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Moderator: Judy Shelton -?Co-Director, Sound Money Project, Atlas Network

Gerald P. O?Driscoll Jr.?-?Senior Fellow, Cato Institute

Kevin Dowd -?Professor of Finance and Economics, Durham University

Tyler Goodspeed -?Junior Fellow in Economics, University of Oxford

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O’Driscoll — What CBs can’t do? They aren’t prescient. ?Policy discretion — results aren’t measured, and politicians blame the Fed when things go wrong, and take credit when things go right.

Politicians and Central bankers engage in “symbiotic rent-seeking.”

Fed reform would involve reducing the Fed’s scope, improving its performance and enhance?its accountability.

Fed should let assets roll off the balance sheet and even sell off securities on the long.

Eliminate Fed 13.3 powers to eliminate lender of last resort powers. ?Can’t implement a policy rule without that.

Wants to keep the regional Fed banks.

Dowd: “Money often costs too much” Ralph Waldo Emerson

John Law and money printing. ?Sir Robert Giffen: “Governments, when they meddle with money, are so apt to make blunders.”

Allowing people to use their money freely is often viewed with scepticism.

ZIRP is not stimulative. ?It is a trap.

QE/LSAP

QE — greatest Wall Street bailout of all time.

Argues that ZIRP causes productivity to drop. ?Real Private Non-residential investment has only now come back.

Can’t calibrate hedges because markets are too stable. ?In a crisis, that would shift.

QE has not worked in Japan. ?Policy is increasingly delusional.

NIRP [negative rates] — doesn’t make sense. ?If it makes your brain hurt you are sane.

Must abolish cash to do NIRP. ?The most vulnerable people depend on cash. ?Loss of cash is a loss of civil liberty. ?Bad guys use every amenity, including?cash.

Helicopter money is a form of redistribution, which should belong to Congress. ?End of sound money. Hyperinflation.

The most costly money is the money that is free.

Goodspeed: We all ought to read more financial history: Those sympathetic to the elimination of large institutions today will learn. ?Aids imagination. ?Gives you kind of a “control group” to work with.

Prior to 1863, the US states had a wide number of approaches. ?There was public, mutual, and no insurance for deposits. ?He looks at contiguous counties in different states with different insurance regimes.

They had no effect on bank failure initially. ?Over the long run, though, the more double liability resulted in less defaults. Public insurance — ?More exposure to real estate and interbank lending, and other types of opaque lending. ?Double liability took less risk prior to crises, but took more risk after crises, adding to system stability.

Seems to be that growth was the same across the counties with public vs double liability.

Scottish banks with unlimited liability. ?During a balance of payments crisis — uses an extension option against British speculators.

Upshot: Socializing losses does not work well in the long-term.

Q&A

1) Benefit of QE?

Banking system bailout, nothing else

2) Ed Teryakin — what should Congress do to change the mandate of the central bank to get a better outcome?

O’Driscoll — long weak recovery; U-3 unemployment low?because of people who have left the labor force

3) Walker Todd — lend in a panic only on collateral of recognizable value for lender of last resort powers?

O’Driscoll: Texas S&L crisis — collateral rules get fuddled.

4) Real purpose of stress tests?

To calm the public. ?The tests are bad, particularly in Europe.

5) John Flanders, Central Methodist University — Canadian experience many fewer defaults. ?Weren’t US banks over-regulated?

Unit banks less stable. ?Law of small numbers in Canada. ?But are fewer bank failures a good thing?

6) How did we end up with a central bank? ?George and Martha Washington owned shares in the Bank of England.

Goodspeed: US banking has always had more failures. MD & VA tobacco planters defaulting on Scottish banks in 1772.

Dueling notions on the need for central banks with the Founding Fathers. ?George Selgin tossed in a comment.

7) CPA — aren’t buybacks a waste of funds. ?Bernanke said there would be a wealth effect, and then spending will rise. ?Spending did not rise. ?Wealth effect is not big.

8 ) Isn’t it a bad thing that there were no Canadian bank failures — not enough risk taking? ?Morphed into a question on risk-based capital:

O’Driscoll: RBC is a disaster.

Goodspeed: Canada was not starved of capital. ?Banks regulations can lead to their own set of problems. (DM: RBC creates its own weaknesses, but the one covering insurance in the US is pretty good.)

