the federal reserve's role in promoting u.s. economic growth and jobs was the focus of a panel discussion today at the new america foundation. panelists included a former associate director in the federal reserve's monetary affairs division who worked on the feds bond purchasing program. the new america foundation and the roosevelt institute cohosted this conference of the future of the federal reserve. >> to help us explore these issues we will have -- dean baker of the center for economic and policy research, tim chatman of -- tim conova of chapman university. we will begin with a presentation by joe gagnon and i will introduce the other panelists after the presentation. joe gagnon senior fellow is an associate director of the division of monetary affairs of the u.s. federal reserve board.

prior to that he was associate rector of the division of international finance and senior economist. he is taught has taught at the university of california's school of business. joe if he could start our discussion off. [applause] >> is very wicker or is someone going to turn the page? thanks for having me here, michael and i would like to talk about what the federal reserve can and should be doing to help restore full employment. let me just start by saying that it is true that we are, the

federal reserve has said its policy rates at zero, the lowest it's ever been and that is the bounds for reasons i won't go into, but it doesn't mean that it is all the federal reserve can do. the federal reserve, monetary policy works in general by tilting the balance between savers and spender so when monetary policy wants to increase spending coming and going, they lower the rate of return to savers which makes it more attractive to borrow and spend. when they want to slow the economy down they raise the rate of the return for savers which makes it more attractive to save and enough band and that is how they get the economy moving the way they want. normally, they you short-term interest rates to do this which they have under their control, but as we have learned, in the past couple of years, the federal reserve and federal banks do have an important influence on longer-term interest rates and that is what

quantitative easing was all about. in particular you can lower the long-term rate which is to ray and the bond price, raise the value of that asset and that should -- that stimulate spending and discourages saving in the normal way. but, there is actually other channels monetary policy can work through equity in principle. there's there is nothing that the federal bank can't do to raise out the prices, lower rates of return and encourage spending if it needs to. in the jena there are laws that prevent the federal reserve from buying equity but in japan they cannot. now, you will notice i haven't mentioned this sort of standard textbook bank lending channel. when we did the first qe two years ago we knew the banking

system was broken and we did not expect it to work through the banking system. we expected it to work through these other channels, so i'm not saying the banking system is not a channel also but it wasn't at this time. so, the way to think about monetary policy is that there is really no limit to how much private spending the central bank can create if they want to under any circumstance. now it can't just stop and start just on a dime. is like steering a supertanker, so there is sort of essentially no limit to how much people, the federal reserve can encourage spending but you don't want to overdo this ability because if you do, try to push the economy too hard, too fast you will get

inflation instead of extra employment it then we sort of lose that channel. this spending will turn out to be inflationary. right now there is not much concern right now about inflation in the u.s.. now there is outside the u.s. because of commodity prices. there is an inflationary risk outside the u.s. because of fast growth and the rest of the world, but about 80 to 90% or over 90% of all costs in the u.s. are not from commodities. they are from mostly labor in the u.s. so that is not a concern right now. of course this won't last forever. now, just briefly, normally central banks do refer to you short-term trades and they have been very reluctant to do anything else beside short-term insurer strays because that is what they are used to and that is their bread and butter. it is kind of scary threatening,

sort of scary to face in a world in which you have to use a different power than he normally did and that is why they have been -- to do much and i don't have time to go into this but some of these other things the fed could do our bit riskier although in the big scheme of things not really. but they are a bit riskier and so they prefer to stick what -- to what is safe. but, the actions the fed took in late 2008 and into 2009 i think were pretty aggressive. i do believe chairman bernanke is right when he says that the fed avoided a second rate depression. i think on almost any measure the financial markets hit us in 2008 was bigger than the one in 1929 but the policy response is better. so, think the chairman is right

the fed was aggressive and rightly so. but i think circumstances demand even more aggressive action. to say that you were aggressive and he saved us from a second great depression, fine, kudos. you know we probably don't acknowledge that enough but it doesn't mean that the fed delivered the right amount. mrs. and uncertain area and they think they were still a bit conscious relative to what was needed. so, near the end of the first quantitative using i publicly called for 2 trillion quantitative easing too and 11 months later the fed finally came around and announced about a quarter of that in november of 2008. during this process the fed was facing lots of opposition from politicians and people in the markets he didn't want this.

people were afraid of inflation, which has been really nonexistent and i might remind people to years ago people were screaming that the fed's policies were going to cause runaway inflation by now and that hasn't happened. even with oil prices inflation is only a bit over 2%. and, oil futures markets think that oil prices are excellent going to fall from here on out. there is little support for quantitative easing in general and the fed was uncertain about the effects. so my sense is that this timidity has cost america at least 1 million jobs, that's where we could have been by now relative to where we are now which is most unfortunate, but somewhat understandable. and i think the biggest point i would like to make is that i think we need more voices on those sites to say all the fed here's is what they're doing is

dangerous, how what they are doing is inflationary, how they are out of control. and in the public's mind a lot of what the fed is doing is a -- bailout and i'm not talking about the a lot part of fed policy. i'm just talking about ordinary bread and other policy. i think what we probably need now is not an end to qe2 but some continuation at roughly or slightly higher rate than we have in the past six months. i do think that over time as the economy recovers, the scope for doing qe is reducing overtime you know, we have to look forward. we have to look forward and it looks like in the sense if you look forward to years the fed's own forecast is unemployment is

still going to be above their estimate of where it should be an inflation is still going to billy be below their estimate of where they wanted for the next two years direct going into three years from now. it seems to me that is not acceptable and it was probably the weakest part of chairman bernanke's press conference was when he was asked about this. if you are under shooting on unemployment thread your forecast tour three years ahead and you don't have any inflation in your forecast, in fact a little bit too low when energy doing more? i think that is a question that needs to be asked more and more and they think the only answer he got was well, some people out there are worried about inflation in future. the same people have been proven wrong continuously for the past two years. energy prices which are not under the fed control are not expected to continue to rise. futures markets have energy prices falling over the next two years. there is no reason to fight that any more. buy guns of icons but you shouldn't fight inflation when it is actually expected to be negative in the future and wage

increases are the lowest at the lowest level in post-war history. so this to me is the weakest point of the fed's policy right now. moreover, so i think there are some scope for more qe bed it is diminishing because as the economy recovers the gap that needs to be filled is less. however i would note if there are substantial cuts will next year and if there is an agreement to drastically rein in the budget deficit in the near term than i think then we really will need more qe than i have recommended. so i think the lesson i would say is the fed needs to hear voices on both sides and would feel much more comfortable going where i think it actually wants to go if it isn't only attacked always and have has some of the -- support. i think as i said, its own forecast of minutes it is not having good policy.

i think thank the chairman worries about inflation expectations, but i would note the fed mandate is not to address the inflation when as we have seen their concern is unwarranted. the fed's mandate is to deliver low actual inflation where we are talking about something in the range of one, two or 3% and even with oil prices we haven't even exceeded that range. the best forecast as we are going to be below it again or at the low end of that range going forward. thank you. >> if i can asked the other panelists to join us. thank you joe for setting up our conversation this morning. he will be joined by dean baker who is codirector of the center for economic and policy research. author of taking economics seriously. his work as a consultant for the world bank, the joint economic

committee of the u.s. congress in the oecd. we will also be joined by tim conova, they waste that betty hutton blames professor of international economic law chapman law school and codirector of the center for lawn development. his research crosses the disciplines of law public finance, economics into history. if we could begin with dean. >> thanks allowed mike. i appreciate the chance to talk about this. eyes feel when we are talking about the fed it is sort of like thanksgiving how you are at the adult table and the kids table and i think a policy debate in washington is being the kids table. you can argue over -- i was reading in the times this big thing about the oil tax breaks which takes me back but the reality is it is nothing. where as much as what goes on that really matters is that the

fed and we are not invited to that table for the most part. that is over here, don't talk about that. that is not really the realm of the popular discussion. what i wanted to say little bit about is that we should be at the table and i want to talk about it and drop or at least what i see as backdrop to what this polices are in terms of employment issues and again joe talked about the dual mandate which is exactly right. at least in principle we have a dual mandate i might the central european bank which has focused on inflation. i worry that we are leaning towards that, de facto even if not mott and i want to say a little bit about the fed in the budget. people understand how important that is for the budget and it is enormously important. and then just a little bit further on what joe was saying i will disagree with him that we avoided the second great depression we will be that for discussion but i will argue again with him but that they could be more aggressive than i actually probably will carry that further than show what.

joe would. the first , the fed's dual mandate. what is striking to me is that you have this mandate here that the fed is obligated to pursue high levels of employment which actually are defined in the laws as 4% of employment and price stability. i think your heart has to offer that the feds actually follow those with equal vigor. i had sort of an eye-opening -- i had the chance to meet with a couple of people who were more liberal members, and at that time i was arguing that we can get lower rates of unemployment. i think an employment rate at that time was 6% which was generally believed to be as low as you can get without accelerating inflation. what is wrong with trying to see? what happens if we have low rates of inflation and i was told well we lower employment. of course the model show is very gradual. there is no model that shows if you get half a percentage point or percentage point below it

goes through the roof. there is no model that would show you that in no the one believes that. okay let's say you are right and we get a high rate of inflation what is the issue there? in fact there is not a big problem with higher inflation at that time of 2.5 or three. supposed to want to 4.5. he said the feds committed price stability. no one takes that seriously. you have to take take the price stability seriously. yes, i do. which i think speaks volume. the point here is we have aligned we have congressional mandate. they are symmetric. they are supposed to look at unemployment supposed to look at inflation. they obviously do not look at the symmetrically and i think that has a function of who follows the fed and who who is in isn't that what the fed. they're constantly engaging members of the financial community. the ideas that congress is supposed to be hands off. let me just point out the

sources say that is okay if you have been doing a great job. you are hard-pressed to say that we could talk about the current it should talk about the current collapse but let's go back. the absolute conventional wisdot because i thought the unemployment rate could be up below 6%. i will refer to someone who i have great respect for, paul krugman who wrote a great piece called voodoo redux come interest in timing. the second half 1995 in a journal called the international economist and he said the only people questioned the existence of the neighbor of this range are politically motivated hacks. the unemployment rate got down to 4% and we had very little evidence of inflation. how did that happen? alan greenspan and this is an idiosyncratic character who said i don't see any inflation. andy lau the unemployment rate to go down and he did not raise rates even when other members including more liberal members of the federal reserve ward said

