[inaudible conversations] [inaudible conversations] hello ladies and gentlemen. Welcome to politics and prose on this balmy spring avenue afternoon. Forget started if you please sign in you shall have my eternal gratitude and let you know this evening we are recorded and we want to make sure that your questions are recorded as well for posterity. You will see to the side of me theres a microphone so when we have our questionandanswer session tonight, they could we speak directly into the microphone to ask your question i would appreciate. Finally once the event is over i wish if please do us a favor of folding your chairs up and putting them up and once again youll have my eternal gratitude. Charles wheelan is the reason why so many of you are volunteering your afternoon to listen about foreign policy. The best math teacher you never had and formerly a correspondent for the economist mr. Wheeler went on to write statistics and was widely praised for ruthlessly stripping away the jargon obfuscation to produce clear and entertaining explanations concepts to be far more obscure than they should be. I think it takes somebody very smart to make money seems a simple and Charles Wheelan process of starting with the absurdity of the whole premise of the little pieces of paper we obsess over and going on to look at the reason behind money, why money is good and why can go bad reading naked money is to see the economic patterns fall into place. It is time and the mechanisms upon which Global Financial system arrives under intense scrutiny and think the best thing we can do before we attack what the its partners than it. We are fortunate that Charles Wheelan acidulated out for us. He paints a picture of the ex ordinary consensus which is money. Just remember we realize how bizarre those crumpled pieces of paper in your wallet or we will swap it out for brandnew books. Thats a pretty good deal. Ladies and gentlemen, Charles Wheelan. [applause] thank you very much for coming out. You may be disappointed to realize there will be no nudity and this is about getting rich but naked money naked money is the third of what we are describing is the naked trilogy. There will be a box that im told and if you asked me in graduate school never did i imagine i would be here speaking or that i have what written three books all with the word naked in the title but they happened in many ways by accident. I will give you the origin of the series and then i will talk harbaugh this book. They get economics is written as close to by accident as you can when it comes to writing a book. I was trying to write a book on the gambling industry. I was at the time the correspondent for the economist based out of chicago. This was 1997 and for those of you, you may or may not know if you go back to the early 90s in places like iowa it was still illegal to have the bingo game at a church if there was money involved. When you fastforward to the midpoint of my tenure at the economist there were 19 riverboat casinos and myriad other forms of gambling so along with other states in my territory you had an explosion of indian casinos, you have all kinds of other forms of gambling that for spreading at a rapid clip so i figured this would be an exciting thing to write a book about and id written columns about compulsive gambling, casino design, the politics of state governments and Indian Tribes and so on. While i was trying unsuccessfully to peddle this book i was hired to teach a class at northwestern at manoa school of journalism but economic and finance for journalists which i felt would be a great contribution to the field but i couldnt find a book that would be appropriate for journalists. They were over technical long and dense and so on so i called my agent the woman unsuccessfully peddling the gambling and i said let you know more about the Publishing Industry than i do. Clearly there must be a book on economics that expresses how important these ideas are that doesnt get locked down in the math and the graphs. Its really fun stuff. Theres a long pause and she said no theres not that you are going to write it and its going to be called economics for poets and im going to read it. The gambling book was never written. Someone needs to write it this theres not a lot of interest there. The second book naked statistics in some ways was the same. I had taken a lot of statistics classes tonight taking two classes from people who won the nobel prize and they were arguably the two worst classes ive ever taken in my life. In some ways i was even more frustrated than i was with economics because its actually intuitive. If you want to understand why polling works you can figure out all the coefficients and use a lot of greek letters or you can just say you have got a bowl of soup and a mix up properly and take a small spoonful you are going to know what the whole thing takes like. And if you havent girded up like we have been doing lately with internet polls and people not answering their phones it wont take the rest of the pot naked statistics was sort of bored by accident. This book is the same way. Naked money was born out of the identifier three related concepts in the book all woefully misunderstood and not going to go into in great depth but for example we have two president ial candidates both of whom have embraced the Gold Standard when the university of Chicago School of business and if you are interested in economics at all is called the international itm panel. They have a sample of 50 economists. Its nicely ideologically diverse and german this group