 

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LUNCHEON ADDRESS

Hon. Phil Gramm -?Former Chairman, Senate Banking Committee

Mark Calabria introduces him, maybe a little over the top — some clever comments and insightful, though. ?Gramm didn’t come to Congress to be loved. ?What does Mother think of your ideas, Gramm would often ask.

Gramm: A few key points, try to be brief…

1) Most of what you know is not so — echoing Twain

Quotes a book on Monetary Policy from the 19th century. ?Crisis: Obama: Greedy bankers took advantage of deregulation.

Insured commercial banks had high capital levels at the time of the crisis — 10% (DM: but look at the tangible capital ratios)

Government incented aggressive policies — highly levered with lots of Subprime mortgages as a result of CRA lending. ?(DM: note, I saw this in the low income tax credit business.)

2) Banks have been deregulated over the last half-century. ?No, at least not on net. FIRREA, Sarbox, and many others (of course look at Gramm Leach Bliley).

Glass Steagall existed prior to the Great Depression. ?Glass believed in the real bills doctrine. ?No evidence for banks overdoing margin lending. ?The Fed started eroding Glass Steagall prior to GLB. ?The only thing GLB did was allow banks to participate in a wide number of different businesses in separate subsidiaries. ?Argues that it clarified regulatory authority.

GLB made banks more stable. ?Clinton saw this in diversity of revenue streams. ?Argues that GLB had nothing to do with crisis.

3) Financial crisis occurred because of institutions too big to fail. ?940+ institutions were bailed out. ?Many large firms did not need the bailouts, and it was forced on them. ?Lehman was not too big to fail.

4) The bailouts were large and costly. ?S&L bailout $258B. ?Depositors bailed out. ?Current bailout: US Govt made $24B on the bailout.

5) What turned the crisis into the Great Recession? Obama pursued bad economic policies that overcapitalized the banks. ?As such the banks don’t lend, and the recovery was weak.

6) Worried about two hidden costs of Obama policies. a) run-up in the debt, which may lead to much high costs when interest rates normalize. ?b) explosion of the monetary base — IOER and reverse repos ameliorate, but what if we had a real recovery?

Government might find itself competing with private sector for capital then.

Q&A

1) Erin Caddell, Capstone LLC — how would you modify Dodd-Frank?

He would eliminate most of it, except that banks have to take back mortgages that default early.

2) Student from Georgetown: Major headwinds for debt reduction, what will happen?

Debt reduction won’t be top priority. ?Doesn’t get infrastructure investment. ?Either get rid of Obamacare or not. ?There will be people that lose as deregulation if it occurs.

Likes Pence and Priebus. ?(for now)

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PANEL 2: MONETARY MISCHIEF AND THE ?DEBT TRAP?

Moderator: Josh Zumbrun -?National Economics Correspondent, Wall Street Journal

Athanasios Orphanides -?Professor of the Practice of Global Economics and Management, MIT Sloan School of Management

H. Robert Heller -?Former Member, Federal Reserve Board of Governors

Daniel L. Thornton -?Former Vice President and Economic Advisor, Federal Reserve Bank of St. Louis

Zumbrun introduces the panel, saying they are monetary policy practitioners.

Athanasios Orphanides begins by praising Friedman, mentioning the book Monetary Mischief. (Note: Amazon Commission)

Limited space for fiscal policy given high debt levels. ?Monetary and fiscal are always linked, though central bankers are loath to discuss it. ?Puts up a graph of rising government debt 1998-present. ?Also graphs Italy, Germany, Japan. ?Is there a debt trap now? ?Is there monetary mischief, inflation, now?

(DM: Phil Gramm just sat down next to me.)

Can debt be sustainable over the long run? WIll there be policies that kill growth? ?Inflation is too low? ?Are there policies that raise the cost of financing debt? (Financial Repression)

Japan was already experiencing deflation prior to the crisis. ?ECB gets its own crisis as a result of their structure.

Puts up a graph of policy of ECB, BOJ, and Fed. ?Suggests that quantitative easing was warranted, and other abnormal monetary policies. ?Suggests that BOJ QE was mild until 2013.

Puts up a graph of Central Bank balance sheet sizes. ?Then one of average interest rates for government debt. ?Then one of real per capita GDP, suggests that Japan has not done much worse than the US, though demographics are a problem.

Comments that QE is a help to governments in financing their debts. ?Look at gross debt net of central bank holdings.

ECB great for strong economies, and poor for weak economies.

