Over the last few weeks we have had a series of discussions at Hoover on the 10th anniversary of the financial crisis and recession. This all happened mostly due to the energy of John Taylor.
The final event on Friday Dec 7 was aPanel Discussion Summary, including Taylor, Shultz, Ferguson, Hoxby, Duffie, and myself, with question and answer. Click the above video.
This was preceded by four smaller discussions. We did not video them, but there are transcripts and presentation materials.
October 19, The causes. (Follow links to a transcript and to the presentation slides.) John Taylor and Monika Piazzesi present and learn discussion on the causes of the financial crisis, emphasizing monetary policy, regulation, and housing.
November 9 The Panic What happened on in the panic of August through November (or so) 2018? Did the actions of government officials help or hurt? Or both? George Shultz and Niall Ferguson present their views and lead the discussion.
December 7 The Recession. Why was the recession so deep? Why wasn't it deeper, repeating the Great Recession? Why did it last so long? Did fiscal stimulus help or hurt? Caroline Hoxby and John Taylor led, focusing on labor markets and stimulus. I added some comments on QE and the lessons of the long zero bound for monetary economics; Bob Hall comments on labor markets and unemployment, Mike Boskin comments on stimulus, and much more
December 7 also, Lessons for Financial Regulation. Darrell Duffie and me. Darrell summarizes his excellent "Prone to Fail." I expound on the need for more capital.
What's distinctive about this series, given all the other conferences and retrospectives?
First, we decided not to have retrospectives from people in power at the time. Many other such meetings are descending into memoirs of how we saved the world. Maybe they did, maybe they didn't. And maybe that's not so interesting, except of course to the parties involved who would like to go down nicely in history.
Second, you will find an effort to trace the intellectual lessons of the last 10 years of thought, not just whether certain actions were right or wrong in context of some eternal truth. We all have learned a great deal in the last 10 years, and opinions are shifting. For example, I discuss how capital, once thought immensely costly and regulation much prefereable, has slowly emerged as not at all costly and the best salve for financial crises. Similar lessons have emerged throughout.
Third, and perhaps most importantly, you will find here many disagreements with the standard narrative and what is becoming the first draft of history, as Ferguson nicely described. No, maybe it wasn't just "greed" and "deregulation." No, maybe our officials contributed to panic as much as they helped to stop it. No, maybe fiscal stimulus and QE did not save the world. No, maybe our super-confident regulators armed with an immensely larger rule book are not ready to save the world again next time. And in each case you will hear contrary views buttressed with facts and thoughtful analysis. Perhaps when the second draft of history is ready to be written this will be a starting place.
The course is here, University of Chicago Canvas course 23303. To log in and use it, you need to email instructional.design@chicagobooth.edu. The course is open to anyone, not just University of Chicago students. If that doesn't work, email me john dot cochrane at stanford dot edu, and I'll see what's wrong.
The videos, notes, and other materials are still available ungated on my website, here, under the "Asset Pricing" tab.
If all goes well you see this:
Economic note: It's interesting how software depreciates so rapidly, though its physical being depreciates not at all. Perfectly good software stops working as operating systems and machines get "upgraded," as IT departments seem to latch on to new "solutions" every three years, and so forth. Most of my email from before the mid 2000s is gone due to an "upgrade." My website is in the midst of an "upgrade" crisis, and I can't seem to keep the online class going for more than two or three years. There is an interesting economics paper in this. As son of a historian, I feel for the historians of a few hundred years from now who, looking back on our interesting era, will find a blank void, as all of our records are unreadable.
March 4, I was honored to give the Homer Jones lecture at the St. Louis Federal Reserve. Link here
Strategic Review and Beyond: Rethinking Monetary Policy and Independence.
I used the opportunity to put lots of thoughts together in condensed form, on how the Fed and other central banks should approach monetary policy, financial regulation, and ever-expanding mandates. The link is to the html version. It will appear in prettier form in the April St. Louis Fed Review.
The conclusion
Should, and can, the Fed stimulate with strongly negative rates, immense QE asset purchases, and an arsenal of forward guidance speeches? I think not. What sort of target should it follow? A price-level target. The Fed should get out of the business of setting the level of nominal rates and target the price level directly. Price-level control will be much more effective with fiscal policy coordination. The Fed should offer a flat supply curve of interest-paying reserves, open basically to anyone, though the Treasury should take up much of that role directly.