of economists and what idm does is pull these economists on issues such as trade, does it kill manufacturing jobs . Today thats where the bureau of labor statistics is worth money to spend that when this panel was asked what the United States would be better off if we went back to the Gold Standard it is the only time in all the years that i followed the survey they answer was unanimous and it was no soot should cause everybody a little concerned that we have every economist on the panel saying one thing and the high proportion of personal president ial candidate saying something else. The book therefore was designed to serve this need and the things it covers her money and if you read something from the beginning of the book its about money. Money is such a strange concept that therell be times when i was working in on the book where farley understood it. At the end of the day is an issue of trust and comes down money works when other people think money will work and then there is banking and banking as we learned in 2008 has inherent frailties saying it will never change about finance is its basically about intermediating lenders and borrowers. You could do that with conventional banks and you could do that with the repurchase market or you can do it with all kinds of institutions but at the end of the day people at nexa capital are giving it away temporarily. They are renting it to somebody else and expect to get a rental rate and the people who needed are borrowing it. A woman called me from Time Magazine today she said is there ever a situation when debt is a good day and . Debt usually is a good thing. To thing. It means you can buy a house before you are 65 and you can afford to go to college and all those people up extra capital dont have zero return. You have problems when all those people would like to get the money back now and all those people who have it cannot possibly pay back even if they put it to good use. If youve ever seen its a wonderful life thats pretty much everything you need to know about the Financial System. While 2008 is still deep in our memories obviously 1929 was fundamentally much worse but the United States is a history of banking crisis beginning at the end of the 1700s. They were panics you had never even heard of in the 1830s, 1860s and the panic of 1807 and it all happened at their core. People suddenly want their money back and you cant give it back to them at the same time. Theres a panic and healthy institutions become unhealthy and so on. The last piece is the Central Banks in the Federal Reserve in particular. The central bank it is the institution with full oversight of the money. Theyre the ones entrusted with protecting the value of that Paper Currency which is either worth nothing or a lot depending on how you look at it. I love the tweet from politics and prose come, if you think its worthless give it to us and we will give you books in exchange. Its not worthless. You cant take your paper money anywhere in washington and wave it around and demand silver or gold but its by no means worthless. Anywhere up and down the strip people will gladly give you a predictable amount of goods and services in return. The central bank is response over at that and also a shares it shares responsibility for treasury and other agencies for oversight of this frail Banking System so they are the ones charged with protecting the system that has at its core this fundamental weakness. Those are the three pieces. I will start with reading a couple of pages from the beginning, what is money and then i will turn to the very end which is what we have learned about central banking and i will paraphrase some of the lessons and then we will have time for questions and answers. Chapter 1, what is money . In 2009 north korea did something unusual even by north korean standards as the high bar or low bar. The nation issued a new currency that lops two zeros off all the bills that one law was declared equivalent to 100 bill currency. This is not a particularly new tricks. Sordid countries in the best of issued new currency is with fewer zeros. The tool for inviting inflation. In 1994 purcell created a new currency to replace the inflation. It would be worth 2750. None of this is inherently good or bad for consumers as long as the old currency can be freely swapped for the new currency to imagine of United States had no dollar bill but instead broke any everything in pennies. The government announced pennies could no longer be used for currency. A product that used to cost 200 would now cost two in terms of purchasing power nothing would change. People lead lots of pennies before would now have lots of dollars. Bank accounts would be easier to convert and everyone would lose two digits. Prices would look lower but in terms of the came later well for rich people would still be rich and poor people would still be poor. Only in dollars rather than pennies. Anyone over the age of six recognized is that 5 is no different than 500 pennies. We would all just carry fewer coins in our pockets and stores would no longer accept pennies but if you discover 300 of them at the cushions of your couch you could take him to the bank and swapped them for dollars. Brazilian teddy or to convert their some european nations said they will forever Exchange Coins for europes even though the country gave up the rich mark for the euro more than a decade and a half ago. North korea is not like other countries. When north korea enters currency reform the governor announced only limited amount of bill currency could be swapped