supplies of Long Duration assets in the hands of the public, depressing term premiums and reducing longer term yields. At times the decision to begin or extend the program may also have a signaling effect to the extent that Market Participants see that decision as indicative of commitment to an accommodative policy stance. However, its important to recognize that the potential signaling aspect depends on the policy context. In particular, the fomcs decision to modestly reduce the pace of asset purchases at its december meeting did not indicate any littling of its commitment to retain highly competitive policy for as long as needed. Rather, it reflected the progress we have made to our goal of substantial improvement in the Labor Market Outlook that we set out when we began the current Purchase Program in september 2012. At its most recent meetly, they clarified its guidance on rates, stating that it expects to maintain the current target range for the federal funds rate well past the time that the Unemployment Rate threshold of 6. 5 is crossed, especially if projected inflation continues to run below the ommittees 2 longer run goal. Had these unconventional tools been effective, skeptics have pointed out the pace of recovery has been disappointingly slow with inflation adjusted g. D. P. Growth arrivaling only slightly higher than 2 over the past few years and inflation still below the committees 2 longer term target. However, as i will discuss, the recovery has faced powerful head winds suggesting that Economic Growth might well have been considerably weaker or even negative without substantial Monetary Policy support. For the most part, Research Supports the conclusion that the combination of Forward Guidance and largescale asset purchases has thopped promote the recovery. For example, changes in guidance appear to shift Interest Rate expectations and the prepared of studies show it pushed down longer term Interest Rates and boost asset prices. These changes and financial conditions appear to provide Material Support to the economy. Once the economy improved sufficiently so that unconventional tools are no longer needed, the committee will face issues of policy implementation and ultimately the design of the policy frame work. Largescale asset purchases have increased the size our Balance Sheet and created substantial excess reserves in the Banking System. Under the operating procedures used prior to the crisis, the present and large quantities of excess reserves likely would have impeded the ability to raise shortterm no, maam nail Interest Rates when appropriate. However, the Federal Reserve now has effective tools to normalize this policy when conditions warrant without reliance on asset sales. The Interest Rate and excess reserves can be raised which will put upward pressure and shortterm rates. In addition, the Federal Reserve will be able to employ other tools such as fixed rate, overnight reverse repurchase agreements, term deposits or term repurchase agreements to drain bank reserves, to tighten control over money market rates in that proves necessary. As a result, at the appropriate time, the fomc will be able to return to conducting Monetary Policy primarily through adjustments to the shortterm policy rate. It is policy, however, that some specific aspect of the Federal Reserves operating framework will change. The committee will be considering this in the future, taking into account what is learned from this experience from the new tools for managing Interest Rates. In the remainder of my remarks, i will reflect on the state of the u. S. Economic recovery and its prospects. The economy has made considerable progress since the recovery began some 4 1 2 years ago. Payroll employment has risen by 7. 5 million jobs. Real g. D. P. Has grown in 16 of 17 quarters, and the level of real g. D. P. In the Third Quarter of 2013 was 5. 5 above its prerecession peak. The unemployment right has fallen from 10 in the fall of 2009 to 7 recently. Industrial production and equipment investment have matched or exceeded prerecession peaks. The Banking System has been recapitalized and the Financial System is safer. When the economy was in freefall in late 2008 and early 2009, such improvement was far from certain as indicated at the time by stock prices that were nearly 60 below current levels and very wide credit spreads. Despite this progress, the recovery clearly remains incomplete. At 7 , the Unemployment Rate is still elevated. The number of longterm unemployed remained unusually high and other measures such as the number of people who are working parttime for economic reasons have improved less than the Unemployment Rate. Labor force participation continues to decline, and although some of this decline reflects longer term trends that were in place prior to the crisis, some of it likely reflects the discouragement about job prospects. In retrospect, many of the factors that held back the recovery can be identified. Some of these factors were difficult or impossible to anticipate, such as the resurgence of volatility associated with the sovereign debt crisis and the economic effects of natural disasters in japan and elsewhere. Other factors were more predictable n. Particular, we appreciated early on, although perhaps to a lesser extent than we might have, that the boom and bust left severe imbalances that would take time to work off. As carmen and ken noted in their recent research, Economic Activity following financial crises tends to be anemic, especially when the expansion was accompanied by rapid growth in credit and real estate prices. Weak recoveries from financial crises reflect in part the process that a Balance Sheet repair. Households pulled back on spending to reduce debt burdens, while Financial Institutions restrict credit to restore capital ratios and reduce the riskyness with a portfolio. In addition to these financial factors, the weakness in the recovery reflects the overbuilding of housing and to some extent commercial real estate prior to the crisis together with tight mortgage