More than two hundred people gathered at the Cato Institute last Thursday for our 33rd Annual Monetary Conference. Over the course of three addresses and four panel discussions, a distinguished cast of speakers — including St. Louis Fed president James Bullard, Richmond Fed president Jeffrey Lacker, and Stanford economist John Taylor — covered topics ranging from the rights and wrongs of monetary rules, to the ins and outs of the Fed’s long-awaited “exit strategy” from quantitative easing and near-zero interest rates. If you didn’t make the event, here’s a synopsis.
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Rethinking Monetary Policy – Cato’s 33rd Annual Monetary Conference
![monetary policy, federal reserve, plosser, miron, selgin, sumner, john b. taylor](/sites/cato.org/files/styles/pubs_2x/public/download-remote-images/www.alt-m.org/138335041145/2015CatoMonetaryConference.jpg?itok=s7wYIVHY)
Opening Keynote
Bullard kicked things off with the keynote address, noting that while he favors policy normalization — that is, a return to the kind of monetary policy (and Fed balance sheet) that prevailed between 1984 and 2007 — there is a risk that we’ll get stuck at “Permazero” if the economy fails to take off, or suffers new negative shocks. He speculated that inflation would stay persistently below target in such a scenario, while monetary policy would lose its power to stimulate or stabilize. Long-run growth would continue to be driven by real factors, but asset prices could become very volatile. Bullard stressed that this was just one possible interpretation, and that it didn’t change his view that the Fed should begin raising rates and shrinking its balance sheet. Nevertheless, he said, we should be prepared for the possibility that things do not go according to plan.
Panel 1: What Monetary Policy Can and Can’t Do
The day’s first panel, moderated by Wall Street Journal chief economics correspondent Jon Hilsenrath, focused on what monetary policy can and cannot do. There was a broad consensus among the panelists — the Richmond Fed’s Jeffrey Lacker, the Bank of Mexico’s Manuel Sanchez, and George Tavlas of the Bank of Greece — that monetary policy should focus on price stability, while steering clear of objectives it is less suited to, like boosting growth, guaranteeing financial stability, or pricking asset bubbles. Within that discussion, Tavlas made the case for monetary rules over “constrained discretion,” suggesting that Milton Friedman might be sympathetic to the Taylor rule if he were around today.
Panel 2: Inflation, Deflation, and Monetary Rules
Monetary rules were the focus of the next panel, which featured John Taylor (he of the eponymous rule), former Philadelphia Fed president Charles Plosser, the Mercatus Center’s Scott Sumner, and our very own George Selgin. Although all four panelists favored a shift towards rule-based monetary policy, each took a different approach.
Plosser noted that the Fed already runs five different monetary rules through its model of the economy when preparing for Federal Open Market Committee meetings. So why not release the results of that analysis, and use it to explain how policy decisions are made? Sumner advocated a similarly incremental approach, suggesting the Fed could be “nudged” towards his favored paradigm — NGDP targeting — with requirements that it clearly define the “stance of monetary policy” in its communications, regularly review its past policy decisions, and set “guardrails” for the maximum permissible fluctuations in aggregate demand. Selgin drew a distinction between rules and “pseudo-rules,” arguing that the former must be strictly enforced, hard to “innocently” break, and possible to stick to during a crisis. Taylor, meanwhile, argued that capricious monetary policy was promoting massive capital flows between emerging and developed economies, stoking exchange rate volatility, and giving rise to widespread capital controls and currency manipulation. Rule-based monetary policy, he suggested, is a necessary complement to open capital markets and floating exchange rates — and legislation in the U.S. would set a great example for the rest of the world.
Luncheon Address
Claudio Borio, the head of the monetary and economic department at the Bank for International Settlements (BIS), delivered the conference’s luncheon address, arguing that we need to reassess “three pillars” of received monetary policy wisdom — first, that the natural rate of interest is best defined in terms of output and inflation; second, that money is neutral; and third, that deflation is always and everywhere a disaster. Borio rejected all three premises. He preferred to think of the “natural rate” as one which is consistent with good, sustainable macroeconomic performance. According to this view, financial imbalances (such as asset price bubbles) are the key signifier of disequilibrium. Borio also questioned the idea of monetary neutrality, arguing that credit-induced resource misallocation is central to an accurate understanding of the economic cycle. This means that easy money can’t always solve our problems; you need structural and balance sheet reform after a crisis. Finally, on deflation, Borio highlighted BIS research suggesting that there is only a weak association between deflation and economic contraction. What link there is derives largely from the Great Depression and is more aptly attributed, in that case, to a collapse in asset prices. In reality, said Borio, garden-variety falls in the prices of goods and services do not always portend doom — and shouldn’t always spur offsetting policy actions.