you have to raise rates or we will have inflation. the long and short of what i would say is there there is claim of expertise, trust the experts we know what we are doing. you don't know what you are doing. the evidence is you mess up again and again and again. so you absolutely need public oversight. okay, so say it is historical and i would argue again if we are talking about the ucd and other banks we should say this times 10 but certainly with the fed. the budget, i mean one of the things again i get it a kick out of this budget stuff and everyone saying you know including my friends who want to pat themselves on the back we got the balanced budget back in the late '90s and clinton did things right. we can argue whether or not clinton did things right but if you want interesting reading go back to january 6 and look at the congressional budget office's projections for the deficit in the year 2000. they projected a deficit of 2.5% gdp. remember back in 2000 we had a huge surplus, if i percentage

point switch. why did i say january 1996? at that point all of the -- were in place. all the spending cuts were in place and in fact we look through the cbo tracks when there's a change in their projections each and every six months, how much of that was due to legislative changes? how much to economics? if you sum up the legislative changes, is changed and spending policies from january 96 to 2000 it went the wrong way. we had 10 billion greater towards deficit so how did we switch five percentage points of gdp? that would be 750 billion in today's economy. we are going the wrong way in making the deficit bigger. in 1996, january 1996 the congressional budget office and the unemployment rate would be 6% in 2000. dampener it actually averaged 4% the difference between 6% and 4% unemployment come, we also had extra tax on the sparred --

stockmarket level but the main reason that we got from a deficit of 2.5% of gdp to instead a surplus of 2.5% gdp as we allow the unemployment rate to go way below what all the experts thought was possible. of the experts have their way we would still have had a large budget deficit in the year 2000. this is the one time i will be thankful for alan greenspan. the other point i will make and i'd love i love to throw this out here because i've make a counterargument, how the fed could affect the deficit. as you know in qe2 the fed is buying up long-term bonds. supposed the fed were to buy those bonds and push it to 3 trillion to get round numbers and just hold it. terkel hold those assets. what would that do? i'm sure some people are jumping up and down. you put these research there and it creates inflation.

the fed is different ways to control the money supply and when we do that -- but why does that matter? opposed the fed sat there on june $3 trillion of u.s. government debt and held that for the next decade well and beyond that, what does that do? the differences somewhere in the order of cumulatively $1.8 trillion in interest payments. the interest is paid to the fed and refunded to the treasure. lester the fed refunded $80 billion to the treasury. so we would have much much lower interest payments over the course of a decade and beyond if the fed simply bought and held the bonds. buying them today, the anticipation is that it will sell them back to back to the public salanter's will be paid to the public rather than pay back to the treasury. i would argue there is no reason for the fed not to simply hold them and have the interest paid back to the treasury. okay, the last point, what should the fed be doing now? i'm 100% with joe that the fed should be more aggressive. you look around if they were hard-pressed to find any evidence of inflation anywhere

in the data and it has become almost comical because they are pointing to the rising commodity prices which again a lot of that is due to china and india and short of bombing china and india i don't know what we will -- and i'm not advocating that. some of that is clearly speculative and that seems to be reverse. whether that is a standard not i don't have a crystal ball but let's imagine heads down as most forecasters are showing, the fed should be worried about deflation. i'm not worried about deflation frankly but the point is you are very hard-pressed to find any real evidence of inflation if you point to commodity prices and they start to go the other way. you really don't have anything. i would argue that we need to be much more aggressive again as joe was saying and stealing one of his ideas, you could target long-term interest or target the five-year rates of the could target long-term interest rate to say we are going to buy up enough lawns to get 1.5% or whatever that target is. you could ask to go a step or

there and something chairman bernanke advocated back when he was a professor at princeton for japan. is a flat we target a higher inflation rate, and target three or 4% inflation rate? it is good in the current environment because we can lower real interest rates, but the other reason why do so good is it relieves the debt ridden. we have all these people who are heavily indebted in their homes and we should expect house prices to more or less rise with inflation if we want people to get out from under debt. there is no better way than to have a somewhat higher inflation. i think we have to have a much broader debate on the fed and i conclude by saying that they think about the fed, there's this idea is church politicians are not supposed to talk about it. what i would say is i think at the fed we think of food drug administration. we don't want congress deciding individual drugs, if this drug safe and as this one harmful? on the other hand if the fda does not prove any drugs in five years we would probably say there's a palm.

alternatively if they are keeping drugs and everyone is dying, again would say there's a palm. the congress has an obligation and responsibility to oversee the fda the same way it has an obligation to oversee the fed. when you look at the track record your hard-pressed to say they are doing a good job right now. [applause] >> thank you. is a pleasure to be here, and i agree with one of the statements that team just made about this great depression. when i compare, when we compare the 1930s with today, certainly the 1930s the unemployment rate fell in half during that decade and there was significant economic growth during the decade and yet we still refer to it as the great depression. even though the unemployment rate fell in half it is incredibly high unemployment. today there's a tendency, what do we call what we are in today? is no longer a recession and

technically i hear it called the great recession. is not a recession because we see some economic growth. the unemployment rate has come down to really barely below 9% as we have heard earlier. when you start including underemployment and part-time workers looking for jobs and those who have fallen out of the labor market and discouraged workers we are talking about perhaps double that. it is an enormous percentage of the population that is demoralized and discouraged today. i think it is useful and i talked about this quite a bit, is useful to compare today to the 1940s. i look at the 1940s federal reserve as a model for full employment when the fed accommodated much larger deficits than today but they were active deficits. it was government spending on real jobs, real industry, real education. the first half of the decade versus world war ii and the second half of the decade was

the g.i. bill of rights and the marshall plan. we compare that with today with a quantitative easing programs. the federal reserve is spending but it is spending to prop up financial markets and bank balance sheets and to try to lower and just rates to help encourage business investment and a roundabout way. that was discredited years ago is pushing on its strengths. that was the metaphor rather than directly stimulating demand for government spending. just to give you an idea for metrics, during the 1940s, the federal government spending was about 45% of gross domestic product. today it is about 26% i believe. the federal deficit during the 1940s was more than 30% of gdp today it is about 10%. long-term interest rates were actually lower during the 1940s than today. the treasury was pegged by the federal reserve which kept interest rates even lower than today even though the federal government is borrowing three times as much at its peak.

gross domestic product, economic growth during the 1940s averaged more than 6%, much higher than today and inflation was kept low during the 1940s. the federal reserve was a big part of the story in the 1940s and in accomplishing the three main primary keynesian economic objectives. full employment, reducing the great disparities in income and wealth and third, reigning in cartels and financial cartels in particular. those three primary objectives i would suggest were mutually reinforcing. for instance, as the federal government was able to obtain full employment the jobs market with unemployment by the end were 1.2%, that helps redistribute income to the middle classes. that redistribution in turn help the economy because more money

was in the hands of those segments of the population with a higher propensity to consume that helps increase aggregate demand and helps increase what keynesians called animal spirits, real business investment and that in turn helps increase tax revenues across the board. as we put resources to work they are able to pay taxes. hewitt got to ask the 15 million people out of work right now and probably another 10 million detach from the job market is a lot of people who are not paying their fica taxes. they're not paying state and local taxes, income taxes that is. today we see a downward cycle in the same metrics that is also mutually reinforcing in a very negative way. we have a restrictive fiscal policy which actually, well one indication of it actually is to cut backs in state and local budgets across the board.

it is very reminiscent of the 1930s. when you aggregate all of the state and local spending cuts and tax increases in the last few years, it really undermines any federal fiscal stimulus coming from washington d.c.. and that undermines of course the jobs market. it undermines consumer income, the propensity for consumers to consume, to spend and in this kind of market we see a lot of belt tightening and that undermines the incentives for businesses to invest and reduces tax revenues across the board, as i mentioned. ..

it stem to the financial with crisis and propped up the bank's but the money did not result in real spending on the middle class and jobs for the middle class. in fact we see tightening during this period of time and in many ways it is more of the same. the assets purchases were not as toxic all but they were still financial assets the hot and purchase more than $600 billion

of long-term treasury and it's to try to bring down long-term interest rates and hoping that that will lead to banks to start lending to the middle class and small businesses to mainstream. i would suggest for talk about a ge3 there should be a ge3 for main street, not wall street. with the federal reserve lending directly to state and local government to prop up their budgets so that there's not another cycle of spending cuts of the state and local level. i living in california and it's like groundhog's day. it's like that bill murray movie where the state goes through all kind of pain to cut government spending, a laid-off teachers and other essentials services, close is an enormous budget gap, we go to sleep thinking the problem is solved and we wake up to find that two, three months later is an enormous budget crisis again and it's even bigger. when you are cutting new government spending in this kind

of environment you are laying off taxpaying resources. john ge3, what would it look like? it could look like as i suggest the federal government lending to put a floor underneath their budget so we don't see another round of cutbacks with teachers and other essentials services that there shall also be a major infrastructure investment program much larger than we have seen. we have really only seen roads and bridges in the economic stimulus package that came out of washington in early 2009 but when we tally up long list of the unmet needs of this generation it's an impressive list. justin california again, the sewage treatment facilities, the transit, the need for alternative energy. the yale economist who predicted this housing bubble and collapse

has written about the need for the conservation corps where the project of an attrition programs we saw in the 1930's to put millions of americans to work or not working. he said of the federal government spent only $30 billion it could put a million people to work in the conservation corps. so i'd like to see the discussion heading indirections lot of austerity but of how the federal government and the federal reserve can facilitate more spending on resources in the middle class rather than talk only about the financial markets putting real work to employment in the growth again. thank you. [applause] >> we will have time for questions and discussions but i would like to start this off by building on one of the themes of

tignes canova asking the question are we asking the federal reserve is central bank to do too much because of the lack of other institutions? if you go back in history to 1938, 39 in number of keynesian surround the roosevelt of administration which came very late in the keynesian policies believed you had to fight future depressions with two institutions, not just one. the federal reserve had to carry out the proper monetary policy but you also have some kind of fiscal policy entity. they had concluded at that point and i think history has vindicates them that congress cannot rationally respond in terms of adequate fiscal policy. either the sums would be too low like the american recovery reinvestment act or too political with half the tax cuts or too lead in the cycle so they came up with this idea similar

to history they called its spending, spending by lending rate of corporation and a similar government agencies would be a part of the institutional apparatus of the federal government, and they would work together with the fed and monetary and fiscal policy. so, that's just the question, you know, i would like to hear our panelists address essentially if we have either and an adequate mom existent policy are we asking the fed to do too much? asking it to be the reconstruction finance corporation and federal reserve time simultaneously? joe? >> i would say my answer is yes and no.