credit. Indeed, recent activity varies, in comparison to the construction more typically seen in recoveries. Although the Federal Reserve, like other forecasters, had tended to be overoptimistic in its forecast to real g. D. P. During this recovery, we have also at times been too pessimistic in our forecast of the Unemployment Rate. For example, over the past year, unemployment has declined notably more frequently than we and others affected, even as g. D. P. Growth was moderately lower than expected a year ago. This discrepancy reflects a number of factors, including declines in participation, but an important reason is to slow growth of productivity during this recovery. En few actively, when gains are limited, firms need more workers even if demand is growing slowly. Disappointing productivity growth accordingly must be added to the list of reasons that Economic Growth has been slower than hoped. Incidentally, the slow pace early in the recovery was not evident until well after the fact because of large data revisions, an illustration of the frustrations of realtime policymaking. The reasons weak prblingt activity growth are not entirely clear. It may be the result of the severity of the financial crisis, for example, if tight Credit Conditions have inhibited innovation, productivity investments and the formation of new firms, or it may reflect slow growth in sales, which led firms to use labor less intensively or maybe even mismeasurement. Notably, productivity growth has also sagged in a number of foreign economies hard hit by the financial crisis. Yet another possibility is weak productivity growth reflects longerterm trends largely related to the recession. This will be important in shaping our expectations for longterm growth. To this list of reasons for the slow recovery, the effects of the financial crisis, problems in markets, weaker than expected productivity growth and events in europe, i would add one more significant factor, namely fiscal policy. The federal fiscal policy was expansion air in 2009 and 2010. Since that time, however, federal fiscal policy has turned restrictive according to the budget office, tax increases and spending cuts likely lowered output growth in 2013 by as much as 1. 5 percentage points. In addition, throughout much of the recovery, state and local government budget have been highly contractionary, reflecting their adjustment to sharply declining tax revenues. To illustrate the extent of fiscal tightness, at the current point in the recovery from 2001 recession, employment at all levels of in which trast in the current recovery Government Employment has declined by more than 700,000 jobs a net difference. There have been corresponding cuts in got investment in infrastructure as well as increases in taxes and reductions in transfers. Although long term fiscal sustainability is a critical objective, tight policies have been counter productive. The recovery is weaker than it otherwise would be. But the current policy mix is particularly problematic when Interest Rates are very low as is the case today. Monetary policy has less room to maneuver when Interest Rates are close to zero while expansery fiscal policy is lying bly both more expensive when Interest Rates are pinned at low levels. A more balanced policy mix might also avoid some of the cost at low Interest Rates such as potential risk to Financial Stability without sacrificing jobs and growth. The encouraging nuzz is that the head wintsdz ive mentioned is may now be abating. Near term fiscal policy remains restrictive but the degree of restraint on Economic Growth seems likely to lessen somewhat in 2014 and even more so in 2015. Meanwhile, the budgetary situations of state and local governments have improved. The after effects of the housing bust also appear to have waned. For example, not withstanding the effects of somewhat higher Mortgage Rates hows prices have rebounded the number of home ownerers with underwater mortgages has dropped as have foreclosures. Household Balance Sheets have strengthened considerably with wealth rising and debt burden at its lowest level. Partly as a result of households ex proved finances lening is showing signs of easing though borrowers still face impediments. Businesses are also in good financial shape. The combination of financial healing, greater balance, less fiscal restraint and of course continued Monetary Policy accommodation bodes well for Economic Growth in coming quarters. But if the experience of the last few years teaches us anything is that we should be cautious in our forecast. What about the rest of the world . The u. S. Recovery appears to be somewhat ahead of that of other advanced industrial economies. For example, real g. D. P. Is still slightly below its prerecession peak in japp and remains 2 and 3 in the u. K. And euro area respectively. Nevertheless, i see some grounds for cautious optimism abroad as well. As in the United States, Central Banks and other advanced economies have taken significant steps to strengthen Financial Systems. Financial sector reform is proceeding in the effects of tilingte tight fiscal policies. Although difficult reforms such as banking and fiscal reform in europe and japan are still in early stages weve also seen indications of better growth which should have positive implications for the United States. Emerging market economies have also grown somewhat more quickly after a slowing in the first half of 2001. Although Growth Prospects continue to be good here too the extent and effectiveness of Structural Reforms like those in china and mexico will be critical factors. Last month we had a ceremony at the board to commemorate the centennial of the signing of the act by president woodrow wilson. Over its 100 years of existence the fed has faced numerous challenges. Certainly the past few years will rank as some of the more difficult times. The experiences led to important changes at our institution including new Monetary Policy tools, enhanced communication, substantial increase in the institutional focus on Financial Stability and macro