for the new currency, about 690 is the official Exchange Rate and we should take a small detour about the official change rate. You can imagine north korea takes the north korean wand as whatever the great leader says it should be worth in dollars. Most people would much rather have the dollar so at 690 at the official Exchange Rate is worth 35 in the lock market. Anyone holding large amounts of gold currency would see their kimmage wealth destroyed and that was exactly the point to the point. And i think government has become increasingly intolerant of blackmarket activities outside the countrys official russianbased economy. Lackluster traders were sitting on large batches of cash. The stroke of the government 10 or whatever the Supreme Leader does de palma get legislation the government confiscated most of that illicitly it that illicitly akin weighted wealth. Of course many ordinary North Koreans hoping to avoid starvation during the winter and also keen bladed large stocks of cash after the announcement of the currency reform the sparse news that leaked out of north korea made reference to quote chaos in markets in rail stations that savers to swap swapo paper new. North koreans took 21st two convert their old currency to new currency. The writers they new york or in one day all your money was lost. People were taken to the hospital in shock. The north korean government took value and rendered it worthless. Thats a very curious power. One side note there are a lot of koreas but my Research Assistant over the course of the book developed a fascination with north korea and the last time i saw him finishing up the book he said im going to north korea. Ive just got to get there. I said you know now might be good idea. He did disappear for a long stretch and the next time i heard from him i got this hand addressed envelope in my mailbox and inside was the north korean wand notes along with the story of how you smoke without Andy Kim Jong un posted stamp which not everybody gets. But he did escape the country with his 5001 note. Okay back in the United States last i checked back to the north korea. Juan which is more curious was juxtaposed against what happened at exactly the same time. In response to the financial crisis the Federal Reserve is aggressively injecting liquidity into the Financial System. The concept of liquidity will be explored but the Federal Reserve is doing everything in its power to lower Interest Rates from struggling banks businesses and consumers would have easier access to credit after the real estate bust. Heres the part thats almost north korean in its weirdness. The Federal Reserve accomplished its task by creating new money from nowhere. Theres a windowless room at the Federal Reserve bank in new york where traders created new electronic money and use it to buy billions of dollars in financial assets. In january 2008 and january of 2014 the fed injected roughly 3 trillion in new money. One minute the money did not exist, the next minute the trader acting at the best of the fed. Bonds by private institutions and pay for those securities by transferring electronic funds to the countenance selling firms, new money. That is the sound of a guy sitting at his computer in new york creating a billion dollars and using it to buy assets from citibank. Click, click, 2 billion more. While north koreas Supreme Leader was taking money with die when rendering it useless the fed was doing the opposite creating money out of nothing. Neither the north korean yuan organized it dollar dollars have any Intrinsic Value. One cannot take either currency to the government issued it and demand something tangible in return which is gold or rice or cooking oil. At least. At least then it states you would not be sent to labor camps were asking. North korea could wipe out money and the United States could created because money in both countries is just paper are increasingly bits and bytes on a computer screen. That brings us to the third wacky thing going on at roughly the same time north korea was destroying money and United States was creating it. American prisoners for conducting many of their transactions using pouches of macro, yes the oily fish. Prison inmates and that states are not allowed to use cash. So they typically typically have accounts at the commissary where small items can be purchased with no cast circulating. A good deal the commissary can be used as liquidity. As its been the case throughout history this kind of commerce becomes easier whether there is an informal agreement on a single account such as cigarettes and the item that has emerged as the Gold Standard for trade in american prisons of the federal smoking ban blue cigarettes out of the pouch of macroor the mac. It comes in it pouch ripping cans. Macroi alsos tune chicken oysters in part because the mackeral happens to sell for 1 dollar at the canteen so its good that you need to think in terms of dollars well amused using macs. Unlike the dollar or the. Juan the macrohas interests. Its always needed. In fact the north korean or american economies ran on macro me the supreme Supreme Leader of the Federal Reserve could have done what they did. You might get arrested if he tried to trade it with a winter coat but you can go and the basement eat it during a political famine. Government government could try to confiscate all the mackeral but thats a morgue difficult task. Similarly the United States Federal Reserve cannot instantaneous generate millions of pouches of macrowhen none preview is existed. No one in a windowless room at the