this is where i think microversus macro. i think the federal reserve and what i would call the macrolevel can get you with a lag in a year or two pretty much any you want if they persistently go at too low a level and get inflation that's a long way toward furious and yes, but i don't think that it's too much to ask the fed in that sense. but if you want -- the fed cannot control the money is spent on, and the channel through which the policy works are hard to predict. they could go another round of questioning, the first round by the way to set the record straight, a lot as it did go to letting homeowners refinance lower mortgage rates and a lot of it went to the corporate borrowing and that led investment to be strong. we would have liked more bank lending to small business and we would have liked the stryker

housing markets but we couldn't control where it went. the next round might go to a cheaper dollar, it might be heading that way. the fed can't control where the spending comes from. that would take the government. so, if you want more infrastructure spending, that would take another -- the government either federal or state governments aside and the fed could support that sort of thing. he could provide an environment in which that would have been easier with lower interest costs to the government. but it can't do that. it can only get the spending going and it can't control where the spending goes. but if you come by net so that's where i see it. yes it can do spending but it can't directly. >> i would say we would certainly like to have, you know, to put on this, fiscal policy. we don't, you know, so an absent fiscal policy is the fed sitting there while it's natural to say that you want to have decided to action. i would like to agree with what joe said and i would carry it further in terms of the qe1 and

qe2. there's an issue of people wonder water that's horrible. but in terms of business having access to credit, the united states unlike japan, we have much more direct credit access so many of the midsize firms could barham the financial markets and if you look at the interest rates deir our historic lows, really nominal. so, for most businesses and even the national federation of independent business was a survey every month and they ask you what is the biggest problem facing the business almost no one says access to credit so i don't buy that somehow access to credit is a big obstacle for the recovery. there is no evidence to make that case. the interesting issue, could you have the fed absent the congressional action, again, we know the congress could do but absent the congressional action, the fed made loans at the peak of the crisis for just about

everyone at the low market rate. could it to it to the government i think some short-term loans to government. again, you know i don't know how we change thing with the financial reform all but it could previously do that and it may not have been a bad idea. so to extend credit for at least a three or five-year period to the states again, you run the risk some will be wasted in the context of the unemployment rates that you are seeing today what's that risk and how was that a down side? so i would like to see the fed basically use every channel that can to try to promote growth at this point. >> in the spring of to those of the former chairman paul volcker was agonizing the fed was beginning to make loans where the collateral was the toxic mortgages, and he said this was unprecedented in the past the fed purchased government bonds and bills and notes and the fed was moving into a different type of policy where it could be seen

as trying to prop up a sector of the financial markets and he agonized this might end up leading people to question the fed's independence and of course they went way beyond that. no longer was it just making loans where the collateral was tax accounts sets it was outright purchase in the toxic assets to read and where is the legal authority to do it? even if there was none, who's going to challenge it? nobody has the standing to challenge the federal open market committee decisions at this point. so it seems to me that of course the open market committee could purchase municipal bonds and prop up the budget of state and local government. the splending for of the question we see the parallel banking system built in the united states and it's not just the reconstruction finance corporation it's also the creation of the federal home loan banks. the federal reserve could certainly purchase the bonds of

an infrastructure to give the congress were to create an infrastructure bank. and finally how we see i think the futility where the limits of ordinary monetary policy the fed could push interest rates down and perhaps near the zero on long-term and that might not have the effect of bringing us in the unemployment rate we desire. that is a bit naive at this point to think just to lowering interest rates is when to change the underlying conditions in the economy that dramatically when you have a top-heavy distribution of wealth and income that's more top-heavy perhaps the in any time since the gilded age and you have this type of mass unemployment you do need a fiscal solution, not just the traditional monetary. >> if you can wait until the microphone our lives. >> good morning. my name is lehane. and i have them the federal

reserve financial institution operation from our assumption of capitalism that free trade and we don't have free fair trading is manipulated so that it's a financial institution so i ache for the suffering of the middle class or lower income or actually even a senior citizen if they are healthy but deprived of the right and resources. so we're talking about the financial manipulation by the federal reserve. >> could you formed a senator of a question, please? >> you can address this issue because their operation does not benefit the society of the general public.

for instance, if you say you want to have a state and local [inaudible] they are told, the developer, they have been misleading -- >> we need to have time to answer the questions. we will take two or three questions here. >> thank you. my name is joe murray with global financing by wanted to ask a kind of international context question. one is qh2 may be great for the united states but what i've been aware of is the money leaves the united states and carry st and brings inflation overseas is not domestic. so how can we have more bank for the buck domestically at least and the second question is if there is time or a reference to

how a european central-bank, the restrictions and how it could be changed to near-poor the u.s. debt. we will take one more question on this side over here. >> reference was made to the 1940's. i'm sorry i work with cooperatives. there were two other institutions created that have moved to this latest round of the financial difficulty with little harm. the credit union system and credit unions represent almost a third of americans in the united states and there was no door to any other credit union. the system for farms also was relatively unscathed through this difficulty that basic question is can elements of cooperative ownership and consumer control and ownership

be applied. >> if i could have one small correction to something tim said, actually was a person in washington who was managing qe1 when i was at the fed that is the last thing i did and i can tell you if we didn't purchase any toxic assets we only purchased prime confirming mortgages the were guaranteed already by fannie mae and freddie mac said they were already guaranteed by the federal government and they were already primed performing mortgages that was qe1. only non-toxic assets. not to say the federal reserve didn't lend against the assets like the stearns bailout. i will do the international question which is just -- i

think there's a lot of complaint when it was announced but if you look at the data since then the capitol flow to the countries declined after. even in the principle it could have been a problem. i think the countries have their own monetary policies and their own ability to set the conditions in their own countries to suit themselves so if the need to fight inflation they are going to do it. i think one of the challenge to the two channels however for the commitee defeasing to work would cause the dollar to decrease. if you look at the data the spending money hand over fist to push the dollar up and they've been doing this the past ten years to the unprecedented extent of a trillion dollars a year. this is the currency, the victim of the currency war for ten

years now. i think it is a time we should think about stopping that because this overly strong dollar is choking off exports and a big part of our problem. we need export-led growth and recovery, and the way to get it is through a depreciation of the dollar. >> i would agree with that completely that i would carry that a little further. the period use of the developing countries bodying dollars of crazy goes back to the 97 financial crisis and i blame the international monetary fund because the flow back when i was in grammar school will send ancient history the story was money was supposed to go from rich countries to poor countries, to have flows of capital coming from rich countries like the united states and europe to the developing countries fast-growing in china and india. st middle class economics. higher returns to capital and developing countries the was supposed to be the deal. somehow we forget this.

i used to teach my students walked away with nothing the new accounting identities. well, the trade deficit is equal to the net national savings to read the u.s. as a large trade deficit. why? because we have an overvalued dollar. everything you want, what your agenda on trade we will give it to you times 20. it won't make a difference getting the dollar down by 20 or 40%. it stands to reason. if the dollar is overvalued by 30% it's the same thing as putting a tariff all of our exports for 30% and giving the import subsidy. you're not going to have balanced trade in that. so we need to get the dollar down. if you want to the dollar down to counting identity national savings that means either you have the negative public savings at the budget deficit or - private savings. the housing bubble leads people to spend all of their income because they think they have all this wealth in their house. so, take your pick.

you need to get the trade deficit it doesn't have to be balanced but some are close to zero otherwise we have to have either - private savings or - public sittings no way around that. i agree we should be focused very much on getting the dollar down. >> the qe1, i think it depends on your definition of the toxic. there is no doubt the subprime mortgages crisis turned into a private mortgage crisis. so, to say the fed was purchasing prime guaranteed conforming assets doesn't say much in the way it had never done before it's still buying assets toxic i would say no. less. i but also have some qualms about the idea that we need a recovery that is an export-led recovery. when we talk about we want a

weaker dollar be careful what you ask for to redouble translate pretty quickly into higher commodity prices. if we have higher oil prices as part of this recovery would be better to have a tariff for the federal government to collect that increasing price, use the revenues to then subsidize alternative energy. but just to push for the weaker dollar will result in higher commodity prices and other central banks around the world will then respond to push their currencies lower and will have the bigger of the neighbor competitive devaluation déjà vu of the 1930's as well. mike understanding about the european central bank is that it's trying to purchase the sovereign debt of other countries which is why the bailout's of the big countries of greece and ireland and portugal and spain is occurring

off from the central bank buying their bonds but germany and other countries financing the bailout. the question dealing with a vocal operative systems like the credit system, i will note there is one state in this country that has a state-owned bank in north dakota, the bank of north dakota has been around since 1919. north dakota is the only state consistently in the surplus during the crisis the last two years and has i believe the lowest unemployment rate in the country and the bank of north dakota is doing quite well. californians and others might bring their hands but they are not getting the kind of assistance from washington that they need. there's nothing stopping any state in this country from experimenting this direction. so finally, the thing i want to stress is that instead of the export-led recovery, we need a

recovery that is focused on increasing demand within our own country in putting resources to work on our own country and not being obsessed with pleading this export game. >> we have just a few minutes. i would like to ask joe and dean if you'd like to respond on the export recovery versus the domestic demand. >> i think there's all kind of issues on what we should spend on whether we want to change the tax system which is on a fair and whether we want to have the better infrastructure in this country. but there's all kind of issues which regard worthy and i support a lot of what america does and i don't really want to but all i would say is that although the federal reserve cannot control exactly how the spending would happen, it has the ability all by itself to get any level of spending that you

want, any your name and number of the federal reserve roughly over time, and then the question becomes how do we allocate the spending and tax rates regulations, government programs, better outcomes of it. >> dean and tama? >> in the short term to need domestically led recovery and i think a lot of things to be talked about. there's a lot of things we wanted to which we want to do long term as well. we could use more infrastructure, the country could spend more there's lots of things we could do as well. but in terms of the long term balance is i don't see a story where if you go back to the u.s. as the economy looking at trade deficits five to 6% gdp i'm not worried about the currency war because it ends up being really