policy on increased transparency. We off speak of the tral reserve and other institutions as if they were autmuss actors. Of course they are not. The fed is made up of people working within an organizational structure and Institutional Culture and set of values. Of the hard work they have brought to bear and i think we and they have been well served by a culture that emphasizes objective expert analysis, professionalism, dedication, and independence from political influence. Whatever the fed may have achieved in recrept years reflects the efforts of many people who are committed to pursuing the public interested. Although the fed undoubtedly will face some difficult challenges in the years ahead our people and values make me confident that our institution will meet those successfully. Thank you. [applause] thank you very much. Ts just really awesome in the literal sense, not the undergraduate sense. It is really awesome to hear those set of remarks and to reflect upon an extraordinary institution that the Federal Reserve is. So we have two ive asked two distinguished scholars to reflect not so much on what the chairman has said but on the state of Monetary Policy and nance and both looking backwards to thinks of what we have been through but also looking forward to what the lessons are for perhaps future for men or women and also scholars who are thinking about where theyre going to devote their scholarly lives. The first is ken rogue gauf. Tp he has a most distinguished career in many areas both in Public Service and in academic life particularly in open economy Macro Economics and finance. Ben referred to his recent book called this time is different. This is a wonderful thats not the right word. This is a very, very interesting book about financial crises over the centuries. And i would just say read it and weep. But before you weep, lets hear ken. [applause] thank you very much for inviting me here. I certainly would not presume to comment in this context object chairman of the Federal Reserves speech which is a tour deforce awesome i guess sums it up as bill said. Certainly this is a prive ben n for us to have bernanke here who has had an exem employery career which ub doubtedly exspires many people here. There are many things to say about bens tenure but i think the one which just seizes me is the extraordinary creativity at they exercised during the financial crisis trying out things which just seem surreal like declaring that the investment banks are banks so that the Federal Reserve could give them money. There are many people who have think they have 20 20 hindsight and see clearly things the fed could have done better. I certainly can think of a lot of people and things that could have been done worse. Nd i found their originality blinding more than thinking 20 20 hindsight. Sometimes people in the press or friends say well what problems does this raise . Have we figured this out . I think we have to put this in context. We still dont have the Great Depression figured out. We know that were way ahead of where we were when ben wrote his 1983 article, more than 50 years after it happened about the importance of credit and the Great Depression how that made it last. Jeff and others talked about how the Gold Standard transmit it had Great Depression after that and i am sure there will be a similar trascombrectry on our understanding of this crisis where people are continually reevaluating, looking at things from a fresh perspective. I would like to see, some day i assume youll write a book after this. But i would like to see chapter on the whackiest ideas you didnt do that came up. And i think this by the way when you appear on letterman would make a good tenlist for him and you could i suspect probably make a couple of appearances and not go over the same list twice. There certainly were many ideas that are floating out there that were not tried and maybe theyre good and maybe theyre bad. But ill list a few of them. Ben rightly said that fiscal policy was inadequate i think largely declaring victory prematurely but i think there were many other problems. But i would just mention a few ideas. I think one would be that i think authorities around the world were somewhat reluctant to write down debt for example there were plans to write down subprime mortgage debt in the United States. Marty felled and many others proposed things. Certainly Carmen Reinhardt and i long advocated significant debt restructurings in the periphery of europe. Another idea very krnt is to think about whether the Federal Reserve should allow temporarily higher inflation. Mike has a very precise idea and potentially use unlimited policy tools for example on limited qe to try to achieve that. A smaller idea but i think an important one is the idea of starting public fralks bank while credit markets were so weak to seed publicprivate partnerships. President obama suggested that. There were a lot of ideas about how to write down debt more dramatically during the crisis. For example, nationalizing a major bank. Many people proposed that. The idea would be to restructure it and quickly privatize it. And i think when you look back on these ideas you have to remember that theres a huge overhang of uncertainty over the economy. So yes, one of the feds jobs is to be very creative. One of the governments jobs is to be very creative. But theres a balance and its a very, very hard to get that right perhaps easy with 20 20 hindsight but very hard to know precisely what works and doesnt. Ben referred again and again to maintaining Public Confidence. How far could you push things and maintain Public Confidence . And the same could be said for some of the problems that theyve dealt with in europe. And speaking of europe, certainly for a couple years it looked like the other shoe might drop. That the euro zone could fall apart. We didnt know where the bottom was. And in terms of calibrating ideas, for example if youre just in the middle of restructuring your banks and then that happens, it could be very difficult. So youre acting under