Going forward, the Fed and its international counterparts should disavow the temptation toward ever-expanding mandates and economic and financial dirigisme that would take them to "macroprudential" policy, discretionary credit cycle management, asset price targeting, and exploiting regulatory power to embrace social and political goals… today on climate change and inequality, perhaps tomorrow on immigration, trade restriction, China-isolation, or whatever the smart set at Davos wants to see. Only limited scope of action to areas of agreed technocratic competence will salvage the Fed's, other central banks', and international institutions' useful independence.
Of course this effort arrives with spectacularly bad timing, as nobody is talking about anything but the Covid-19 virus. Still, life does go on, and I don't see anything that is directly contradicted by current events. And perhaps you want to read and think about something other than virus crisis, and issues we will go back to thinking about when it's all over.
In the final section (see the footnotes too) I discovered that our international institutions, BIS, IMF, FSB, and so forth were busy dragging banks into the partisan warfare over green new deal style climate policy and forced redistribution. I took a dim view of that. First of all, the idea that climate and inequality present financial risks is just fanciful. Most importantly these are political minefields that will doom independence.
I think this section holds up well. That the worthies who look in to the future and spot risks to the financial system, and drag banks into accounting for them via stress tests and regulatory accounting, found climate change and inequality the biggest run-provoking risks they could think of, not even mentioning pandemic, tells you volumes about the whole technocratic project.
If you like to watch videos, here is the actual lecture somewhat shorter than the written version.
A new Grumpy Economist podcast, summarizing a lot of the last week and some newer thoughts.
A video discussion with Niall Ferguson and H.R. McMaster on the Covid-19 situation, focusing on longer-run implications.
I ran out of time on one important point. The US is now playing the 2008 playbook on a grand scale -- bailout, stimulus, Fed printing trillions of cash and lending it to avoid bankruptcy. Apparently "infrastructure stimulus" is next. We're sort of like a 2 year old with a hammer, to which everything looks like a nail.
The danger in what we are doing is likewise that this becomes enshrined as standard pandemic policy for the next time -- shut down the whole economy, print rivers of cash, wait for technology to save us. This episode should be regarded as what not to do, so we have a robust and fast-moving public health response that avoids a shutdown.
Niall and H.R. are quite a bit more guns-ho for Cold War 2 with China than I am, and see the virus as confirmation of that need. I think we'll have more of that discussion in future episodes.
The latest GoodFellows, on just how much we need to ramp up Cold War 2 against China.
Since it was two against one, and I didn't get a response in, I'll add one unfair late hit. In discussing Huawei, and whether Chinese state planning would allow them "economic dominance" in the next decades, my colleagues jumped to the charge that Huawei equipment would include nasty backdoors that the Chinese government would use to spy on us.
I think here they confused "economic competition" with security competition. The topic was whether state planning could give a nation "economic domination" of anything important. The reply that we need to worry about security implications does not answer the question.
The charge I think has also been overstated. Huawei has every interest to assure people its equipment does not have back doors, and my impression is they convinced the UK pretty well on that. Moreover, the US government is explicit in its desire that Apple and other US companies give the NSA back doors. I would welcome more knowledgeable commentary on this issue before next week.
Cato took some comments I made in a recent event and produced it into a nice short video, 8 minute overview of where I am, or was last week, on the economics of lockdowns. I clearly need to work on the visuals.
At that link, you can see the table of contents and read Chapter pdfs for free. You can buy the book for $14.95 or get a free ebook.
The conference program and videos are still up.
Much of the conference was about the question, what will the Fed do during the next downturn? Here we are, and I think it is a valuable snapshot. Of course I have some self interest in that view.
As long as I'm shamelessly promoting, I'll put in another plug for my related Homer Jones Lecture at the St. Louis Fed, video here and the articleStrategic Review and Beyond: Rethinking Monetary Policy and Independence here. That was written and delivered in early March, about 5 minutes before the lookouts said "Iceberg ahead." John and I don't put a lot of our own work into the conference books, but it sparked a lot of thoughts. I am grateful to Jim Bullard and the St. Louis Fed for the chance to put those together.
Monetary policy is back to "forget about moral hazard, rules, strategies and the rest, the world is ending." This is a philosophy that happens quite regularly and now has become the rule and strategy. So strategic thinking about monetary policy is more important than ever. This is a philosophy very much due to John Taylor.
The last part of my Homer Jones paper delves into just what risks the big thinkers of central banking were worried about on the eve of the pandemic. Pandemic was not in any stress test. BIS, BoE, FSB and IMF wanted everyone to start stress testing ... climate change and inequality. This is a story that needs more telling.