Panel 3: Monetary Policy and the Knowledge Problem
The monetary conference’s third panel discussion focused on Hayek’s knowledge problem in the context of monetary policy. Cato senior fellow Gerald O’Driscoll suggested that the knowledge problem explains why rule-based monetary policy is superior to central bank discretion — we don’t know enough to design an optimal monetary policy, so we’re better off using rules to create a monetary order and anchor expectations. The American Enterprise Institute’s Alex Pollock took a similar approach, asking, “Does the Federal Reserve Know What It’s Doing?” His answer was a resounding “no” — but it’s not their fault, said Pollock; it’s fundamental uncertainty, not incompetence, that dooms the Fed to recurring failure. Speaking last, David Malpass of Encima Global LLC added his voice to calls for monetary policy normalization, arguing that the Fed’s zero-interest rate policy is actually weighing down economic growth.
Panel 4: The Fed’s Exit Strategy vs. Fundamental Reform
The prospect of monetary policy normalization provided the backdrop to the day’s final panel discussion: “The Fed’s Exit Strategy vs. Fundamental Reform.” Alt‑M contributor and George Mason University economics professor Larry White tackled the first half of that title. He argued that quantitative easing (QE) wasn’t really a monetary policy at all: by deciding to pay interest on bank reserves held at the Fed, policymakers effectively “sterilized” QE, which meant it barely affected the broad-money (M2) aggregates. What sterilized QE did do, however, was to preferentially allocate credit towards housing over other uses. In this context, an “exit strategy” worthy of the name must put an end to this discretionary credit allocation — but, alas, there’s little indication that the Fed has any intention of doing that. Jerry Jordan, former president of the Cleveland Fed, was similarly gloomy about the prospects for a meaningful exit strategy, arguing that monetary policy has lost its potency now that banks are no longer reserve-constrained, and questioning the Fed’s ability to normalize policy even if it wants to. Kevin Dowd, an adjunct scholar at Cato’s Center for Monetary and Financial Alternatives, brought the session to a close by outlining a bold agenda for fundamental monetary and financial reform, eschewing incremental steps in favor of a re-commoditized dollar, an entirely new bank capital regime, radically reformed bank governance, and a thoroughgoing roll-back of government intervention in the United States’ monetary and financial system.
Closing Address
The closing address of the 33rd Annual Monetary Conference was delivered by Rep. Bill Huizenga (R‑Mich.), who chairs the House Financial Services Subcommittee on Monetary Policy and Trade. His remarks focused on the draft legislation he unveiled earlier this year, which would require the Fed to adopt an explicit policy rule, and grant greater auditing power to the Government Accountability Office, among other reforms.
If you missed the conference, video footage of all the sessions is available here, on Cato’s website. The papers submitted to the conference will also be published in next year’s Spring/Summer issue of the Cato Journal.
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This post was originally published at Alt‑M.org. The views and opinions expressed here are those of the author(s) and do not necessarily reflect the official policy or position of the Cato Institute. Any views or opinions are not intended to malign, defame, or insult any group, club, organization, company, or individual.
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A recent op-ed in The Washington Times illustrates the point, using a recent Medicaid fraud case that is currently in front of a federal appeals court:
Read the rest of this post →Here’s a quiz: Which of the following is a federal crime: (a) A hamster dealer needlessly tilting a hamster’s cage while in transit; (b) subliminally advertising wine; or (c) selling a fresh steak with paprika on it?
Give up? The answer: all of the above.
Right now, there are approximately 4,500 federal criminal statutes and 300,000 administrative regulations that can be punished with imprisonment — and the list keeps growing. This is an invitation for our government to over-prosecute. Too often, federal prosecutors are accepting that invitation and rejecting more measured and effective administrative and civil remedies.
[…]
In a case that was recently argued before a federal appeals court, executives at WellCare, a managed health care company in Florida, were prosecuted based on their reasonable interpretation of a Florida statute. Federal prosecutors, however, disagreed with the company’s interpretation, even though Florida never issued any regulations contradicting the executives’ reading of the law.
Let’s Talk Turkey
Thanksgiving is almost upon us and time has come for that most sacred of American traditions: bemoaning the rising cost of living. Per this Bloomberg headline on Thursday, “Thanksgiving Meal Costs Most Ever as Bird Flu Hits Turkeys.”
Well, that’s complete and utter nonsense.