enormous uncertainty. One element where i think Academic Research can inform policy and maybe we need to think about in the future is rethinking the Business Cycles after financial crises. We havent really had a real financial crisis that was worldwide like this in only a handful in advanced countries since world war ii. But they are a very different animal and the length of time it takes to recover the per capita g. D. P. Where you started can be a very long time. The chairman gave some examples of countries who havent reached their level of g. D. P. Of when they started but frankly i think when you have these long periods, when youre talking about five years in the case of some of the periphery countries maybe ten years before theyre completely out of this you need to think about per capita g. D. P. Theres a lot of population growth that goes on then and its a pretty ugly picture. If you look at the 10, 12 countries that had systemic , ancial creasees in 2008 only the United States and germany reached the per capita g. D. P. Level where theyve started. I should mention that my frequent coauthor giving a paper on this right now thank goodness her plan had been canceled she made it five minutes ahead of the session so looked at evidence from 100 different systemic financial crises from 1857 to 1913 and this trajectory that weve experienced is very common among them where if you you have to think in terms of six to eight years as the typical amount of time that it takes to recover your previous level of per capita gled. Thats not getting back to potential. It may be more than that for some of the periphery countries if imf outlook forecasts are correct. Thats the cumulative loss here as something thats just staggering. There are many factors i think which have made it so protracted in europe i would identify the nation building thats going on that creates many problems. But certainly the lack of deleveraging and guaranteing the Financial Sector and preventing the crisis from morphing faster in the short run has left problems lingering in the long run. I will leave it to you to look at our paper about ideas about more eclectic approaches to debt restructuring, using elevated inflation. Capital controls, financial repression and other ideas that advanced countries have used in the past to try to deal with debt problems that perhaps we need to look to. I want to give a few comments about research that might come out of the financial crisis. Sometimes graduate students say to me somebodys already working on that. Trust me, no one will have figured it out by the time you graduate. Its not a threat. I think one lesson weve certainly learned is the importance of looking at economic history. That i think across many fields simply because long time periods can take in these rare events that you might not otherwise see. And i would also say the importance of looking at many countries. Another area is looking at financial frictions that sounds obtuse maybe to some of you. When cains came along in the 30s the big insight was product markets might not clear right away. There could be nominal rigidityings. And that started modern Macro Economics. i ¿do we understand those frictions yet . No, not really. Those of you who follow those meetings realize that rather than necessarily agreeing with the freshwater and saltwater approaches, there is just more truth with certain techniques sed. No one has really gotten to the root of it. The financial frictions anticipate a similar trajectory where as soon as you depart from complete markets let us understand what we mean by what we mean by supply equals emand. You create all sorts of ad hoc issues that we have to try to better understand how to approach. I think political economy is very important in thinking about these problems. I have worked on sovereign debt my entire life. It is a fundamental lyrical economy problem. The ability to pay is not the issue as much as willingness to pay or fairness as you have t. I think these are very important things. Let me pick a more mundane area hich is measurement. We talk about were gdp is. You have to understand that we did not even have this construct until it really started this with the commission and the 30s. It was backtracked at 1929 and economic historians have looked at it more sense. It is considered there is a High Standard deviation around t. There are conceptual issues you hear about like intentional investment where you reorganize offices or firms, perhaps retraining people in ways that do not show up in gdp. They are a lot like investment. We do not measure them. Another issue where measurement is a big problem is that it is very, very hard to properly measure the inflation rate. The fed targets it but the truth is we dont really know at a deep, economic level what it is, especially when we are making long comparisons over ong periods. The many problems. The commission did a wonderful job in the late 1990s. The central problem is that there are constantly new goods. You give an example of what was world ash used in the worlds fair in 1899. 10 of the goods were still being used by remember that. There are things like the internet, cell phones, which we just do not properly integrate into the cpi. It is very hard. When you try to make these comparisons and say what was the real way 20 years ago . What is it today . It is very sensitive to how you are measuring inflation. Similarly, what is the real Interest Rate . We make a fact that we overstate inflation. That is part of the reason for the 2 instead of zero percent. Some people think it should be four. We dont necessarily have a recise idea. Let me just close with thoughts for the next fed chairman. I think a big question on the front burner is whether in the nearterm there should be a more eclectic policy towards inflation, perhaps raising be trigger point in the feds rule for how much inflation they will tolerate. In europe, i think they have to have more eclectic policies towards dealing with that rather than hoping to grow out of it. For economic researchers, i have the