fed can push a button have pouches of macroshow up. Click, click thats the sound of no macrobeing created. So we have the series during concept of money. Money just depends on confidence. Consider the case of indian rubies. According to the Federal Reserve bank of india and the soil ruby is legal tender songs that has to wouldnt have serial numbers. Thats the same thats true with u. S. Currency. As long as there are two serial numbers its fine which is why you are willing to accept it. The same in india if you present a crumpled dirty work toward go to an indian bank the bill must be replaced with a crisp new one yet on the streets of mumbai you will find it difficult to get anyone to accept a torn or overly worn ruby even if the serial numbers are clearly visible in intact. Not shopkeepers taxi drivers and Street Vendors therefore no one who expects to do business with shopkeepers taxi drivers or Street Vendors will accept it. No one wants to be the left to take the soil bill to the bank to exchange it. If people accepted the soiled note no one would have to take it to the bank. If it has two serial numbers and the guy at starbucks hands it to me i will take it which is why well take it do we are not in india. No one will accept torn rubies because no one looks at rubies. My travel to india i refuse to accept rupees in bad condition. It keeps getting weirder. And somalia the opposite was happening. Money was no with no legal value was driving to the currency of choice for small transactions with the somali shilling which was not legal tender. Dollars were used for larger to go along civil war at the Central Bank Bank of someone he had shut down. A transit Transitional Government was responsible for Monetary Policy. From a legal standpoint at the time the somalis showing the same legitimacy in monopoly money. And thats money. In that sense at least have been issued two decades earlier by a government that no longer existed and the economist noted the use of paper money normally takes an expression of faith. The somalia case there was effectively no government. The currency just pieces of paper marched steadily on. Why . The short answer is people except somali shillings because people looks at the somalia shillings. The shillings were useful as a medium of exchange for small transactions. The somalias reese to buying tea and bread was shillings and we have a good idea of how many of shillings a small bar of soap costs. Somalia has a strong clan and kinship system. In the absence of a government the system functions as an undergirded currency. There was an expectation among members of these networks that others others in the network would accept shillings. Economist explained in the same article paper currencies always need consent from their users if the Exchange Bills for actual stuff. The supply of shillings was more or less fixed because there was no government to print more than paid in contrast acquires a functioning government often a recklessly print currency as they struggle to stay in power. Take the belarusian ruble. Partly because of the hair engraved on the note and its unique ability to propagate. The only growth in the supply of somalia shillings came from counterfeiters and even the high number of events was limited because of the specialized talent equipment and materials needed to make them. For this reason businesses and somali banks sometimes except in highquality counter which created a mindbending logic explained in one news account quote the imitation of the thing that which is already at notional value turns out to be worth something but its like a bank willing to accept counterfeit monopoly money. Not just fake money but fake fake money. Here is the only picture the book. This is a real sign that appeared in south africa which is close to zimbabwe in zimbabwe i have on my desk a 100 trilliondollar note from zimbabwe which i think i bought for 10 mostly because of its novelty value because its in nj. The signs as toilet paper only to be used in this toilet no card or no cloth no newspaper and note dollars. The lower bill have become so useless that they were better use of toilet paper than fractional currency. So we have reached a paradox here that modern money money the currencys use of United States Canada Europe japan and china and every developed country can be produced in unlimited quantities so you have always the potential of the zimbabwe problem. They have value because the government issued them declared them to be legal tender. A century ago those same countries use commodity money gold silver or a combination of the two. How is it that in the name of progress all the worlds most economically vibrant nations have mood for money with intrinsic tie you to money with no Intrinsic Value that can be produced in unlimited supplies . We dont even needs quality paper and specialized in getting more and i know that because a lot of the cases or hyperinflation particularly latin america. The only constraint on how much money they printed was whether they could get enough of the highquality paper because they were producing it. Sometimes i think was an argentine at the height of the hyperinflation was paper from europe to produce more currency. So its very strange and so when we finish this with a brief theoretical detour, if we could design the perfect money from scratch what would it look like . Obviously wed served for three functions described earlier. Basically can think in terms of this money and q a we can talk about things like bitcoin and discuss whether thats money or not. A