scary for the other countries and they don't want to throw money at us the end up losing that story. i'm not terribly worried about that. it's not practical for the u.s. over the long term to have a trade deficit of 546% of gdp pitfalls we have to get back down there and i would trust other countries are not fools they will lose again throwing money in the garbage and for poor countries that. instead of china pay inglis it's bigger of paying their own people to buy their stuff and i think there are people smart enough to figure that one out. >> tim, last word. >> i think you look at the federal reserve and it's not just a matter of some of the policies we are talking about to lead the fed is also a bully pulpit in some ways. the fed chairman has a big impact on all kinds of policies and we saw during the 1990's and afterwards chairman greenspan pushing the agenda of the deregulation and the bush tax cuts and in some ways nothing's

changed and the bully pulpit. ben bernanke came out during publicly at an important time to support the extension of the bush tax cuts. so the people in places of the said matter that dominate the fed and the fed chairman is really responsible to the matters, so one thing that hasn't been discussed here enough is the structure and its lack of diversity to all of the kind of social interests that are impacted by the federal reserve and i think their needs to be a lot more discussion about reforming the fed in a way that it's not just regional federal reserve bank presidents who are accountable to the financial sector, but to have real formal representation of labor and debt and industrial capital the fed. i think their needs to be much more talk about that. unfortunately most of that talk seems to come from the libertarian right, and i think that it needs to be reclaimed by the progressive populist center

as well. >> please join me in thanking our panelists. [applause] morrill from the conference also reserve on consumer financial projections and the new consumer financial protection bureau authority the bureau was created last year as part of the new financial regulatory law we known as the dodd-frank act. this runs just under an hour. >> this bill was on restoring growth in employment and helping us explore these issues we will have been showing the peterson institute for international economics. dean baker of the center for economic policy research and tim chapman -- ayn rand canova of chapman university. we will begin with a presentation by joe gagnon and

then i will introduce the other panelists after the presentation. joe gagnon a senior fellow at the peterson institute is a former visiting assistant director of the division of monetary affairs of the u.s. federal reserve board. prior to that this is the director of international finance and senior economist he has taught at the university of california's business. joe, if you can start hour were discussion of? [applause] >> is there a clicker to turn the page packs >> thanks for having me here, michael. i would like to talk about what the federal reserve can and

should be doing to help restore full employment. let me just start by saying it's true that the federal reserve said its policy rate at zero, the lowest it's ever been and that is bound for reasons i won't go into. but it doesn't mean that it's all the federal reserve can do. the federal reserve monetary policy works and general by tilting the balance between savers and suspenders so in the monterey policy wants to increase spending and get the economy going, they lower the rate of the return to favors which makes it more attractive to borrow and spend when they want to slow the economy down they raise the rate which is it more effective to save and not spend and that's how they get the economy moving the way they want. normally, they use short-term interest rates to do this which they have under their control.

but, as we have learned in the past couple of years, the federal reserve and the federal banks do have an important influence on the long term interest rates and that is what the quantity is easing was all about and in particular you can lower the long-term rates to raise the bond price of that asset, and that showed as far -- that stimulates spending and discourages saving in the normal way. but there's actually other channels the monetary policy can work through equity in principle there is nothing that the bank can't do to raise asset prices or lower the rates of return and encourage spending if it needs to. in the united states there are laws to prevent the federal reserve from buying equities but the bank of japan can and has bought equities.

now you will notice i haven't mentioned the sort of standard textbook bank lending channel. and when we did the first quantitative easing to eke years ago if we knew the banking system is broken and we didn't expect it to work for the banking system. we expected it to work for the other channels. i'm not saying the banking system is in the channels so but it wasn't this time. so we to think about the monetary policy is that there is really no limit to how much -- >> we are sorry but this is not the segment we had planned to bring you, so now we are going to move on to some more from this conference with a panel discussion on the federal reserve past work on consumer financial protections and the new consumer financial protection bureau authority. the bureau was created last year as part of the new financial regulatory law known as the

dodd-frank act. this runs just under an hour. >> -- to help families save and build up assets over time, and in our work we have a longstanding concern about really the proliferation of use of financial products and practices that often targets lower-income families and low-income communities. being able to manage your money effectively is one of the essential components of charting a path towards the economic securities. and this is something that extends up and down the income scale. but really in recent years a bunch of things have gone wrong with our system of delivering financial services. we've got this a ray of high-cost and low-quality products that are out there. they've created a new profit centers for banks and also non-bank actors alike. but it turns out they hurt the rest of us and played a role in

the onset of the great recession and if the housing bubbles well. before the recession took hold of new america we have been talking about the idea of creating financial products safety commission and we got this idea now known as a household name who but before she was a household name the was a concept we thought had a lot of value edwards campaign in this kind of work in the last election and this is a concept that got into the debates about financial reform that led to the dodd-frank bill and created the consumer financial protection bureau which i do think is a fairly significant and meaningful achievement that potentially can remake the financial services landscape. prior they had major responsibilities for protecting consumers. it wasn't their primary concern and they didn't do a very good

job of it. so, it really laid the foundation for the argument and you needed a new call on the beat and that's what we've got now. so we really want to see what's next, how this new agency will rollout. it's going to the house that the fed but will step should be given a lot of economy so many of the financial questions we need to turn to today with this panel what is at stake in the rollout of the csb and how can this ensure it's an effective entity and how can they be addressed by the fed such as the community reinvestment act that still requires major fed attention how can they relate to one another in this new landscape and provide a rule writing and examination and enforcement activities for and what are some of the residual

responsibilities we should expect them to assume in the future. so those are the questions for the panel today. they're going to look at these and others. we have an excellent set of them. donner is the exit of directors the americans for financial security to read this group played a major role in the financial reform debate and helping kind of public discussion and sold in a productive way off. travis plunkett tracks regulatory efforts of the consumer federation of america. a very effective advocate for consumers and one of the most knowledgeable people i know of on a lot of these issues so we're pleased to have him here path and then ed mierzwinski tracks the consumer program of the u.s. park and he's been there since 1989 so he's got a couple of war stories to share probably. another expert that has provided bagram for a lot of reporters and analysts in these

discussions so we're happy to have them. they are going to speak for ten minutes and then i will moderate the discussions that will include all of you. >> thanks for the opportunity to be part of this conversation i was asked to talk about how we got where we are today and why the fed lost its consumers bought and also very briefly but the community reinvestment act. to state what i think is obvious to this group of leased feel you're a consumer protection by the existing bank regulatory agency and the fundamental source of the financial crisis is an economic disaster wall street demand for the loans without regard to whether or not borrowers would be a will to repay them and to feed into the securitization machine created

an explosion but the closer you look the more obvious it is that the consumer protection could and should have turned off the spigot. the more you look the more uzi calls to developer that were ignored. it wouldn't have to get remarkable for site or remarkable toughness or resistance to capture act. in fact it took pretty remarkable blindness and remarkable illogical commitment to the inaction and a high degree of identification in the interest perspective of the institutions the fed was supposed to be regulating. and that's discouraging in some ways but probably encouraging and others in terms of the possibility of doing better in a new regime. as is now widely known the fed had the authority and a sort of had a multiple authorities to times over to act in the effusive and fraudulent lending and it was shown evidence of the

problem and asked to do something about it and failed to do that. one piece of the authority spokesman was rulemaking authority under hopa as amended in 1994 that gave the authority to regulate under deceptive abusive lending practices in both purchased and refinance loans with interest rates that preceded the charge as well as by statute making certain things illegal on a tiny group of the highest cost alone and the fed knew they had this. the report talks about a meeting in cleveland that the governor gramm was out in 2000 or 2001 where folks in the community leader of evidence of the doubling of the foreclosure rate in that city between 1995 and 2000 as a result of abuse of lending so it's one of the places in the front of the wave, and governor gramm was talked about in of the authority and said he thought he -- the things he was hearing about work to be illegal and nothing happened. one story i know of, actually

only one occasion before 2008i am aware of that the fed contemplating using that and then the field to do so and both the narrowness of the place and the failure to do so i think makes for a good picture. the contemplation of around the specific case of the far worse for the homeowners being refinanced out of habitat for humanity and zero interest rate loans in to the high rate refinanced loans people were promised a lower payment by virtue of debt consolidation with credit card, all your debt into this and a teaser interest rate will lower your payment, families who lost their homes with what equity in the zero downpayment habitat for humanity loans were losing their homes. the fed put out a proposal to make a bunch of that illegal and then they withdrew without comment. the one rule that they did also illustrative of the mountain to climb on any the one they did

put out that time under hopa was using their authority to find points and fees. they did decide supreme credit insurance should be defined as a point and the discharge people for insurance would pay off their loans if they died or got sick or lost their jobs it would cost ten or $15,000 it was financed and to the loan up front and on which points there's a huge equity serving device. so after fannie and freddie decided they wouldn't buy loans with north carolina essentially all told them, california in a major battle is essentially out lot when they were sort of almost gone the fed then acted in that one way. so hopa was not the only place in which they had the authority to act to curb the sub prime lending they also could have acted under their equal credit opportunity act authority and here just as a picture of what

was presented to them and not acted on in 2000 the treasury put out a report which was itself the result of produces and organizing and pressure and among the conclusions of the report or the sub primm loans five times more likely in black neighborhoods in white neighborhoods and that homeowners and high-income black neighborhoods were twice as likely as homeowners and low-income white neighborhoods to get supply loans. and they concluded including the analysis clearly demonstrates the need for the timely concerted federal action in this area to expand access to prime lending in these communities and protect subprimal or worse from the dangers of predatory lending. the fed had authority under these equal the opportunity that nothing happened. in addition the fed had supervisory authority under the nonbank mortgage lenders owned by hinkle companies but not directly or indirectly by thrift and this included some of the biggest and most dangerous of prime and alt-a lenders including the finance

countrywide and wells fargo financial. on that group of firms the federal reserve took only one public and for some action for poor underwriting between 2003 to 2007. just to sort of last category in a way that the fed having many economists at least study the problem it was a notable feature of my personal experience, and i know many people experience when evidence of abuse of lending was presented the answer was thrown back of the consumer advocates in the residence where they show us the data that is just anecdotal we can't act without more data than that so there to rather than taking action, they set an impossible bar for the public. we all know the consequences. the market exploded and wall street didn't just tolerate risky mortgages in the absence of action permited and recalled them, so the prime and the

profits at country wide work to% for subprime mortgages before for the mortgages and by 2006 the supply alt-a and home-equity lending or more generally had reached 48% of total lending volume a year 44% of the loans were not full document and nearly 25% of all borrowers are taking an interest loans. it's no wonder the can be disastrous. there is now just as there was in 2006 more than $10 trillion of mortgage debt outstanding in the u.s. and we will put a perspective on that number because i didn't know what it meant to lead the u.s. bond market is like $35 trillion. it is a very big market but that is not the only place the fed failed to take action or its failure to take action has consequences for the consumers'

pocketbooks and therefore for the economy as a whole overdraft to take one other example. the regulators including the fed identified the problem some eight to ten years ago. and in 2005 to put out goodbye vince including many good ideas like requiring too often and limiting its kafta checks and debit cards but they called it best practices and they made it explicit they were not going to enforce it, so they put it out but many of the practices they recommended again had actually only gotten more frequent since then. it wasn't until congress started to act and post the fed and other regulators have taken some action to get a sense of the size of the problem on overdraft in 2009 consumers mostly low to moderate incomes and 24 million on fees and that is on the cash advance of about 23 --