happy message that this crisis is going to provide a Fertile Ground for Academic Research for a long time to ome. Thank you. It is always a great pleasure to have ken reflect and push all my buttons. I was talking to someone as i came into the meeting. How are we doing about measuring the contribution of the internet to economic welfare and true output . There was a long silence. Not very well. One other thing i do think this issue is a puzzle about why is it that is the cycles caused by financial crises our business are different . There is Persuasive Evidence they are different. You just look at your standard model and it is not clear why they should be different. This is another one that will outlive the career of the current graduate students. Our second comment will be by emile. He is in Edward Eagle Brown professor of finance. His research is banking, Business Cycles, corporate finance, my setting, and Monetary Policy. Among his outstanding contributions is a reason one where he organized a panel of Economic Experts to determine what economists think about key economic issues. Check it out. It is really interesting. You know what you think, and you know what your friends think. This is a sample of people from freshwater, nowater, salt water underwater, you name t. Its really surprising. When ken mentioned some of the bad ideas, he did not mention going back to the gold tandard. If you want to know what the economist think about the u. S. Going back to the Gold Standard, you might be surprised. Before we do that, professor kashyap. Ok. Thank you, bill, for the kind words. And for including me in this session. It is a privilege and honor to speak with chairman ernanke. I am going to be more forwardlooking in my comments. The transparency of the Federal Reserve means i was able to predict quite a bit but what the chairman was going to talk about. I will give some open questions about several things he discussed and at the end i am going to have a little tribute. It may get me in trouble. Maybe well go viral, we will see. The web address appear for those of you that want to see the video im going to play in end. You can note that. I will talk about four questions. Three of which were directly in the chairmans remarks. One about leverage and the role that it plays in Financial Stability. A second one about Forward Guidance. How Forward Guidance operates. A third one about the keyword tapering. The events of the past summer what we should make of that. And finally, the only really thoughtful thing i have to say is about this last point which i think is a great, open topic that is someday going to get someone a nobel prize. I will try to play what i mean by that but in terms of deep questions that the crisis has raised, trying to figure with the social value of liquidity creation is a great thing. You can go download his remarks on this, closely related to some of the stuff jeremy was talking about. Ok, so. This first bullet could have almost been a quote from the speech. It is almost boilerplate anguage. They Say Something like we are looking for buildups and leverage. We understand how they amplify. It started as a modest shock. We look across the Financial System and we see markets looking unusual but we do not see a big buildup of leverage and therefore we are somewhat confident that we are not eaded down a replay. I think that is a little bit of fighting the last war. I think we now understand much better that leverage can amplify shocks that start out small, but i think it is not yet established that if you do not have leverage that means you cannot have financial instability. There was a nice keynote address to the sentences go fed and asia conference in november where he laid out a framework were Asset Managers can create a feedback loop that can be destabilizing. I listed the mechanism that is here. I dont want to get tied exactly to that mechanism. I think we need to be on guard for mechanisms that can bring instability that dont require everage. A fire sales can come from forced selling and one reason for that is because of debt and everage. That is not the only reason you an get it. I think trying to decide whether all we have to do is essentially keep our eyes out for leverage is something that is a great open question. I think this will be an area where there will be a lot more work. We have another mechanism were Asset Managers are chasing returns that gives the same kind of flavor were there can be a kind of positive eedback. They pile into certain traits, pushing up prices, reinforcing itself, and then you get a moment of truth then it unwinds rapidly. That is a great open question and one we should study. It leads me directly to my second question, which is can we go by this socalled separation principle . I dont know if lars is at the meeting, but he has talked at length about this. He is a great quote there that Monetary Policy should be the last line of defense of Financial Stability, not the first line. There is a notion that you often hear that says we have all these regulatory tools that we can use to constrain risktaking in the Financial System. We should apply those to financial instability. We should not burden the shortterm Interest Rate with more work. It already has inflation in mployment. I think one issue is what happens if the kind of example i just gave you is the way the world actually works . You have Asset Managers interacting in markets where there is no intermediary and you can still get the cycles. In that world, if what you are going to try to do is something with the Bank Capital Requirements or liquidity requirements or anything like that, those tools are also very secondbest for confronting those types of problems. The shortterm Interest Rate in some sense is a direct input and Forward Guidance is a particularly effective, may be dangerous, input in that if you think about the incentives of Asset Managers, if you tell them you can fund this asset by rolling over shortterm funding without much risk of rates rising, youre going to pull people into a trade. The