Charles I. Plosser
President, Federal Reserve Bank of Philadelphia

Plosser’s speech: “Good Intentions in the Short Term with Risky Consequences for the Long Term.”

Since Plosser is reading his speech almost verbatim, for me to take notes would be superfluous.  I have to run to get my car, so I won’t be here for the Q&A.

In short, Plosser is concerned for the institutional image of the Fed, and trying to be more orthodox, and rules-based.  He wants the Fed to move away from the relatively unorthodox policy currently followed.

I’ll have a summary post this evening with my views of the meeting as a whole, and where I think various speakers hit and missed.

Moderator: Tao Zhang
U.S. Bureau Chief, Caixin Media

Capital Freedom for China


Eswar S. Prasad
Tolani Senior Professor of Trade Policy, Cornell University

Renminbi as a reserve currency 3 conditions:

  1. Internationalization
  2. Capital Account Convertibility
  3. Do other countries hold Renminbi assets as protection against payments crises. (DM: also, do you want to have a lot of debt for foreigners to invest in.

Much progress on #1, little on #2 and 3.

Second order effects of opening: Institutional market development, financial market development.  Try out experiments in Hong Kong.

Size of China, macroeconomic policy potentially allow for  reserve currency, but the banking and financial markets are not capable of absorbing the volatility.

PBOC creating Renminbi swap lines.  IMF more involved w/China; SDR basket membership coming.  Renminbi becoming a bigger factor in the global economy.

Yukon Huang
Senior Associate, Carnegie Endowment for International Peace

400 years ago, China was a reserve currency with 30% share of Gross World Product.

Being a reserve currency lowers trading costs, lends prestige.  Serves as a “Trojan Horse” for reform in China. Seiniorage.

Triffin dilemma, conflict between domestic and foreign goals, adds to currency risk.

China has partially internationalized with capital controls.

Also, reserve currencies are typically issued by democracies.

Chinese authorities use banks to motivate growth and development.  Not markets.

Capital flight happening.  Huang thinks that is good: diversification and other benefits.

Zhiwu Chen
Professor of Finance, Yale School of Management

Money used to settle increasingly more transactions in China, whether it is housing, wages, etc.  Everything is no longer tied to the government.  “Rise of the individual in China.”  McDonald’s in China originated “I’m loving it.”

As rule of law diminishes across Chinese industries, state ownership tends to rise.  The more free the movement of capital in Chinese industries, state ownership tends to fall.

China late to develop limited liability corporations in the late 19th century.

SOEs ran into major losses in the 1980s, and private corporations came back.  But most large firms are still controlled by the government.


Possibility of democracy in China?

Prasad: No.  Communists have largely delivered the goods.  Regional problems.

Chen: Yes. Options for the Communist Party are limited. Change may be forced when the good can’t be delivered any more.

Huang: property rights are uneven, and Party members abuse their power.

Moderator: Mary Anastasia O’Grady
Member, Editorial Board, Wall Street Journal

Lessons from the Euro Crisis

Opens by saying that the Euro was started with good intentions.  (DM: low praise that it was not designed to fail.)

George S. Tavlas
Director, Bank of Greece

Euro was anticipated to reduce economic problems in Greece, and it worked for a while after 2001.  Interest rates fell and became stable.  Government deficits rose.  Net public saving fell.

Crisis hit. Yields screamed up. Real GDP falls 20% 2008-present, maybe another 6% next year.

Difficult to run large external deficits under a gold standard.  Relatively easy to do so in the short run in the Eurozone.  Mundell’s optimal currency union requiring flexible wages and prices is necessary but not sufficient.

Under a gold standard, credit spreads are high and restrain government borrowing.  Eurozone membership facilitated Greek overborrowing.

Can’t hold a peg without credible fiscal policies.

Jürgen Stark
Former Chief Economist, European Central Bank

ECB will ride to the rescue of European Governments.  This is not a sustainable policy.  Adjustments need to take place.

ECB — principles & rules based. (DM: somewhat subverted at present).  Some countries were allowed to join the Euro who really were not qualified.  Rules were not upheld. Countries did not get the practical impacts of sharing a currency.