Fed — should we be concerned about the balance sheet? ?IMFsays we can grow out of the huge balance sheet if the balance sheet does not grow.

Unsound fiscal policy overburdens central banks.

Heller: everything I want to say has been said already. ?Monetary mischief: Monetary policy does not serve the nation. ?Debt trap: the det grows faster than GDP inexorably.

Suggests that a 0-2% target would be better than 2% for inflation. ?2% consensus under Greenspan — but that is not price stability — eventually Bernanke defines 2% as price stability.

QE was ineffective, and the Fed always overestimated its value. ?Limited room for future stimulus. Perverse effect on savings. ?Must save more to get the same amount of future funds. ?Growing income and wealth inequality.

Hyman Minsky: “Every expansion creates the seeds of its own destruction.”

Pension funds suffer and are underfunded. ?Life Insurers suffer a little. ?Stock market tracks QE. ?The rich do well as a result.

Moving closer to a Federal Debt trap. ?(Guy next to me says “Kaboom” when looking at the debt graph.) ?Interest payments double as interest rates normalize. ?(DM: that’s why they won’t normalize — at least not willingly.)

Thornton: The Fed’s policies are a disaster, and they are ongoing. ?QE and forward guidance on long-term yields. ?Risk-taking is reduced, and GDP grows more slowly. ?No empirical support for QE. ?Keynesian economics have led to a credit trap.

Puts up a graph of CD rates versus t-bills. ?Then Baa yields minus Aaa yields — markets had stabilized by 2010 by these measures. ?Bernanke also argued that QE reduced term premiums, but markets are not segmented.

That said, FOMC’s low interest rate policy, helped make long rates low. ?As the ’90s progressed, Fed funds became uncorrelated with long Treasuries. ?Detrended, after May 1988, behavior changed because the FOMC used the Fed funds rate as the main policy tool, which affects short rates predominantly.

Graph with high negative correlation between the Fed funds rate and the spread between 10 and 5-year Treasury yields. ?Quite striking. ?(DM: this is all bond math)

Graph of household net debt as as fraction of disposable income. ?New bubble of stocks plus real estate.

Argues that credit trap has been going on for 50 years or more. ? Reliance on credit is evident from the growth ?in government debt, which is a function of Keynesianism.

Q&A

Q1 Chris Ingles, CPA: Isn’t the Fed enabling the growth of a socialist state? ?Isn’t growth coming from government deficits?

Orphanides says blame governments, not central banks. ?CBs get forced into enabling the politicians in order to keep things stable.

Q2: Mike Mork, Mork CApital Management — wouldn’t it be better to let interest rates float to aid the market’s allocation of capital?

Thornton: Fed can’t really control interest rates. ?We could get out of the zero lower bond at any point by selling bonds and adjusting policy. ?Take away the excess reserves and the market will find its own level.

Orphanides: can use balance sheet or rates — focus on the results of price stability

Heller: Money supply prior to mid-80s under Volcker gave way to Fed funds under Greenspan. ?Existence of money market funds was a reason for that.

Patricia Sands from George Mason U: ?Were the central banks really surprised? ?Why do Central Banks exist in the first place?

Orphanides: we want to avoid inflation via monetizing the debt. ?We sometimes get second and third best solutions. ?We want to avoid the worst cases.

Heller: CBs can’t bail out governments without risking hyperinflation.

Thornton: interest rates are not the solution. ?They don’t create big changes in spending. ?(DM: Yes!)

Moderator: Craig Torres -?Financial Reporter, Bloomberg News

John A. Allison?-?Former President and CEO, Cato Institute, and former Chairman and CEO, BB&T Bank

Mark Spitznagel -?President and CEO, Universa Investments, LP

James Grant -?Editor, Grant?s Interest Rate Observer

John Allison: Talk about Monetary vs Real economic effects. ?Wall Street did not cause the crisis. ?Was a combination of CRA and the GSEs, aided by the Federal Reserve.

When the dot-com bubble deflated, Greenspan ran monetary policy too loose, and deliberately inflated a housing bubble. ?Greenspan (DM: Bernanke) talked about the global savings glut. ?When rates rose, they rose rapidly in percentage terms rapidly.

Bernanke inverts the yield curve, incenting banks to take undue credit risk. ?Bernanke said that there would be no recession amid all of the bubbles. ?Many mainstream businessmen felt fooled by the Fed.