question is, will there be a moment of reckoning where that has to unwind and everything reverses . If you think that you can get this instability coming out of Asset Management or other mechanisms that involve fire sales that do not directly involved intermediaries, there is a real question of whether or not we are going to have the tools and want to use them. I think it is instructive to remember that it took a long time for the fed to actually have the intellectual framework and the public trust to be allowed to take the punch bowl away from the party with respect to inflation. I tend to think that even if we had known where we were headed with respect to the housing markets, it would have had to have been a very brave chairman to require raising down payments in 2007. It would say, you are hating on he poor. It is not clear to me that we have tools that we understand and we will be willing to use to maintain political independence if we use those in the wake of this crisis. We have all of these ideas and we have many examples, but we really do not have much experience doing it. There is this advantage of the shortterm Interest Rate that it is direct and also, in this case, it could be part of a mechanism that could generate instability. The third question is what to make of the events of last summer. This is a chart one of my colleagues created that shows you the remarkable events around the potential talk of paper and the head fake in september. I think it is difficult to square why all of these markets in many other markets, that is an intermediate bond fund and emergingmarket want in homebuilders. Spectacular returns right around the day when it looked like the fed was maybe going to taper and then maybe they werent. Why do i say this was an interesting question for research . Well, the conventional view im guessing because the chairman was going to Say Something about this you did Say Something about this you said you had tools and if we start easing back our asset purchases it does not value anything necessarily about the direction of the shortterm rate. That is one interpretation of what was happening, that people could just not believe that it was possible. You lift your foot off the gas on the taper tool and you wouldnt do something with the shortterm Interest Rates. There are other interpretations that are less benign and i think those involved views that markets are fundamentally about disagreements and that we have a different worldview that many in the Financial Market ave. Part of what is going on everyday day is that youre mediating this disagreement. If that is true, the way i prefer to interpret what happened in june was, for a couple of years now you have been piling people into aggressive position saying, take your gamble, and then all of a sudden you raise the possibility that the accommodation is going to slow. At that point the people that have been most optimistic about the prospect of easing policy are going to be the ones that have been most aggressive position and suffer the most mmediate losses. That triggers a rebalancing where people take losses and the people that replace the optimists are less likely to use leverage themselves or it it will be a little bit schizophrenic. Im tell you a leverage story, now. If that is true, and there is anything like this, it means that when you are setting Communications Policy you cannot pretend that there is a representative agent. You have to be caught doesnt of the possibility that youre going to say one thing and the guys that just want to hear go, go, go are going to take that and get put into a position of risktaking. It is also safe to say that part of what we have learned is that because of the increased transparency we know a lot more about what many policymakers think. I think it is safe to say that there is not a representative foc member. There are different camps. We are reminded right now that in any given year you can lose three or four people who are governors that can just leave. When you are trying to forecast what the fed is going to be doing in 2016, you may not even know who was going to be making those decisions. I think this means we should rethink some of these models that involve an institution like the fed committing to do something in 2. 5 years when you dont even know who the people will be. I am not sure what the fed can do that is institutionally feasible. That is another area. I will close with this this is a little play on ed rescotts famous theory. I am struck by how little attention the public has paid to what is actually going on with the rules. There is an attempt at will be made that will be potentially monumental in the way that we approach banking regulation that will finally Pay Attention as to whether or not the banks have enough assets in hand and a funding structure in hand to void fire sales. There are two potential tools. In of them has to do with the amount of shortterm funding you can get. The other is the amount of assets you can have that you can sell and hopefully not push prices around. This is underway. It is being phased in. It is going to take a long time. Thereve been thousands of comments on it. You think about it, we have no framework for thinking about liquidity at the highest level. We are greatly assisted in most aspects of corporate demands by the miller proposition. To tell you the precise conditions under which the structure of an organizations funding is irrelevant. We do not have anything like that for liquidity. We dont know if we have too much of it or too little of t. We dont have an idea about what frictions lead banks to be organized in the way they are organized in shadow banks be organized in the way that the shadow banks are organized. We can talk, for instance, about the right incentives for creating liquidity are different from the social incentives. I think it is a huge and you cannot tell if youre moving towards or away from the first est. Its hard to decide how to calibrate your tools. I think this is probably if i could solve one problem in all of economics, i