The headline grabbing data comes from the American Farm Bureau Federation, which faithfully records the cost of 12 items (e.g., turkey, pumpkin pie mix, sweet potatoes, etc.) that go into a preparation of a Thanksgiving meal for 10 people.
On the face of it, the nominal cost has risen by $0.70 from $49.41 in 2014 to $50.11 in 2015. Using a BLS calculator, I have inflated $49.41 in 2014 dollars to $49.64 in 2015 dollars. So, the real increase amounts to mere $0.47.
Now let us see what happens when we adjust the nominal cost of Thanksgiving dinners by the rise in nominal wages.
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Now Americans may get a chance to save in a similar tax-friendly vehicle. Senator Jeff Flake (R‑AZ) and Representative David Brat (R‑VA) are introducing companion Senate-House bills (S. 2320 and H.R. 4094) to create Universal Savings Accounts (USAs). The accounts are like supercharged Roth IRAs.
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- USA accounts would allow individuals to decide what to use their savings for and when, without Congress micromanaging their choices, as they do with other accounts.
Flake and Brat cite data showing that only 53 percent of adults could currently cover an emergency expense of $400 without selling an asset or borrowing, and most Americans do not have the recommended three to six months of income in their current savings accounts.
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House Speaker Paul Ryan is known to admire these sorts of accounts, and numerous Republican presidential candidates have pro-savings features in their tax plans. So if the next president is a Republican, we should have a good chance at making these pro-family, pro-growth savings accounts a reality.
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In 2010, Burma’s military junta–misnamed the State Peace and Development Council–began a controlled move toward limited democracy. The process was highly imperfect and there has been backsliding of late.
Nevertheless, national elections were held last week.
Nobel Laureate Aung San Suu Kyi’s National League for Democracy annihilated the regime’s Union Solidarity Development Party, winning 78 percent of the seats. Voters rejected many top military and USDP leaders.
The losers were surprised that the people gave them so little credit for the end of dictatorial rule. “All of our calculations were wrong,” said one. Yet this happened before.
After ruthlessly suppressing pro-democracy demonstrations, the military regime sought to improve its image with an election in 1990. The NLD similarly won about 80 percent of the legislative seats. The embarrassed junta promptly voided the results, suppressed protests, and kept Suu Kyi under house arrest for most of the last quarter century.
No one expects a similar response this time, however. The military made a far more calculated move toward democracy, writing the constitution to guarantee its influence. Moreover, after inviting in the West, the military could not easily return to isolation, the almost certain result of any electoral repudiation.
However, is the military prepared to allow reform to move forward?
Suu Kyi and the NLD face extraordinary challenges, made more difficult by people’s high expectations. People across Burma voted for The Lady, but she has never held office or participated in the give and take of politics.
She faces what remains an authoritarian state. Human Rights Watch recently warned that “the reform process has stalled.”
Much must be done. Civil and political freedoms must be further expanded. All members of parliament should be elected. Judges must be made independent and fair criminal procedures need to be established.
Moreover, power must be fully vested in civilians. Today, the Ministries of Defense, Border Affairs, and Home Affairs are formally under military control, while the army has seeded its personnel throughout the nominally civilian bureaucracy and judiciary.
Fundamental economic reform also is necessary. The Economic Freedom of the World index places Burma at a dismal 146 of 157 nations. Little progress has been made toward a market economy. The new government must make Burma attractive to domestic entrepreneurs and foreign investors alike.
Conflict continues among a number of ethnic groups. Peace requires allowing substantial self-government, creating trust after decades of military atrocities, and reintegrating ethnic and religious minorities in Burmese institutions.
Riots and massacres have continued in Rakhine State targeting the Muslim Rohingya, encouraged by radical Buddhist nationalists. The national government must protect vulnerable groups from organized violence.
Standing in the way of real change is the military-drafted constitution, which bars Suu Kyi from the presidency and requires a 75 percent vote in parliament to amend the constitution, while guaranteeing 25 percent of the seats to the military. Forging a relationship with the army while edging it aside will require extraordinary sensitivity.
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And her plan for governing sounds anything but inclusive: “The president will be told exactly what he can do. I make all the decisions, because I am the leader of the winning party.”
It has been more than a half century since the people of Burma have been able to rule themselves. They face tough questions of media freedom, political reform, economic liberalization, ethnic conflict, military accountability, and more.
As I argued on Forbes online: “For too long the Burmese people could only look to the future and hope for change. Today they have a chance to enjoy the opportunities that the rest of us take for granted. Hopefully now, after decades of conflict, the future finally has arrived for Burma.”