24 billion on fees on the cash advances and about 21 billion from the perspective on that number total federal spending for the food stamp program in 2009 was a little more than twice that. real money. the example on the credit cards, on the prepaid cards which are going to be a growing source for the low-income people, bank fees, paid a lending, 20 billion a year in the auto dealer markups. why? some combination of an ideological commitment to not regulating former chairman greenspan explained he didn't use his authority under snap because he didn't make determinations and unreceptive the year and market forces would take care of it. identification with the interest rate not focusing on consumer protection making a subservient to bigger pieces of the mission and protecting the banking system so that this was important in macroeconomics and banks are the primary focus on

the clients and the failure to allocate resources to the consumer protection split responsibility and competing responsibility for things and the way in which the new regime is designed to take that on. let me say one other thing about the cra and then i will turn it over. and i think this sort of perspective on the path of the community reinvestment act from the consumer community groups is on the one hand there's been tremendous success attracting trillions of dollars and investment to communities that wouldn't have happened otherwise and on the other hand this up prime mortgage crisis itself is an evidence to the failure to the full control that it should have and over time the problems it gotten worse and those include problems that probably require a statutory change and more assets are not in the institution and a bunch of regulatory problems likely to inflation, 99% of the biggest banks getting satisfactory ratings, says it areas no longer

making sense in the agencies including the fed not taken seriously the responsibility to enforce the law and because the enforcement is so fragile the cra is a fundamental problem with what you're going forward it has any meaning at all. [applause] >> hi everybody. it's good to be backend i want to thank read and new america for their relentless and their long-term focus on the need for financial reform and in this case the need for the increased consumer protection and the financial arena. so, lisa focused more less on the path of the mistakes made derogatory areas that the fed led to the creation of a new consumer financial protection bureau. how they will interact with the sec and other regulators and then it will talk about the

future with responsibility the fed has left and the consumer protection and fair lending area what we can expect from them and how we can affect them. so on and the cftc, the three underlying causes that lisa delude to are addressed in the creation of this new agency. first as she mentioned repeatedly consumer protection till three the cracks. it wasn't a priority for the seven federal agencies that had some jurisdiction. second, she didn't mention this so much but it comes up constantly the fed and particularly other regulators subordinated consumer protection to a very narrow poorly defined definition of safety and soundness. in other words profitability seemed to be the top priority of the financial institutions they were regulating other than protecting consumers, and we know a number of the practices lisa detailed were exceedingly possible. but not good for consumers and

not good for the financial institutions or the economy. third major factor, and this was an ideological bias with other provincial regulators there was a conflict of interest. they were not independent of the institutions they regulated. with other regulators we saw the charter jumping to avoid tough regulations and we saw assessments of the industry being used to take funding for the agency and go elsewhere. but the fed does lisa mentioned was an ideological bias against regulation and an over focus on macroeconomics and ignoring the consumer protection. what we have under dodd-frank? given those lessons we have a single agency with authority that has been taken away from the seven agencies. over 20 existing if protection and fair lending all these to

become law and some new authority. most of it is not new by the way, it is some new authority curved unfair abusive and deceptive practices. we also have massive new authority over large long banks and some specific categories of non-banks that could be any side. mortgage lenders, pay lenders. so the goal is to regulate lesson learned all of these players similarly. it doesn't matter whether you are a thrift or small institution regulated by the fed or small institution regulated by the fdic. the goal was one standard and hopefully a similar approach to the enforcement supervision also as i will mention in a minute, supervision and enforcement will be done by the provincial

regulators when it comes to some smaller institutions. another big lesson learned, the agency will be accountable. so, single agency, consumer financial protection, single director by the way. lots of checks and balances on the director but single measure, single agency, symbol director. if there are mistakes in either direction and if they ignore consumer protection problems the fed did or if they overreached and in hinge on access to credit in a way that is not constructive, or not a desirable, they are accountable. it's going to be very clear who made the mistake to read and i mention checks and balances. this single agency led by a single director has some unprecedented checks on their power. i will just take off three that are huge. first, only example in the

federal law of any agency being subjected to a veto by other agencies if they overreached. second, they have a cap on the funding. in many ways believe it or not it is the model for the cftc doesn't have a cap on its funding. third, they have to go through a very long and compared to most other agencies very time consuming rulemaking process. for example the have to convene panels before ever issuing the rule to look at the impact of the work on small businesses. so small businesses and small banks will get a sneak peak before the consumers ever see it. so, we have an agency that is accountable and the goal is also independent. that is why their funding is not appropriate. the funding as was mentioned, the agency will be housed within the federal reserve system. it has to walk off a percentage of total operating expenses every year for funding.

so it's not appropriated. the fed has the statutory prohibition on what it can do. it basically can't interfere on any decision in any way. once again, the model here similar prohibition on the treasury interfering on the occ. okay. what do they have to do in terms of working with the fed? there are many provisions in dodd-frank that means the provincial regulators and the csb have to work together. first and foremost we should mention that smaller institutions with 10 billion few assets are carved out completely from the agency authority to supervise, check the books at the bank's and also enforce the law. so, that in and of itself requires coordination. they can't examine the

institutions, the can to initiate enforcement measures. they must coordinate the supervisory activities with provincial and state regulators and they have to consult on examination schedules and reporting requirements. the cfpb can ride along with these provincial regulators. let's say the fed when it examines its institutions on what they call the sampling basis that i think means they will be able to pick out a representative sample of examinations and ride along. the flow of documents has to go both ways. so the cfpb has to share with the other regulators. its examination of the large banks, and the other regulators have to share their data and paperwork under examination to the small banks. if they don't enforce the law properly thus efp de connect and notify the provincial regulator that they have reason to believe that a smaller bank or credit

union has engaged in a violation of the law and must provide a written response. ultimately the bottom line, they can't enforce it but with a candor is to call attention publicly to the lack of enforcement and we think that will be a significant factor getting the regulators to do the right thing. it goes the other way, too. if they fail to act, then any of their regulator has authority under the statute can recommend that the cfpb initiate an enforcement proceeding if they don't do so within 120 days, in this case the agency can act and they can go out and enforce and then there's a number of consultation requirements under the statute so if you see a picture emerging. these are not -- we are going to force them to talk to read our

opinion, consumer protection has to be -- we need a twin peaks system which is what we have now. the regulation provincial regulation, but both in practice the other and we need to talk frequently this will be culbert and cooperative which we didn't always see previously. so the final thing to say before i turn it over to ed is that this isn't written in her dark black inks. there is this whole arrangement. there's a very significant attempt by republicans in both houses to renegotiate dodd-frank last week senator shelby and 43 other senate republicans said that they would not confirm any director for the cfpb to read this is the only position that must be nominated by the president and confirmed by the senate. they wouldn't confirm any

person, doesn't matter who until substantial changes are made to the funding and the jurisdiction of the cfpb. in particular, they want an appropriations process so unlike any other bank regulator they want to appropriate money to the cfpb despite their focus on, you know, the debt and the deficits. second, they want a commission of five people listed as a single director. third they want federal banking regulators the folks who do so well in the previous crisis it better have more authority under the final rule issued by the cfpb. and rejected because they would substantially undermine the independent accountability of the agent. thank you. [applause]

[applause] >> thank you. ayaan ed mierzwinski. i want to thank the new american foundation for the opportunity today. i'm the consumer program director and said the u.s. public interest research group and the state based non-profit, non-partisan public interest advocacy groups we are on the web at usprg.org and founding members as the cfa and the nation's leading waivers seniors and other americans for financial reform and is the coalition that was formed to help pass the consumer side to wall street reform and we think in the creation of the consumer financial protection bureau among many other victories in the law achieved a great deal by getting a call on the beat for consumers. for the first time in federal law we actually do have a

federal financial agencies with only one job, protecting consumers, and now has travis pointed out, we are trying to protect the cfpb before it starts work on july 21st. i was asked to talk a little bit about the future of consumer protection at the fed itself. will of course the cfpb will be housed in the fed and that is probably the most important role the fed will continue to have, but as we pointed out, the cfpb will be in the fed but not under the fed. although the cfpb is under the financial stability oversight council it's not under the board of governors and it's set by congress as a transfer from the fed as 12% after the third year of the fed budget but it's not under the fed. but the festival's other important consumer protection responsibilities that it's going to need to carry out and travis

and lisa mentioned some of the most important but since reed asked me to tell at least one war story i will tell one from my first and to washington in 89i can with of the savings and loan bailout cleanup and as a part of that i work on a number of issues related to both at the law that was passed in 1989 and the federal deposit insurance act of 1991 and after that i was invited by a senior fed officials to come over and have coffee with him. and it turned out it was like a little job interview not to go to work for the fed but to see whether i could be invited to be on the fed so-called consumer excise for counsel. so i did a term, three year term lead for good behavior at the end of it i guess on this so-called consumer advisory council. i just i bring it up as a perspective of the way that the fed's culture is not a consumer

culture. now, i grant that the 1976 legislation creating the council did say it was supposed to be an advisory board of both consumers and creditors. but that meant consumers didn't really have a voice. .. consumer groups, worked for various other operations, journalists, whatever. but it was just difficult to get anything done at the consumer advisory council. looking back, i think -- and i know members who are still on

it. it still exists. it was an example of the fact that the fed had a safety and soundness culture, banking culture. as never had a consumer culture. for better or worse i believe in its keeping this cac. as lisa mentioned, one of the other important fights that was not brought in wall street reform is the fight over expanding and improving the community reinvestment act and moving the community reinvestment act jurisdiction over to the new cfpd which remains with the fed and the other banking regulators. there was political reasons that the champions of wall street performs chose not to have the fight over the sea are a. in many ways i think the sea are a is a very important piece of consumer protection left with the fed. as lisa reticulated, the keen did reinvestment act simply requires the banks make loans and provides services in the communities where they take deposits.