store of value which means if you have wealth in this money is still going to be around and worth probably the same amount next your were 10 years from now and is a medium of exchange. To that end we would look for commodity thats portable durable good visible protectively scarce gold performs admirably by office measures but gold has its drawbacks too. Old may make for great jewelry but has limited other uses. When asked for you are stuck in the bait basement with your accumulated lifesaving single people not feel particularly rich. By comparison the guy with bottled water and cancer of refried beans will look like bill gates. The supply of gold will not necessarily increase at the same rate as the overall economy. Melting ice in the arctic exposed this actually happened during the cornmeal period whenever there were gold or silver deposits discovered in the new world they would bring it back in prices would go up several fold. Even if the supply were increased by right amount the same rate as economic wrote road creating staple prices under normal circumstances a high proportion of the worlds known gold reserves are in china and russia. If you are designing an optimal currency we would not entrust control of money supply to foreign powers whose interest in not always align with our own so gold has a mission in so many to ask the president of candidates on record as we go back to the Gold Standard why they would like to turn our money over to commodities where we controlled relatively small fractions of the worlds reserves. So it ops are different matters such as bags of rice or wheat. These are divisible and not controlled by russia or china. We can fix the affordability problem. The prices will rise or fall depending on the quality relative to other goods. Would you write a longterm contract if youre not sure how valuable rice would be in 10 years from now . Theres an easy fix. Currency backed by a basket of commodities. Suppose each commodity dollar could be exchanged for a kilo of ndo on. Consumers would grow accustom to the system as long as currency remains stable. Any decrease, the currency would have purchasing power, the broader the basket of commodities in which curpsy is backed, the most stable the value of currency and more highly correlated with growth in the economy overall. Remember, this is a theoretical exercise so lets live a little. Money would not be just by gold or rice but sample of goods and services you regularly consume. Better yet, the purchasing power, the fancy new money visavis goods would not fluctuate more than a few percent a year. You would have a very good idea what your money would buy and hypothetical money would deliver by single commodity, purchasing power thats steady over time without the drawbacks, each unit of money would be redeemable for a broad basket of goods as a redictable rate over a long period of time. Okay, here is the mindbending part of this exercise. What i have just described is the dollar, the euro, the yen and many other currencies. Yes, they are just paper or bits and bites but when the government issuing the currency do jobs properly, those pieces of paper have redictable value relative to basket of goods and services in distant future. Central banks can create money from nothing, they can also make money go away. Quick, quick, that is the bankers of growing supply or shrinking. They can man manipulate in ways that stem financial panics, irresponsible policy makers can use the same awesome power to create money so that it becomes worth less than toilet paper. History has seen one of each. Briefly go through the last chapter which is call central banking better. This is around three principles. The first is we were right, its all orientated when i was in grad school, what was i taught in grad school about central banking that was confirmed in 2008, and there were a couple of things, we need a lender of fast resort. When theres a financial panic to which finances always and always will be prone, having the feds step in is what stops the panic, if they do it correctly and theres a whole chapter of 1929 and in 2008 we would argue and i would argue that we did it reasonably well. Central banks political independence is crucial to effectiveness. In grad school i was taught that the reason Central Banks need to be politically is because they were always be pressured from the politicians to create more inflation because inflation operat operates with a lag and politicians can tell central bank, print some more money, then they get reelected and prices go up and nothing has changed but the zero of currency. 2008 was different in that there was so much political hostility to creating more money and propping up the banks and a lot of the political resistance came from the political right warning of inflation but the same basic thing, the Federal Reserve needs to be unincumbert and dollar has remained remarkably stable. I describe in greater length in the book. You aim for perfectly stable prices, Federal Reserve can only cut rates to zero. If Interest Rates go to zero, theyve really gone to negative 2 . You may not be paying interest but the interest is negative 2 . Central bank should regulate institutions for which it is the lender of last resort. If youre the one that bails out people when theres a fire, you should have the right to make them put more fire alarms, we will talk more about that in the q a, if youd like. The things we learned in 2008 . Plenty of effective tools after the head hit it is zero bound. A whole bunch of other fancy tools that push down