Five points to overcome the crisis:

  1. Stabilize and reduce govt debt
  2. Structural reforms — flexibility
  3. Reorganize & recapitalize banking sectors
  4. Reform monetary union
  5. ECB provides liquidity to banking sector

Crisis policies not well thought out, ad hoc, reactive, leaves too much to the ECB to do, too little done by govts


Wolfgang Münchau
Associate Editor, Financial Times

OMT policy not started yet — will it work?  Fundamental problem of Eurozone: No bailout, no default, no exit (inconsistent).  Believes Greece will eventually be bailed out… would go easy on austerity as a policy in Greece.

Banking union necessary to get ECB out of the OMT problem.

Argues that low level economic reform necessary in order to create a economic union.  Political union would likely be needed.

Five conditions for a currency zone:

  1. Real conversions and similarity
  2. (sounded similar to 1)
  3. Political consensus on fiscal & monetary union
  4. Banking union
  5. A willingness to bend political/fiscal priorities in a crisis

Thinks Eurozone will not break up.

Pedro Schwartz Giron
Professor of Economics, San Pablo University, Madrid

How the Eurozone could survive.  Quasi-gold standard — ECB was supposed to be independent from all.  No exploiting money illusion. No devaluation. No excessive debt.

Debt Intolerance: Debt> 90% GDP in developed countries. 60% in emerging markets.  Spain at 90%+ in 2013.

Monetary must be rules-based because we don’t really understand what monetary policy does in the intermediate-term

Inflation will happen instead of default or dissolution


Tavlas: Argentina 2001 vs Greece now — like gold standard in Great Depression, those that left early did best.  Leaving euro: capital flight, new currency has extreme risks, foreigners would not accept new drachma, contagion effects.  Credit Anstalt failure turned a recession into a depression (DM: something would have failed… too much debt.)

O’Grady: Argentina: convertibility, not a currency board.  Very different.  Argentina has not had good results.

Stark: Latvia, Ireland austerity may be working.  Austerity fatigue in the south.

Munchau: Can Germany leave the EU?  Not likely and only Americans ever suggest it.  Unthinkable politically.

Stark: Anyone suggesting this does not understand European history or politics.

Basel II impacts on the crisis 1.6% capital lending to Greece, 8% to a German corporation?  Stark: this is not a key problem.

John B. Taylor
Professor of Economics, Stanford University

Money, Markets & Governments: The Next 30 Years

Last 30 years — 1982-2002 good monetary policy, in his opinion. 2002-2012 bad monetary policy.

Economic performance deteriorated during the great moderation.

Inflation rate came down dramatically.

Argues that Fed funds were too low for too long 2003-2004, and that regulatory rules were not enforced. Partially blames Fannie & Freddie.

Reserve Balances at Federal Reserve Banks boomed 2008 and on.  QE1 & QE2 have had little effect on employment, contra the papers by the Fed.  Aids the government, banks & the housing sector… plays favorites.

Hard to measure output gap.  QE is predicated on a modified Taylor rule much more responsive to economic changes, not what was used in the 80s and 90s for policy.

Argues that the policy of promising to hold Fed funds low to 2015 is inconsistent with where the Taylor rule would indicate.

Also argues that a monetary policy like Milton Friedman’s would work better at the zero bound than QE.  Excess discretion has led to a nonsensical monetary policy.  Policy uncertainty is a negative for the economy.


NGDP targeting — what would the rule be for guiding monetary policy?  Not clear.

Expanded Taylor rule including asset prices?  No, would be too volatile.

Dual mandate came in when monetary policy was way too loose, and inflation high. Leads to too much discretion in monetary policy.

Moderator: William Poole
Senior Fellow, Cato Institute

The Fed has practically given up its independence.  It is independent with the confines in the government.

QE2 was a mistake — there were already excess reserves at the banks.

Current economic problems are not monetary in nature.  ECB has violated or circumvented many strictures in its charter.

Current Fed has too much of a short-term focus.  Dual mandate has been tilted too far toward unemployment.

Criticizes easy monetary policy in the late 90s and 2003-2004.

Kevin Warsh
Distinguished Visiting Fellow, Hoover Institution

Diminishing returns to monetary policy.  Monetary policy can be really strong at some moments, and very weak in others.

What regime are we in?  An important question when setting policy.

Argues that 2008 was a panic and Fed actions were justified.  Today, that’s not so, where monetary policy is weak.