now, enforcement of this law is in two ways. first, it is in the form of public report cards. now, public report cards are simply transparent. they are really the only part of bank examinations that are public in any meaningful way. but, as lisa said, there has been a problem with great inflation. almost everybody gets an a. to get in need to improve you have to be bad. the sea are a offers potential to be improved itself, but the real reason i think it is important that the fed is keeping it and maybe they will do a better job, the other part of the enforcement of the cra is when a bank wants to merge with another bank, when a bank wants touch change its structure. there are certain requirements for acra review. that see are a review is really

the only place where the fed is forced, absolutely forced by law to engage the public because if the community groups makes a.b. full complaint about the failure of a bank to comply with its cra responsibilities the fed has to take it seriously in the merger process, hold a public hearing, listen to the public. i think that they can do a much better job. i think the law itself is a very unique law because it has resulted in trillions of dollars in investments being made in areas that might otherwise not have been made, but it provides an opportunity to pierce through the walls of the fed culture. i don't know if anyone here has ever been to the fed, whether here in deasy or any of the regional banks. granted, there is a lot of security everyplace ago in washington for good reason, but the fed is kind of set up like a

feudal castle out of the planes. these buildings are gigantic and very imposing. i am not sure the public ever goes inside nt of them to have any of them or would want to. it is something about the culture that needs to change. for better or worse they are keeping authority over not only their 800 or so banks that our member banks, largely smaller institutions, but they are also, obviously because of their oversight of the bank holding company, any time there is a merger there is an opportunity for the fed to take a good look at what the public wants and what consumers want. third, as travis' mentioned, the fed retains supervisory and enforcement authority over those 800 banks. i lifted up yesterday. they actually have 819 member

banks. about 19 or 20 of them are bigger than $10 billion. the rest of them are smaller. it is very important that there be an opportunity for culture relationships between this cfpd and the fed and other bureaus as they continue to share that authority. the fed retains authority over something called interchange. the swipe if the amendment. this is a very interesting one that i could talk for hours about, but there is a market failure in the bank card business that has allowed visa and mastercard to impose their will on merchants and collect $0.2 out of every plastic dollar on average whenever you go to the store, are the pomp. because of the contractual relationship between the banks, networks, and merchants the merchants are forced to pass that cost along to all of their

customers, including their arguably lower income cash customers. there is a tremendous reverse subsidy the affluent reward cards owners. it is an ugly market failure. the fed is required to take a piece of that debit card and come up with a rule that makes their pricing reasonable and proportional. it's sort of box open a problem that the merchants were not able to bust up and threw the antitrust laws. we will have to see what happens. the fed is under tremendous heat from both sides as is congress. there are a couple of small centers that could have consumer protection in their work around the country. the philly fed has a payment card research center. the boston fed has some expertise in behavioral economics. i guess my main closing point would be that if we are going to change the culture a degree going to have to rely on a lot of transfer from the cfpd to

maybe get to these operations that they are running to be more consumer facing, to think more about aligning the interests of consumers and regulated entities. i think that those of you who have been over to the cftc, i look at it like a new score. the culture that is being developed over there by professor warren and her staff. they are excited, wanting to work with people, creating a new thing. they have a vision. i hope some of that trickles back because of all of the relationships that travis' described that the bureau is going to have to have with the fed. i also think it is important that the president has nominated and approved some new fed governors, particularly a consumer protection background and can change the culture from the top. in the end the fed needs culture change at all levels.

whether it is being pushed by consumers through the cra challenges, whether it is being pushed by the cfpd relationships whether it is being pushed by new governors there is a lot of work that needs to be done to make the federal reserve think about consumers. thank you very much. [applause] [applause] >> thank you. we are going to jump right into questions. i note that there is a theme of accountability from both panels in different ways. it shows how much more can be done for the accountability structures. they are really from another era and the nature of financial services and has changed so much. it is not about lending your community or region because the organization of banks, operating on a larger area. we can explore that in questions. let's start here.

[inaudible question] >> i know from recent reports the racial disparities are reemerging. there is an increase in lending in black and latino communities, racial despair, the declination dated shows that whites are increasingly accepting, in placing -- increasingly rejected. i would like to know how you guys can interact with the civil rights division of the justice department, head of hbo and other civil rights enforcement agencies to address these and particularly as we talk more and more about the need for qualified mortgage is having a 20 percent down payment. we are going to make it more difficult for low-income people to get loans. an emerging problem that runs

the risk of being -- >> thank you. >> thank you. that is a very important set of questions and would be ironic if it was a tragic for the lesson learned from this round of by the financial crisis. let's return to lending standards that penalize low wealth, people without wealth to more people in minority communities rather than trying to care for those loans that people cannot repay. i think there is a lot that the consumer bureau can do in this area, partially because it has equal credit enforcement responsibilities, partially because it has the holistic look at the market, both the right and enforcer and supervisor and looking across the range of products. it makes it better situated and

able to save we need to look both at the absence of good products and the presence of bad products. part of the mission that consumers have is very connected to what you raise. it is a big task, and there will be a lot of work to do. i think another piece that plays into that and we certainly have been watching closely is the mandated consumer facing complaint system that the cfpb is required to maintain in response to. you know, existing regulators have been dismal failures and a bunch of ways. they don't work and so far. nobody has ever heard of the agency. a complaints system that people know about and that is transparent and that collects information that has

relationships with individual consumers and folks pay edison to patterns in markets that they serve as the potential to provide information that then can be followed upon in ways that get ahead of the problem. >> i will just mention that cfa shares your alarm, as do many of the public interest groups with the proposed down payment requirements you mentioned, civil rights communities as well that is the wrong lesson to be learned. the issue is sustainability and booby trap features, not stopping the low wealth and families from bringing on sustainable loans and paying them off over time. numbers show that is happening, even in the midst of the lending crisis. >> one more thing that people may not be aware of is that the cfpd is gaining authority over credit bureaus.

full authority to supervise and examine that the ftc has never had. there has always been an issue of disparity and credit scoring among people of color versus whites. we are hoping that the new relationship, the new ability to a book under the hood that the credit bureaus will help to investigate some of these issues a little bit further. >> right here. >> questions? >> president and international investor. first, quick what comment. it shakes our confidence to hear that the sec might be the model. >> structurally, that's it. in terms of independent. >> it is also a concern to think that the director, him or herself, would be so important in really making things public. we don't feel there is enough action being taken.

looking decades into the future or however for you want to look, things can be politicized. but the heart of my question is simply this. i have not heard any discussion, and we have had a hard time understanding. if there is anything going forward that would curtail we think what is at the heart of this problem which is the profit commission structure here from the mortgage broker to the loan officer with in the bank to the wall street derivatives banker, all of them were passing along the risk while, of course, accumulating commissions and profit. so, is there anything within this act that will try to address that issue or at least balance the risk-reward ratio in that process? >> one piece of the answer is that there is, in fact, a

specific prohibition on payment of yield spread premiums to brokers and direct employees. the fed already -- and a prohibition on steering. >> spread premiums when you get rewarded. >> yes. the kickback for putting borrowers in a riskier or higher costs alone than the best that they could have qualified for. it more expensive, less affordable loans. so, have they ruled out premiums it came out on track before the new law passed. they will presumably return to that and reread that with the statutory language now in place. >> and then i am certain you are familiar with the other titles of the act dealing with derivatives, credit rating agencies except to. if i recall correctly there is

one provision in tettleton which set up the siepi be that allows them to look at compensation in terms of incentives, constance it -- compensation to brokers, not the overall amount but the various incentives to structure of the composition. so there is some authority there as well. >> also speaking of compensation, another part, section 953 be simply requires all public companies to disclose the ratio between their ceo pay and their median employee pay. there is a bill to repeal the provision. nobody wants to disclose how much money these guys make. >> one other thing, following up on travises. looking at compensation, i think one of the things that has been interesting for us is to think about the transparency and product in a deeper way than just disclosure. you can interpret transparency.

have to have small print where you can interpret it to mean you have to have a product that is not designed to be deceptive in its structure and pricing and the way it is sold. questions of how incentives are structured at every level of the institution. >> you brought up the interchange fee issue and gave it a little quick summary. the fed is making this ruling because they were instructed to by the legislation. if they were not instructed to, going forward where were they have -- is this an issue that would have emerged? how would it have gotten their attention? what other processes that give them a mandate to take the consumer interest into perspective? >> well, the dog frank law including the slight free -- swipe see amendments and the

number of consumer economists as well as the merchants, but basically we ended up in a situation where the banks it to cents out of every plastic dollar. again, the customers at the store and at the pump pay for that. banks refuse to negotiate, banks refuse to make it transparent. it has been a problem. so the fed was ordered to come up with the rule that sets are reasonable and proportional price. the rule is limited. the merchants bid of only part of the problem. it extends from credit cards to debit cards which are atm cards that can be used anywhere, and prepaid cards which all have a certain amount of entertained on them. the only part that is affected by dodd-frank is dead into change. there is at two-tiered system, smaller institutions, the same smaller ones that are not under

the cfpb are not covered by this rule. they can have higher interchange. the second part is that the institutions have to have entertains that is reasonable and proportionate. prepaid cards. small banks are exempt. the current average into change according to the fed will the minister will make the proposal around $0.44 per transaction. the rule that came out, the proposed rule of 7-$0.12. they went back to the drawing board to complete the final rule. most people think they are going to come in of little bit or even much more than that in the final rule, but a lot less than 44. the question is what would they -- how are they supposed to consumer -- consider consumer issues. they're done focus groups and their normal rule making. but the great, great majority -- and they have allowed us to come in and meet with them, consumer groups, and pitch and meet with

them as many industry groups. i don't know what the fed would have done if they were not ordered to do this. >> in the first panel there was this mention of their is room for more oversight where congress gets involved and says this is an issue. that is what happened. we are not sure whether they will end up in the right place, but i guess i am still concerned going forward about when issues are identified in the market how it rises to the level. >> you know, one of the matter. maybe it was on the previous panel with the next panel, congress had of left-right coalition led by ron paul and bernie sanders, kind of the odd couple that increased transparency and audit oversight. in the interim why the law has been being enacted the fed has been fighting tooth and nail against the freedom of information act requests from noted journalism organizations such as bloomberg which led the fight to open up information about who got all of the