Interest Rates, things that were hypothetical crazy ideas when i was in grad, bank of japan tried them first, the fed has done obviously a number of them. We need to pay more attention to systemic risk, there were a fair number of people around 2005 who had a pretty good idea that the Real Estate Market was overheated. There are very, very few people who had any sense of how that collapse in Real Estate Market would spread so viciously throughout the global system. So if youve seen the big short, the best illustration, the central bank. Looking across the system and thinking, okay, if that house catches on fire, even if we know the person there is irresponsible and we dont want to bail them out, what happens to the rest of the neighborhood and it remains to be seep whether we have successfully done that or whether we just change it had nature of the next crisis, transparency and good communication matter in most institutions, one of the most curious things about the fed is how being opaque and secretive is strength for a long period of time. Many bad things about it one of which is trying to figure out what the central bank is doing so why would you in the world would you hide it from it. You would not believe some of the questions that ive gotten. My famous Conspiracy Theory is that jpmorgan who was one of the original architects of Federal Reserve act of 1913 deliberately sunked the tie tine titanic because opponents of the Federal Reserve were on the ship, apparently there was a [laughter] a novel in the 18 oh 90s 1890s and they got the idea. It was also true that the Federal Reserve killed kennedy. He was about to crack down on the central bank and they were fighting back. So the fact that the central bank is trying to be more open minded, thun one of the things that ben bernanke did, and stuff that we are still learning and we are not sure and one can the Federal Reserve and the other extraordinary measures were accomplished with the fed creating all that new money, click, click, click. There might. If they start to do that, can the Federal Reserve unwind this huge dash of reserves and they believe that they can but that is as of yet unproven and we have gone to New Territory aggressiveness for which the fed has acted. The American Central Bank is the only one that i know of that has a dual mandate, it is charged with protecting empowering of dollar and also maintaining full employment. Most of the time, for example, paul would tell you those are the same thing. Only way you maximize is to making sure theres no inflation or deflation, but theres periods when theres room to do things to promote employment that wouldnt necessarily be inflationary or a little inflationary and the two objectives come into conflict with one another. Theres a potential conflict. My daughter is about to start college, work hard and have fun, most of the times the things are the same but sometimes theyre not. We are still parsing what the fed actually ought to be doing and then we the last one is the does the centrals operate with rules or discretion to act as necessary. This is a somewhat technical or political debate. Congress is currently train to reign in the fed, audit the fed, everything to do with the fedex planing its decision on Monetary Policy and some of those bills that have been introduced that the fed must declare a set of rules for which its going to act and deviates and report to congress on why it has done that, some even more, would take even more control than that, so on this very Important Note that money is important and its also very, very political. I think you see that in the president ial race. I think you see that in congress and what have you. Thank you very much for coming. I would be happy to answer questions about money, central bank or banking or anything else. [applause] [laughter] that was a great talk. Could you say a little bit about the impact of feds, trading dollars, what it has done to stock markets and what that might mean . This is the trilliondollar question. Punt intended. The feds mission is to protect the persons, we havent even seen the fed hitting its inflation target, by that metric, it has not been, but as you alluded precedented period and zero Interest Rates and negative Interest Rates in parts of the world and that has all the other consequences, ben bernanke would say that low Interest Rates make prices go up. Thats exactly what its supposed to do. Its one of the three channels, which is cheaper to buy and the second caused currency to decrease and puts people back to work and the third is that other asset prices go up, so buying a house is cheaper. I dont know unless anybody does what the effect of all these asset prices increases might be and other related things, so for example, people like i forget his name, the head of the reserve bank of india, when the u. S. Interest rates get so low, money goes around the rest of the world because people look for yield, thats extremely destabilizing in places like india or smaller economies and when u. S. Start raising rates its going to come all back. I think the jury is out on what the impact is going to be, so far we havent, to my knowledge, seen bubbles in those places but the law consequence is the most important and Public Policy in general and central banking in particular, so, you know, i think we will see whether we create it had next crisis or mini crisis is something that we will be looking for. Yes. When i was in law school in the 70s probably before you were born. No, i was alive. Talked about money apply, Chicago Schools and