Fiscal contraction would allow for more aggressive monetary policy, but that is not true today.  Today the fiscal is aggressive, and the Fed is buying the Treasuries being issued, giving a feel (though not reality yet) of debt monetization.

Fed is weakening credibility by their current actions.

Communications matter, but they are not everything.  What the Fed does is more important than what the Fed says.  Communications policy has limits.

Price stability should be the main mandate. Maximizing sustainable employment is important, but outside the remit of the Fed.  Bank regulation is not as effective as it should be.

Monetary policy can’t make up for bad trade and fiscal policies.

Gerald P. O’Driscoll Jr.
Senior Fellow, Cato Institute

Believes that the Fed is de jure independent, but not truly independent.

  1. History supports a dependent Fed.  Inflation was a result of loose policy 1965-85.
  2. Reading transcripts shows Fed members pay attention to politics.
  3. Inconsistency literature suggests independent central banks will generate inflation at times.
  4. Low correlation between central bank independence and inflation.
  5. Central banks are creations of the State and cannot be fully independent.

De facto independence of Fed is questionable.

Volcker could only act independently because Reagan supported him.

Failure to forecast the Great Recession lessens the legitimacy of the Fed to engage in discretionary policy.

Policy rules when they lead to good results give a central bank more room to run, more discretion.
David Malpass
President, Encima Global

Argues that present monetary policy is contractionary.  Hurts savers, end misallocation of capital…

The Fed is a giant, heavily leveraged SIV, borrowing short and lending long, w/only $55B of equity capital.

Fed is sucking duration out of the fixed income markets more rapidly than the Treasury is issuing.

Capital allocation is getting warped by the Fed, leading to higher prices for gold and corporate bonds, mortgage bonds, etc.

Favors corporate profits over wages… Government and large companies favored over small.  M2 not growing rapidly, even though monetary base has gone up significantly.  Traditional policy transmission mechanism not working.

Does a gold model inferior to Eddy’s & mine.


Malpass: stability of monetary policy/inflation would promote growth.

GDP growth tend to raise interest rates (DM: like the old classical view), as people bid for the ability to borrow to buy growth.

Warsh: Fed is a price-maker, not a price-taker, but it affects the risk-free rate, and it affects the pricing of all assets, distorting investment

Moderator: Zanny Minton Beddoes
Economics Editor, The Economist

Thomas Hoenig
Vice Chairman, Federal Deposit Insurance Corporation

Tells us to be skeptical of changes in financial regulation.  Incentives have not changed to favor increased leverage in financial institutions.  Protecting big banks has further worsened incentives.

Safety net started w/FDIC — insuring bank deposits makes payments system safe.  Investment banking, more volatile stays outside.  As commercial and investing banks were made to compete, the safety net expands, de facto.

1) Banks should spin out their investment arms into separate entities.

Lehman had a short-financed balance sheet, and relied on the government to protect them.

2) Need to rethink the capital approach.  Dump Basel.  Simplify, it is too easy to game.  Increase capital levels.  (DM: As I say, dumb regulation is good regulation.)  Need a simple tangible capital ratio.  Need to negotiate a tangible capital ratio, and a transition period.

Tangible capital during unregulated periods 13-16%.

3) Re-establish bank supervision as a tool to uncover risk.  Real supervision would find risks, and raise capital when needed.  (DM: how do we get mean regulators back.)

Jeffrey A. Miron
Senior Fellow, Cato Institute, and Director of Undergraduate Studies in Economics, Harvard University

Should we try to avoid market crises?

1) Avoiding crises is not a main goal of policy.

Policy in his view is maximizing economic growth.  Growth was not materially affected by crises 1790-1915.  (DM: his log graph hides the real panics.)

Great Depression and 2008-2012 are unique events.  Criticizes Bernanke view of the Great Depression, where bank failures happened near the bottom of the cycle.

Reinhart & Rogoff — recoveries after panics are slow.  Happens because debts have to be reconciled.  (Has a variety of less realistic reasons for the slowness.)

2) Policies to stop crises may hurt more than help.

Policy should be neutral to the sectors of the economy.  Bernanke’s policies are not neutral, aiding housing.

People want to reduce volatility, but that could hurt more than help.

He argues that we should promote freedom and growth.  Reduce government, etc.