injections of cash from too big to fail and of the provisions that the fed had following the collapse. so the culture is not to do anything unless ordered to do it. that is why i think congress is important. the president making good nominations is important. events like this and groups such as ours are important. >> we will ask about that at the next press conference. >> the national reinvestments coalition. i wanted to thank and reinforce what you said about cr8. in particular building on what ed said, it is a unique opportunity for the public to comment on the activities in banks, not adjusted merger time, but also when they go through their cra exams. i think it is actually an underutilized accountability

mechanism with some room. because even within the regulators, including the other regulators responsible, there has been a shift away from taking those exams seriously, and i think that is really -- but often the regulators are going through the process right now to examine the regulatory changes. if anybody would like to be involved in that, i'm happy to talk to you about it. my question is, even though this cfpd did not give enforcement power over cra, what opportunities to you think there are both in terms of cra and in terms of creating a consumer protection culture at the fed for the c-span.org to positively influence the fed? you can point to a few things. greg mentioned the home mortgage disclosure act. i believe the c-span.org gets the power to release that they command at think there are ways in which they could make that more useful or perhaps draw

attention to some of the issues that smaller institutions. are there ways for the cfpb to empower consumers to comment on cra exams or other thought you may have. >> improving cra, ideas for strengthening and making an accountability mechanism. >> well, the cfpb to positively influence. >> abcaeight. thanks. >> i will start. a good question because i know we're running out of time. the big banks are required to have alone investment and service test under the cfpb. it incorporates a lot of features of deposit accounts and basic banking opportunities that people have. why are there so many banks per capita in the affluent districts? why are there so few banks per capita in other places? why are the offerings in the affluent districts better than the offerings and other places? at think the cfpb could help to look at the service test in greater detail.

too many people get aids. i cannot believe it. it is shocking. >> one other thing to mention which has not come up at all this huge the important. the cfpb has a very large research mission under the statute. so, we could sit here for hours, and, i think, play out a number of research projects relevant to their jurisdiction. the fair lending laws. if done properly they would have an impact on analysis done by the fed and others related to that cra. one thing is to make sure that the research that is done and it will be done on two separate tracks by the agency, you know, proper demographic analysis is done on every aspect of what they do. >> right. okay. well, i think we are going to shift gears here and thank the panel for their contributions. [applause] [applause] we will take a 2-minute set up

break for the next panel. thank you. [inaudible conversations] [inaudible conversations] [inaudible conversations] >> more from this conference with the panel discussion on the impact of the new financial regulatory law known as the dodd-frank act on the federal reserve economic and monetary policy. the panelists include the former deputy comptroller of the currency. this is an hour. >> people join as for the third and final panel. the president and ceo of better markets incorporated.

the implementation of .. and financial regulations. chief counsel and senior adviser. a co-chair of the land risk adviser. she joined the sec as deputy comptroller. she built the first consumer complaints department's leading the examination and enforcement process for consumers. josh bin is with the economic policy institute, the author of failure by design and has published numerous articles an academic and popular venues on monetary policy and unemployment. with that, i will pass it off. >> hi, everybody. the one thing that michael did not mention is one of the things

we try to do is combined public experience with past experience. for 18 years i specialize in financial security markets and is used both in the european theater and the united states. then combine that with just shy of ten years' experience and senior staff positions in washington. that is the staff we are trying to build, better markets and where we're trying to promote public interests and financial markets because it seems to me and us that the private sector is well represented in the financial markets and the public sector is not. with that, let me quickly turn to the future of the fed and financial reform. i am sure you noticed last week there was a route in the financial markets and there is a lesson for all of us. somewhat reminiscent. the rush for the exits. when investors began to think their is a significant risk to their investment they will act and act fast. they're not going to be the last ones holding on to something

they can't sell or which is worthless and nonetheless have to carry on the books. this is magnified. overheated market. survival or bankruptcy. the process of selling starts, it starts to run for the exits. builds on itself gaining momentum. of course strategic investments pile in by shorting and bidding up the credit defaults swaps. as the heard moves it does not stay in a rational path that runs into nearby areas of broadening the route which feeds on itself and runs it even more. first, to a very similar investments and to all sorts of investments getting sold into a declining market and a fire sale start. margin calls increased, risk aversion increases to what your takes over, hoarding cash begins

and the debt spiral momentum continues. this is likely will face the fed in its fellow regulators next time. if not just like last time than pretty similar. this debt spiral likely starting with one or two institutions and spreading to others is probably but the fed and its fellow regulators will be confronted with. what they must stop next time without massive bailout and without moving in conceivably large losses from private financial institutions onto the backs of the public again. ..

financial institutions that are too big to fail. merely saying they are too big to fail is simply inadequate. the problem is much bigger. first, more institutions now are even bigger than before the financial crisis in the fall of the way. second, rather than assuming is an implicit government asked up for too big to fail, doesn't express government guaranteed that too big to fail financially to two should simply will not be allowed to fail. these entities are systemically important financial and nonfinancial institutions. so kurds that these. i will just call them cities. let's be honest. these institutions are the new gics. there invites government-sponsored enterprises backed by the federal government and u.s. taxpayers. movies recently rated such

institutions hire expressly for that purpose because of the federal government backside. before talking about regulation, but may talk about the limitations put on the fed to act in emergencies. the fed had in hot fat emergency authority to act in financial crises under what is called section 83. the dodd-frank act greatly curtailed emergency authority particular relating to non-things. first and most importantly, the fed can no longer provide lending assistance to a single specific term unless it is part of a broad base program. think bear stearns neg billets. that is not possible in the future as currently constructed. and the emergence muster broad-based eligibility. they must adopt policies and procedures that collateral any emergency loans is sufficient to protect taxpayers from us. hearts to to believe they put that in law. any such program is terminated

in a timely and orderly basis. they also assign a land of both value to all corruptible or whether the loan is secured and prohibits firing from any such program and facilities by borrowers that are insolvent. again, ask yourself. after doing all of that but before establishing broad-based emergency programs, said his required to obtain secretary's approval. that is not all. this is an emergency program. it got policies and procedures. now within seven days the fed has to report to the congress that the broad-based program set up the program. if it is required to disclose an ongoing basis additional information and the gao has authority audits the programs. you can see the fed is just going to be thrilled to use its part team, three authority. these are unbelievable dramatic changes.

sensate i talked about these in the past, i disagree with dennis. i don't think those are initially set rings. i am not making a value judgment to whether it's good or bad, but many of the key tools and the last crisis are now severely limited. one thing we know for sure is next time it will be different because of those limitations. financial reform i doesn't only limit the use of the emergency powers. as i said earlier it also given the wide-ranging authority regarding systemic risk and primary regulatory authorities. focusing on the fed has sacrificed a few details for simplicity. any bank holding company with $50 billion more in consolidated assets are deemed automatically subject to enhance standards. how many could there be according to the last posting on its 36 depending how you count

them, a few more. they're not the only one subject to credit regulation by the fed. financial institutions with less than 50 million will be designated by the financial stability oversight council, which has authority to designate nonbank financial companies that systemically significant. i matter how a 50 it's the label and yet to be announced standards. while the fed -- whether many regulative positions, they are underpinned by the obligation that the merle haggard and discipline. this is the key to ending today to fail in the guarantees that used to be an implicit putting up exposé. how is the fed going to do this? they have increased capital, liquidity requirements, resolution plants, credit exposure, basically a whole new outfit or requirements that they may put into place. resolution plans they must be

approved by the fed and the fdic that must work closely and collaboratively, which i think the fellow panelists addressed in a. they must be detailing demonstrating these institutions are resolvable if the experience financial distress. i want to put a plug-in for somebody you don't get paid for in the financial reform project put out a report this morning about resolution authority. it will captures the need of it has to be done to be effective. when you read the key question underlying all of this is will the regulators take tough actions and will the politicians allow them to do so. sometimes those questions answer themselves. and of course they are stress tester steps to disclose. public disclosure in the same sentence is an oxymoron. the fed is required to publish the results of the stress test.

the first round did a pretty good job. the second round was trying to figure out to a buddy pass the criteria. but that also has disclosed detailed lending programs and details the discount window after two years. but the real key here for the fed is that it may prescribe periodic public by systemically supporting market evaluation capital adequacy and capabilities. these provisions go directly to whether or not they will be market discipline regarding companies. however, doing this on effectively will require the fed to publicly disclose information for the market to understand true conditions of his systemically significant entity. this is going to require tremendous institutional and cultural changes. the fed has a long history in nothing, whether speaking or not. that is most recently demonstrated at the chairman's press conference.

those states have to win. some of the fed noted, understand that and are serious, but one of the questions upon which financial reform depends. the recent and ongoing actions with nondisclosure to congress, media and public don't bode well. we all know soon enough on before the crisis have been, does the market have information or not to impose market discipline on sifis. this is not valued borrowing costs reflect their operations. is there start punished for risky activities? does america have any idea what the activities are? or does the market believe that sifis will be backed by the taxpayer? these are adjectives that will be knowable within the next two years, almost regardless of which particular action the fed and other regulators take. we are going to know because the market will tell a space on borrowing cost, rating agency remains and other mechanisms -- market mechanisms whether this discipline on petitions. if sifis still favorable

ratings than funding into just due the fact they are the new gics, watch out. another crisis is coming in the u.s. taxpayer is going to be put on the hook again if that the keys. [applause] >> imho in sudbury,, cochair tree-lined risk advisors. mike said as deputy comptroller of the currency back when most of these laws for neo. i was also on the senate forewent cra passed. cosponsored by my boss and i devised a great great many banks also on how to comply with these laws have done pro bono work for community and consumer groups. i try to look at issues from all the angles. yogi berra said you have to be

careful if you don't know where you're going because you might not get there. i think that a crisis at the time we've been through and are still going here cause for a lot of rethinking about missions. and for the fed is has been said by some of the panelists earlier today, there has been a dominant nation throughout its history of focusing on monetary policy in the larger economy inflation and unemployment and they left their mission focused on bank regulation. i think that a lesson we need to take from what we are going to do now is that it seems like the left their mission turned out to be the greater one. we can debate whether a good job is being done in a bad job is being done on monetary policy is. seems that played a role in the speculative bubble that led to the flat of the housing market,

but there's really no question there is both a market failure in the very significant regulatory failure that led us into a terrible situation. the regulatory failure was both on the safety and soundness sign in on the consumer protection site is lisa said earlier. if we have a hierarchy of fed traditional priorities and it is started, as i said earlier with inflation and unemployment is an afterthought to that and then safety and soundness regulation is an afterthought to that and consumer protection at the bottom of the hierarchy, the fact is that had we had active consumer protection really driving, really at the table with the thought process about the risk that we are developing in the system, it is one of the ways the crisis could have been averted here we look at a lot of

things that could have changed history. that is one of them. they speak to a lot of banking groups and i like to say to them , consumer appliance officers could have saved the world from economic meltdown. if they had been at the table arguing against unfair and a set give acts and practices, which that law has been around for what -- 40 or years and has been taking on more and more power as we have gone along. so i want to come with that as a backdrop make three-point. the first is i am glad that dennis talked about the systemic risk issue because i think one of the crucial things we need to be thinking about is the fact that the systemic risks in front of us are unlike anything we have ever seen before and are going to be incredibly daunting. it is not just to big to fail although that's a huge piece of the.