watch this, this is very important and you never hear about it anymore. The fed reserve abandoned the money as a tool and the reason is that freedman conceded that it did not track. Big picture, lots more money leads to inflation. Inflation is everywhere and always a monetary phenomena. But in the short run it doesnt track because if theres a big increase in the money supply, and people are spending less, say theyre keeping in the basement, velocity goes down and you wont see spike in prices, its very hard to track the money supply and know exactly whats going to happen to prices. When paul beat inflation in the 70s, he abandoned money supply and focused just on Interest Rates and prices and those are more directly absorbable tools with prices being imperfect because theres a lag there to but better than money supply. Thank you. Sure. So at one time there used to be discussion of fiscal policy and Monetary Policy and they were almost regarded as coequals in some ways. It seems like its relatively little discretion of managing the economy, fiscal policy and the ability of congress and executive branch to manage fiscal policy in that also sorts of demands have been placed on Monetary Policy to handle at least theoretically in the past it hasnt changed at all. Still pedals that can break and can be used to the same effect. If youre in a downturn, you can lower Interest Rates and most not all economists would argue, spend more, spending democratic labor. Before 2008, Monetary Policy was preferable only because it was faster and easier, the fed could do it without having to get anything through congress. Thats kind of where weve ended up. Theres still a strong believe that when Monetary Policy gets near zero, you should turn to fiscal policy to pick up the slack and at a minimum you should not be hitting the break on fiscal policy as youre pressing the gas. As you saw in large parts of the world, i think the evidence is not unanimous but quite compelling that could be counterproductive in a lot of places. All thats happened is the central policy, the small stimulus at the beginning of obamas term, people are still thinking the same but using Monetary Policy because its easier. This is almost a followup. Obama really wanted to do a major stimulus and there was quite a number of economists that believe that had we should be Building Infrastructure when Interest Rates were so low and prices were low, blah, blah, and as you noted, the banks just received huge amounts of money with no obligation, there was no there were no Strings Attached to that money, so they just lined their pockets an sat on the money and Nothing Happened in the economy. As i understand, you know, Larry Summers and the others argued that we couldnt put any strings on it. Im not really certain what the argument was, why they couldnt butt the strings on, but i would like to know your opinion, was it a good idea, would strings have inhibited the ability to do what we did . This is a great question. I dont im not a lawyer, so the question is i dont know the fed certainly has the authority to lend money to those institutions because they are member institutions of the Federal Reserve system. I dont know their Legal Authority to then put constraints on the bank in part, because, remember one thing that was strange the way the fed acted is many of the banks were not given a choice as to whether to take the money or not, right, and the reason they did is that if you remember, if youve seen any of the movies, if you said, you need the money, you both have balance, what you need to do is im giving you all money so nobody know which of you are in trouble and the fact that you have some involuntarily taking capital from the Federal Reserve that makes it more debatable as to whether i can put constraints on what you do with it, force you to loan it out or limit bonuses and so on, so the legal i dont know the legal answer, they totally botched the pr of both side of things, congress and also the Federal Reserve in that most people had very little understanding of why this was being done, how bad it would be in the absence of this and so i think if we had better acronyms and loans from the Federal Reserve, by the way, the Federal Reserve has been paid every loan it made, every single one against all those transactions being paid back, its unsatisfying on the legal front but i absolutely can see your front that part of what we are seeing on the political front both with donald trump and with bernie, people are just really angry at the pain that was suffered on main street in 2008 and bail bailouts to wall street and people are not wrong but think its better alternative. One of the things i learned in writing the book is how close we were to the financial abest, every time i spoke to somebody to the closer we were of what was happening in 2008, the more scared they were. The story capsulates that. Senior republican on the budget committee, he tells a story right after lea leihman brothers and Mitch Mcconel had a black tie. The fed chair is going to be here, listen carefully to what he has to say. This is a story that he told my class. Bern benanke. You have 48 hours to do something or the Financial System may collapse. Wow, when i sat and write the book i wanted to fastcheck the story. This is my recollection of what you said, its all right. You have 72 hours and if you dont do system the Financial System will collapse. King was here recently, theres a story in the book about him facing the bailout of is it northern rock, right, he gets called out of a meeting and