Average businessmen expect businessmen expect inflation, but it is not happening. ?Now they behave conservatively.

Regulation was worse than monetary policy. ?Risk-based capital. Privacy act. Sarbox.

A big deal, and I am the only one talking about it: Early ’80s: attacked bad banks and they failed — a good thing. ?Good banks kept operating. ?This time regulators saved bad banks and regulated good banks more heavily — perverse. ?Totally irrational.

Sheila Bair should not be viewed as a hero. ?Closed barn door after cow got out. ?Later “solutions” not useful.

Bernanke’s book: on the verge of global armageddon… JA thinks contagion was far smaller than perceived.

Liquidity requirements are restraining lending. ?Thinks that banks can’t aid in creating jobs. ?Lending standards are tight.

Likes a bill coming out that would loosen matters. ?Talks about the ’90s when BB&T opposed regulation on supposed racial discrimination in lending.

(DM: What a dog’s breakfast of clever and stupid)

Mark Spitznagel — management and hedging of extreme risks.

Mises — No laboratory experiments can be performed with respect to human action.

Talks about equilibria, correcting processes, etc. ?(DM: Loquacious, not going anywhere… boring.) ?Mentions Tobin’s q-ratio.

(DM: I remember that I didn’t give his book a good review. ?His talk validates that review.)

Tobin, a Keynesian, looked at the q-ratio as a monetary policy tool. ?But investment doesn’t get affected much by the q-ratio.

Shows how the q-ratio is negatively correlated with future returns, and the left tails get bigger as q-ratios get higher.

Trump can stimulate, but crashes will bring correction.

James Grant: Gruber, Obamacare founder said that it passed because the American people are stupid.

New ideas: what to do now after the election? Grant suggests older policies that existed over one century ago. ?Or, more modern: Taylor Rule? ?Friedman’s constant growth rate of money…

Monetary policy has been debated for the last 250 years… the Fed was viewed as a solution to the Money Trust, but brought its own problems. ?Pension fund problems…

The Fed has paid no price for its manifold failings. ?Double Liability would be a better method. ?Bank shareholders should bail out, not taxpayers. ?Monopoliies: PhD economists w/tenure, Federal Reserve.

$15 Trillion of government bonds have been sold with negative yields. ?A promise to store fiat money at a loss.

Panics used to occur at 10-year intervals, w/gold backing and double liability. ?The economy grew rapidly then.

Overstone: “the trouble with money is credit, and the trouble with credit is people.”

We like being spared volatility. ?How many truly want to have a Old Testament-level bear market?

Swiss National Bank? Creates francs to tamp down the currency and buys up euros, dollars, then stocks.

QE is a cautionary tale. ?It failed politically because it did not work. ?Failure of the PhD standard will lead to new thinking.

Q&A

Mark Q1: Trump sounds monetarist, not radical. ?Who will bring change? ?Who will swim against the tide of Statism?

Grant: Will swim against statism. ?Yeah!

Q2: Could gold trading be viewed by the US as a currency exchange? (lower taxes)

Grant: would be easy to do, but difficult to get done politically.

Q3: Isn’t the cost of funny money low productivity growth? ?(True everywhere it has been done)

Allison agrees. ?So does Spitznagel.

Q4 Julie Smith: recent events in India — the war on cash. ?Comments?

Grant talks about Ken Rogoff, and remove $50 and $10 bills so that negative rates can prevail. ?Someone picked up a copy in India — and it will be self-destructive. ?It murders the cash system, which is the real banking system in India.

Q5: Alex Billy Grad Student at Georgetown: Did the Mexican crisis in 1995 have an impact on future developments?

Allison: big New York banks got bailed out of an irrational risk. ?The cure for too big banks is to let them fail. ?Wall Street was bailed out at the cost of Main Street.

Bert Ely Q6: Support for Basel III is sagging. ?What would the effects be?

Allison: Great. ?Let’s just have a leverage ratio.

Me Q7: ?Risk based capital vs liquidity Life insurers vs Banks?

Allison: doesn’t see it that way. ?Insurers are very different than Banks. ?Buying too much MBS at banks as a result.

Q8: “Ships are safe in harbors, but that is not what ships are for.”

Grant: agrees. Goodhart: Banking and the finance of trade in New York. ?Banks had to remain liquid and well capitalized in order to survive. ?It was a good system.

Q9 (Torres): What should we do now?