would try to solve this one. I am not talented enough to figure out exactly had to do this but i think the returns to trying this are very, very high. Ok, so now i am probably going to get electrocuted but im going to try this. I made a tribute to you. Lets hope it works. a you know greenspan and volcker and fisher and but do you recall a a the most famous banker of all a a ben bernanke, the central banker a a had a very shiny dome a a and if you ever sought a a you might even say it glowed a a ron paul and all the other gold above us a a used to laugh and call him names. a they never let the chairman a a play in any policy games a ben, with your dome so right a a wont you save the world tonight a a then all the economists loved him a a and they shouted out with glee a a ben bernanke, the central banker a a youll go down in history a a youll go down in history a chairman bernanke is a very umble guy. I think it is common when you get economist together or people to say i cant believe the lack of gratitude that the politicians have often showed for what they did in the crisis. I think we were very close to Great Depression 2. 0. If it was not for his leadership, things could have been different. It is unfortunate. I am sure that history will treat you very, very well. It is too bad that it has not been more fun as it has been oing on. We can even give you a gift because of the giving limits. After youre out, i will offer ou some tickets. I have to admit that when you organize this session, your nightmare is some fellow who thinks he is a comic is going to produce something. For the last week, we have been talking about well, is this eally a good idea . I might, if he goes over well, you will be famous, but if it goes over badly, you will be be but of jokes on saturday night live. Well, that went really well. We have some time for questions. There are two microphones over there. We dont have a lot of time, but the chairman very graciously offered to followup and allow you to followup with questions. The ground rules are the standard ground rules, which are questions and no speechifying. When it crosses the line i will intervene. In 2008 the fed acted aggressively to protect money markets and Mutual Fund Investors from small negative returns. In fact, they lost almost 50 etween the crisis in 2009. Shouldnt the fed have acted equally aggressively to buy up stocks . Or was it a big mistake to support the money market mutual funds . I will point out i have two very distinguished colleagues who are happy to take any questions that might come up, especially about production alues. The actions to by the way, were led by the Treasury Department were not about protect protecting the investment of any particular individual or group. It was about avoiding precisely the issue one of the key ideas in a financial crisis is the idea of a fire sale. When large numbers of people are forced to sell assets at a given moment, it will drive down prices well below the sustainable price level. Or not enough buyers in the short run. That internal feedback reduces the net wealth of other asset holders who in turn will be orced to sell. You get into a vicious cycle. The money market funds that were in a run were pulling cash out of other markets held by broker dealers and other. It was not at all an issue of protecting the wealth of any given group in the same sense that intervening with various companies was not an attempt. It was an attempt to try to avoid a cascade of falling asset values and fire sales. The run on the money market funds was already creating it. For the equity funds had to sell assets, the too. They were not runnable. Hat was the point. Next question. My question is the mechanism that can hear you. Cant hear you. My question is the mechanism by which quantitative easing is seen to work. Your original statements back in what was called qe1 suggest that what youre doing was targeting higher inflation and that or, avoiding deflation and the impression that that generated was that higher inflation would generate more timulus. Your more recent statements suggest that quantitative easing works through reducing Interest Rates, buying securities which reduce Interest Rates. Which is the more important . I think you are mixing together goals and mechanisms. The goal was to avoid deflation. One of our concerns, besides the week recovery at the time of qe2, was inflation was very soft and moving down. We are concerned about deflation risk. Of course, deflation is not a 01 thing. Even low inflation can create problems. We adopted the quantitative easing policy with the objectives of raising the inflation rate to meet our target. At the same time, by doing so, we would lower Interest Rates and help the real economy. That was the objective. The mechanism come and of course there is a lot of debate about how this works and so on, but the mechanism that we have focused on is based on sort of a towbin friedman kind of world in which there are imperfections between different types of assets. That is the mechanism which i discussed today which i talked about in jackson hole right before qe2 as well. That is the basic mechanism that we have argued. I just want to ask if you could share with us a little bit more on how you balance transparency and accountability at the central bank . And dependence, and what challenges other central bankers might face in trying to follow your example. Why is it a question of balancing . Ell, ok. Let me let me try specific example. I think i understand where oure coming from, here. The very specific example i have a long footnote in my speech, if you would like to take a look at is on the fed website. It talks about the socalled audit the fed legislation. That legislation is misnamed. It is not about auditing in any common sense at all. As i try to emphasize in my spoken remarks, the fed is thoroughly audited. All of its Financial Operations are thoroughly audited. As i said, we have always had a good record there. Moreover, the the gao, the federal Government Accountability office which is an arm