his staff says, we have to figure out what to do about this and he says, well, what if i dont do anything, we believe that the atm machines will stop working everywhere and he said, you know, you havent left me much choice, have we. Of course they bailed them out. People dont understand counterfactual. The Great Depression was many times worst because we didnt do anything it didnt do anything effectively. Could you comment on the human behavior, psychology and all this. I have come to believe that psychology is so important in economics, in general, but its everything when it comes to money and banking. As some of the sections i read made clear, money is at bottom a psychological creation. Really under any currency for any reason a rumor, people suddenly decide the money is not worth anything, then its not worth anything. On that dimension psychology is very important and that leads the panic and banking crisis but its also true, now economics behavioral economics that i would argue its gotten much better when you move away from this idea that people are act rationally to embrace what shakespeare certainly knew that we were jealous and shortcited and things make a lot more sense. I think some of the greatest developments including nobel prize have been at the center of psychology where we can watch people make decisions and confirm what shakespeare also knew. I think its really important and grossly underappreciated certainly for a very long time. Last one. Well, actually i have two. Okay. If thats okay. [laughter] first you mentioned the feds role as regulatory body so i would like to hear more about that. Im also curious about the u. S. Status of World Reserve currency, whats the feds role in maintaining that or how does that restrict their action . All right, lets take yeah. [laughter] the dollar is not a great reserve currency except for all the other options. We are going to go to euro or the yen where you have deflation, there just arent many other options, theres the yuan in china where theres not much transparency. If i had to bet i would see foreseeable is going to remain reserve currency just because of lack of options. Its not certain that its a great thing, it is certainly true that allows us more leeway on the central bank side. Central banks around the world want to reserves in dollars and so on, but its not clear when you look at fiscal policy that having it so easy to borrow will work out well in the long run n. Some ways it creates some very bad habits and those may in the end come back to bite us, you know, discussion for another day, very concerned about the fiscal situation, the debt and so on. And the first question was first and foremost i was very i praised the feds response but its also true that one of the most failings before 2008 was also the fed and that was on the regulatory front. The fed had the gradest capacity and authority had they opted to crack down on mortgage market. By 2008 my dog would have been approved by a contract with 15,000dollar limit. They missed that regulatory boat. Question is how to fix the problem. Theoretically i support everything that doddfrank tried to do. There are problems it spreads and effects innocent parties, then theres a compelling reason for regulation. The analogy i like a lot, its if youre smoking in bed and you live in the middle of wyoming, its your open. If youre smoking in bed in georgetown, its our problem and therefore layers of kinds of things to try and do, you cant smoke in bed. Thats not a crazy regulation. We may think that youre going to do it anyway. You also have to have sprinklers, even if people do stupid things and bankers, we can still contain the damage. A lot of the regulation, contain the damage and then the last is kind of systemically important risk. There are now controls in place that say, if you as an institution are so important that if something goes wrong, even sprinklers arent going to save it, lets say youre a sky scraper we will give extra vigilance on what you are doing. The question is can you actually do that and one of the nice things, the last person i spoke to was bern bernanke and he pointed out what other people know that regulation inherently builds a fence, which is to say, he cant smoke in bed but people who want to smoke in bed will say, this isnt a bed, its a softa. You get another ten pages of regulation of where the bed is, right . In fact, its true, when cigarette taxes went up you had a boom in the sale of small cigars. So the question he broached and its still unanswered is have we built the fence sufficiently so that we can ward off what we know has always come, which is some kind of financial panic, have we either eliminated behavior, the rule or design to limit activities that might go back or detain, sprinklers, capital controls, you can do stupid things but you have to have more capital on Balance Sheets so when it goes back you wont go bust, living wills, we are going to have the documents in place to make sure you dont pull the rest with you. Theoretically everything that doddfrank is what we need to do. I have no idea whether its going to be successful or not. I think thats the history of the regulation of plans. We are always one crisis behind unfortunately. I took a bad note to end on. [laughter] but thank you very much for coming out. [applause] well, thank you very much for coming out, ladies and gentlemen, its fair to say that we have learned a huge amounts in the world of money and just think about what reading one book will do
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