Allison: Modify Dodd-Frank such that bank with a 10% leverage ratio could opt out of Dodd-Frank.

Grant: How to modify the Fed: End Humphrey-Hawkins. ?Don’t take a poison chalice… reform wisely after there has been a real crisis and want real solutions.

Spitznagel: end low rates so that economic actors don’t take marginal risks.

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Hi. For long-term readers of Aleph Blog, when I am at this Conference, there are a lot of posts. If you tire of monetary policy, or my view of it, you can leave me for a day, or, read the summary that I will write this evening.

I got here early for once, taking Google Maps’ pessimistic estimate a little too seriously. ?That said, I ran into more jams going early (6:40-8:10) than when I used to work in DC. ?In a little bit,?James A. Dorn,?Vice President for Monetary Studies at the Cato Institute should open the program. ?When I get spare moments, I will be tweeting at @alephblog. ?You can also watch the hashtag CatoMC16.

(Note: what you will get from me in the next series of posts is basically a series of my notes on what is said at the conference. ?I will highlight my thoughts with “DM”)

(Hey! James Grant just walked next to me. ?I got to greet him.)

James Dorn is introducing the program and other affiliated programs. ?Mentions unconventional monetary policy — low rates, negative rates, big balance sheets for central banks. ?Do financial markets lead the Fed or vice-versa? ?How can markets play a greater role in monetary policy? (DM: perhaps those are opposed to each other.) ? He now introduces:

Thomas M. Hoenig –?Vice Chairman, Federal Deposit Insurance Corporation

Talks about monetary policy and macroprudential supervision. Suggests that policy has been too short-run focused, leading to less stability. ?The dual mandate sometimes leads to short-run behavior, though it does not have to. ?(DM: politics leads that.)

End of Glass-Stegall with lower levels of capital led to the crisis, with Commercial and Investment Banks seeking financial protection amid risky activities. ?Monetary policy was very accommodative leading up to the crisis. ?The system was more sensitive to shocks. ?Central Banks and government pumped in a great deal to stem the crisis. ?(DM: badly targeted)

The Fed and other central banks discovered the asset side of their balance sheets, and began to allocate credit to non-standard assets.

Macroprudential policy is touted as something to undo excesses of monetary policy, but it will not undo inequities stemming from wealth effects.

We now experience low real growth. ?Arguments are coming now to weaken macroprudential policy to goose growth. ?He argues that that would be long-run foolish. ?The system is fragile enough already, so don’t undo what little progress has been made to make things more stable.

(DM: mentions rising interest rates as a threat, but if banks are doing asset-liability management right, that should not be a risk.) ?Argues that rates should rise at a transparent and deliberate rate.

Argues that the industry should pay out less of their earnings, and retain them as working capital, and aid in increase of lending. ?The government safety net should not be an implicit subsidy to big banks. ?Long-term growth will be best achieved with strong banks.

Q&A

Thomas Attaberry FPA Advisors: Nonbanks are providing a lot of finance. ?How do you work with that?

Banks lend to nonbanks. ?We should regulate that lending.

Q2: Different capital for different classes of assets. ?Why can’t we change that?

Not a fan of Risk-based capital. ?(DM: !) Good as internal tools, but not as an external measure. ?Would simply use the leverage ratio.

Victoria Guido, Politico: How does the election change your view/practice of regulations?

He’s going to follow the law. ?It’s all he can do.

Guy at US Bureau Labor Statistics: What do you mean about labor normalizing?

Not sure what the guy is talking about. Finds it difficult to believe that zero interest rates for 8 years is normal. ?Misallocation of capital. ?Look at long term history — eventually move to a policy that reflects that. ?Will not be simple to undo zero rates. ?Quick? Slow?

Walker Todd, Middle TN State U: Professors talking about ETF market — isn’t this like CDOs etc. prior to the crisis.

Does not know what to say, will look at it. ?(Lousy question and answer.)

Carl Golvin Fed.info: How can fiat money lead to a stable economy? ?Why can’t we go back to gold/silver — constitutional money?

There are still bank crises under gold standards. ?Supports central banks with greater limits.

Max Gilman U Missouri — Mentions Bagehot and reserves held at bank of England. ?Why doesn’t FDIC set up a safety net for all financial institutions on a risk-based basis?

We get lobbied on all sorts of things. ?We provide capital on a legislated basis. ?Shareholders and bondlholders should absorb loss first and second (DM: good answer).