of congress, has access to virtually everything that the fed does and can comment, riticize, report, etc. The one exception is that there is an exemption in the law for gao auditing individual Monetary Policy decisions. They cannot under current law come in and say give me the records of your last meeting. We want to see that and have a independent review of whether you should have raised or lowered Interest Rates at the ast meeting. We view that as an appropriate balance. On the one hand, the fed is very transparent and open. Gao has brought access to all of our activity. Monetary policy is very transparency. Use a minute, the transcripts, five years later. Etc. , etc. Congress took the view in the 1970s at this was needed in order to prevent congress from using gao audits in terms of influencing shortterm decisions. With the socalled audit the fed legislation in various forms would do is remove that exemption. That is your thing you would do, basically. It does not do anything else. Removing that exemption means the gao could come in the day after and secondguess the focs decision. T would be inconsistent. I think the balance where it is now is appropriate. I think i would resist giving congress dayafter authority to secondguess our policy decisions. I think it would be bad for the economy if the public and market makers, Market Participants, thought that essentially whatever the fed did was subject to immediate reversal or substantial ressure by the congress. I asked my students if they had a question for the chairman. There were a number of them. One which i wont ask is, what about bitcoin . I thought an interesting one was this if you knew in 2006 what you know now, what step or steps would you have taken then to prevent or ameliorate the financial crisis and subsequent ownturn . That is a really unfair uestion. The reality is that every policymaker it is the nature of policy. It has to be made in very foggy conditions with very imperfect information. A lot of uncertainty. In order to do anything, i think i would not only have to know everything in advance, everyone would have to know that i knew everything in advance. If i went out and started saying, all the sudden, i am arbitrarily raising by five percentage points, they would say, what . I think the crisis was a very complex thing. Involve many, many issues. One of the concerns i want to respond a little bit indirectly because of the point that anil raised that the usefulness of preventions. Can you put them in place quickly enough and responsible enough, preemptively enough . That is one of the things that the bank of england is trying to do. Theyre trying to find mechanisms for more rapid response. I think that is one of the real challenges. For example, before the crisis the fed put in a new guidance on commercial real estate for banks. It strengthened the criteria for Risk Management and said you should not have too much cre on your Balance Sheet. It took two years of negotiations and discussions and sending out to the banks and they have time to implement it. In order to make it work come up the macro prudential things to work, youll have to have a more nimble system. The answer to the question bill raised is that i am sure there are some things that could have been done, but unless everyone collectively knew what was going to happen and was willing to Work Together cooperatively to take those necessary steps, it is not obvious that you could have avoided it. One more question. You write about the premature phase out of the stimulus at the end of 2010. You think in a future session, it might be helpful if the Federal Reserve were able and willing to give a Cash Transfer to the treasury so congress could sustain fiscal stimulus further without additional borrowing . I dont think im going to go there, no. No, see first of all, that is not going to work because the fed has an inflation target. Even if let me emphasize to everyone that this is entirely hypothetical even if that were to happen, and i think it is no doubt illegal, but if there were to happen at some point in the future, the fed would have to undo that. It actually would not affect the longrun debt held by the government. I am not at all sure that that would even work in theory. It certainly sounds to me like a bad idea in any case. I think fiscal policy ought to e made by the congress and thinking, rensselaer about spending taxes and debt issues. Thank you all very much. The time has come to bring this wonderful session to a close. I want to thank our two commentators for the many insights. I have a few final words for ben bernanke. You have had honors and awards for your service and i am sure there are many more to come. We at the American Economic association have our own unique award. Paul sampson was remarked that for the true scholar, the only coin worth having is the applause of ones peers. So, can we offer you some pplause . National captioning institute] National Able satellite corp. 2014] today on cspan your calls live on washington journal. Followed by the university of akron state of the parties conference. The first Panel Discusses National Party nominations, political scandals and combacks. Then the history and future of the tea party and impact on the republican party. And later today our series of first ladies looks at abigail adams. Coming up in just a moment on washington journal, your calls and todays headlines. Then west wing reporter looks at president obamas relationship with the press and his goals for 2014. Followed by George Washington law school, how the u. S. Determines whether those illegal criminals will be removed. And then the use of Capital Punishment president obama released to executive own orders related the washingtonp. Post is reporting that the white house responded to the Supreme Court yesterday. A group of colorado does not need protection from the Affordable Care act protection on contraceptions. They can be exempted. Good morning. That on new heard years eve, a federal judge overturned the law in florida that required those applying for