Lawrence H. White
Professor of Economics, George Mason University

Create an anti-fragile banking system, a la Taleb.  Anti-fragile: gets stronger from small problems.

Suggests reducing deposit guarantees, and eliminating central banking, because they increase fragility.

Banking is not naturally fragile, White says. (Lots of hand waving, and looking at foreign examples where small failures did not impair the system.)

Suggests that pledging not to bail out banks will make everyone more careful.

We have a less-diversified financial ecology where many are pursuing a single strategy.  Heuristics of having a high tangible capital ratio would aid regulation.  Basel III is the wrong idea — too complicated, and Basel I & II did not help.

Robert L. Hetzel
Senior Economist, Federal Reserve Bank of Richmond

What do central banks control, and how do they control it?  Macro models turn correlation into causation, and obscures the the buildup in debt, which eventually collapses.

If you want to understand causation, you have to have models.  Uses an example from the 1812-1820 period, where small Treasury notes expand the monetary base, leading to inflation, a run for gold, and later a collapse.

Runs out of time.  Suggests we need more intelligence regarding what central banks can and can’t do.


Hoenig: Unlimited liability would be good, but you will politically never get there.

White: Banks arbitrage risk weights.  Zero risk weight for government debts were a fail.

Poole Q: Economics not hard, but the politics are hard.  Eliminating bailout support is impossible — in a crisis, bailouts happen, unless you eliminate the authority, or narrow the banking institutions.

Did existence of the FDIC cause the crisis? Risk-based insurance premiums?  Hoenig: we do risk-weight in some ways… but could you create a bank run from that?

Hoenig: FDIC has a reinsurer, the US Treasury.  White: clearinghouse model worked pre-Fed.

Hoenig: Sweden increasing capital standards above Basel.

I asked my question on asset-liability mismatch — the answer was the usual that you can’t end maturity transformation, and that taking duration risk is a risk like any other.

Note to readers: these are my notes from the conference, as such, they will be rough.

Keynote: Vernon L. Smith, Professor of Economics, Chapman University, and Nobel Laureate in Economics

Main points: 1) we get bubbles because we misfinance long-term assets, typically housing.  We borrow short to finance a long-term asset.  Examples: Great Depression and now.

Other housing distortions: waiving capital gains taxes, deduction for interest, offering credits to buy mortgages, GSE financing, etc.

Housing is the largest part of the growth in debt.

2) Leverage cuts far deeper on the downside than on the upside.  That’s because it is easier to buy a house than to liquidate an inverted debt.

If incomes do not grow to meet the need to finance incremental debts incurred, you set up a debt financing crisis.

Bernanke cut rates 8/2007-9/2008 in the midst of a solvency problem as opposed to a liquidity problem.  Cutting rates would/did not work.

Financing was short-term for housing in the Great Depression.

If you want to separate underwriting and investing, make incentives to underwriters proportionate to principal repayment.

3) How to fix a debt deflation slump:

WWII did not end the Great Depression — many debts compromised, paid off by 1941.

a) must pay off and compromise bad debts.

b) banks mark assets to market, some fail.  Alternative is Japan, where there is no recovery.

Without significant defaults, there is no way to eliminate a debt deflation.


It almost never makes sense to play for the last 5% of something; it costs too much. Getting 90-95% is relatively easy; grasping for the last 5-10% usually results in losing some of the 90-95%.

When I was a corporate bond manager, and doing my own trading, I had a first question in dealing with any broker: Am I getting a good deal?  If the answer to that question was “yes,” then the proper response is “Done.” Don’t haggle.  Even if you get a slightly better deal, it will damage your reputation.  The best reputation to have is between “reasonable” and “tough.”  Tough is worth more when you are driving the deal.  When the deal is offered to you, and it is a good one, reasonable preserves your reputation as a fair negotiator.

You never want to be seen as a pig.  Once you seem to be a pig, opportunities dry up.  The guy who followed me after my time as a corporate bond manager was a pig, according to my brokers, and as such, the ability to do deals suffered.

This is true of much of life.  In negotiation, leave something on the table for the other guy.  You want to be able to do more deals afterward, and a reputation for being tough but fair is the gold standard.

Kids play for all of the marbles.  Intelligent adults play to win a competent fraction of the marbles.  That is an intelligent way to view many aspects of life.  And so I encourage you to play fairly, but cleverly, for your share.