it is also the overall task of understanding these market as they evolve so rapidly. i know a lot of people who have been responsible at large banks and financial companies for managing credit risk. you can talk to those people. they thought they had these risk managed. why did they think that the managed? because the model tells them that they did. they thought they had read it in any know the whole story. but the models are backward looking in the events that occurred were not like anything we have faced before. and this is going to be the world we are going to be in, particularly because of changes in technology and globalization. to knowledge he is going to change completely how consumers as well as businesses access

financial services. are going to have more and more financial services that are simply bypassing the payment system altogether, bypassing traditional banking system and the risks are going to be embedded in all that are going to be unlike anything we've seen before. so one lesson is a fad -- especially the fed are going to have to put tremendous resources in supervision of the system to understand what the risks are for everyone. the second point i want to make is the fed must play a leadership role and consumer protection. now, i have worked for more decades than i'd like to admit. i give you a hint already in the consumer protection arena enter my whole career, these issues have been a side issue in banking. today we have elizabeth warren on the david letterman show. she is a regular on the jon

stewart show. the entire situation has changed. these issues have gone from being boring arcane things on the inside pages on the bank publications to being front pages top headlines and even into the pop-culture. you probably know there is a rap song about elizabeth and people are urging her to run for senate. so the amount of public attention to these consumer issues in banking is unlike anything we've ever seen in our lifetime. it is a tremendous opportunity to do better than it's ever been done before with this problem of people getting into financial situations that they can't manage and are terribly harmed by which has been with us as long as money has been. we have an opportunity to leap forward today and the fed, let's

face it, is going to continue to be the hundred pound gorilla in the financial regulatory sect there. the cfp b. is going to have incredible power and we shall see exactly where that goes. at this point, the fed is the big guy on the block and what he cares about, what it does dominates to a tremendous extent the dialogue, the interest, the people at the top of the hierarchy are talking about. and they are going to need to continue to be active and consumer protection. one of the things that worry for me is the creation of the new bureau as in addition to creating opportunity presents the risk of a tremendous polarization in these issues and which are going to have consumer protection over here and safety

and soundness over here and it's going to feed the notion, which i for one have thought my whole career that what is good for the consumer is bad for process is that for safety and soundness is somehow harmful to the industry and there's a dichotomy between those two things. as someone said earlier in one of the other panels, short-term, there are times when profits are higher. if they're any less than we should've learned from what we've just been through, it's that there really is a tight convergence of interests between the consumer at the end of the day and safety and soundness. if the agency is going to a polarized dynamic, which they really could. i mean, there plenty of signs that those already in evidence. then we're going to end up with the prudential regulator is backing away to consumer

protection and fighting against the reforms that the bureau is going to be pushing for not going to be important. others even things like career passing in the prudential agencies. the examiners are going to top out at the 10 billion institution side and enable you to go on to larger institutions if they are in the consumer protection career path. that is going to make it harder to get your best consumer examiners in those agencies to work in the specialty field. there's a lot of work that needs to be done on bringing agencies together. they should be doing joint policy, joint training, exam procedures from a tremendous amount of work to bring them

together. thirdly, i would like to come to the issue that was raised before on cra and its relationship to these other agencies. for better or worse under a lot of political compromise, and the dog frank -- dodd-frank bill creates regulatory authority around the laws that are responsible that are dealing with people who are disadvantaged, might be discriminated against and can be abused. and under dodd-frank come to equal opportunity act and there has a which overlaps ucla tremendously is staying at hud. the cra is staying with the fed and the other bank regulators and the you got the authority unfair, deceptive and abusive acts will be led by the cfp b.

you can picture a night there in which there is no coordination among these areas. the advent, and the addition by a dodd-frank by the abuses to the sign-up focusing on vulnerable customers and how to protect them is going to be in the middle of these issues that should be looked at on the fair housing act and cra. and if they do do a really good job of courtney admit, we have potential to see a very suboptimal effort. let me put it that way. these laws need to be deeply rethought. the cra issues are in a whole new world and they need a fresh approach. [applause]

>> how come i'm josh couldn't come an economist at the economic policy institute in washington d.c. i'd like to thank new america for inviting me to talk today. my brief was sort of future the federal reserve, what should be kind of a progressive stance on what the federal reserve should be doing? i'll take it mostly a tight at the red sea moment to policymaking. i'll be pretty quick in large part because i'm going to repeat a lot of what was said during the first panel because i actually think the difference between what we need in the current momentum that we need in general is more different in degree, not in kind and i'll explain what that means. essentially, i've got five things that we want from a fed to the future and they're very overlapping. they're not the same thing. most important is a genuine equipment to full employment.

their dual mandates, low unemployment, low inflation. they've not taken the mandate area say enough. liberals, progressives need to demand and the rest of the things are mostly ways to expand margins on which they can actually meet that commitment. so another couple things i need to do. i'm going to argue they need to cut right to the chase to preemptively pop bubbles to really look like their potential to bring down the whole economy. there's something before this crisis that was completely against the mainstream view. they're hard to spot and the fed has the power to clean up after them. the current crisis has shown that the political system will not do what is necessary to clean up after massive asset price bubbles pop. they need more tools to control the short-term interest rate, not just in the current moment but going forward if you think monitoring bubbles is an important thing to keeping unemployed meant in the interest

rate can conflict with each other. they need more tools to enable the real economy to target full employment, but also keep asset prices from spiraling out of control. you need more economics. any two of higher inflation target. i think i will go a long way to give them the flexibility they need to meet the low unemployment targets. lastly and this one is -- i don't know if it's a pet peeve, but they need to get out of fiscal policy debates in terms of the composition of fiscal policy and all talk a little bit more about that. first, to go again the importance of the dual mandate and actually committing to the rates of unemployment, you know, the first panel was very good i may need to do more and i'm going to agree this is carried over. all through the 1980s i would argue an early part of the 1990s, federal reserve tolerated unemployment that was too high. too high to generate wage growth

during the 80s and early 90s as when he saw a really start to pull apart in the united states. and also much higher was needed to keep inflation in check. i think the evidence there was some incipient inflation in the 1980s about to be unleashed if they allowed the unemployment rate to get lower than what was going at the time, it's really weak. when you talk to people who are committed to this and they say the unemployment rate actually started to fall pretty quickly and you actually saw a modest increase in inflation and we are really on the press there. good thing the fed pulled back. i was argued by 20% of its value between 1985. we had a trade deficit, actually did something about it. that is actually going to cause inflation but mostly supply-side emplacement. not the economy overheating. we should've just dealt with it.

this idea that there's real strong evidence that if you go a little bit below you will unleash inflation has been very oversold. i think just -- this is repeating a lot of what the first panel said, but it's hard to overstate how important message. there is a good article talking about the federal reserve policy and it's a common criticism of progressives in general. it is true we have earned issues if we've got this group that cares about children's health and the scriptures about school reform in performance. and i'm sure my own students are as guilty of that as anyone. macroeconomic performance should her stout of the stylus. we all need to be on the same page here. the iu can care about children's health and school performance and it doesn't matter viz. 4% or 10% is absurd in this release to be something the progressives get together on and actually think about macroeconomic policy. they think it is not just federal reserve policy.

i think the press is, macro policy in general this type of chronic, covered. we have a fed, policy measures to the treasury to cover that. they can't cover it. plus every macroeconomic creates winners and losers that we need to track that. again, we can tap more about that, but it's just hugely important. what is the big obstacle that cares about keeping unemployment rate low? the structure of the sun is a problem. the fact that five of the 12 members come from regional banks just guarantees a significant permanent faction of inflation that you're about to go. imagine the federal reserve board was composed of a constituent do you really about full employment of its end-all and be-all but she can't think that issuing cease. so just imagine the afl had three or four.

you know, this sounds crazy, but i would argue it's even crazier to have five of the 12 members be essentially picked by banks. so i'm going to move on. that's the importance of taking that very seriously. to, the classic line about the federal reserve that exist to take the punch bowl race of the party gets going. they've been pretty good in the history of taking it away from rank-and-file workers. that's a good at taking it away from people benefiting from inactive rights bubble. they need to take it away for most people as well. you know, people say the bubbles are hard to spot. i think there is some truth to that. you don't have to spot every bubble. you have to spot the ones that do massive damage when they pop. i'm probably overly u.s.-centric in outlook but if you look at the last 25 years, the housing bubble was not that hard to spot. and it's hard to see all the false positives that would've happened if we had taken this

part of the federal reserve policymaking seriously. into even more important was a respectable point of view four years ago to say as the bubbles pop but actually the fed has a lot of power to swarm in with overwhelming force and keep them from really damage the economy and the 2001 recession that are too blasé about it rebooted and it jumps until august 2003. still it was not crazy to say that. even federal reserve can't or will not be allowed to go with overwhelming force and cleanup into what is needed to drive down unemployment quickly. so preemptive bubble spotting is important. the thing that is important is often you talk about the need to preemptively that some will say should the federal reserve rechecking up short-term interest rates in 2003 at 2004? in 2003, 2004 we had a weak economy. interest rate should've gone out. they need for tools.

you can't control a bunch of different targets with one interest. and so they need a richer toolbox. they have it, used in the past. it is to become a part of what they do. the regulatory angle has been well covered but it's very important. and also you can think of the first thing they do is start talking about done. you know, people point to alan greenspan using the phrase irrational exuberance in 1886 in the stock market bubble continue continued to talking this doesn't work. he cited a 1996 and didn't talk about it again. so the idea that put a full throated campaign and every six months and they go before congress to testify so this is why stock market is overvalued. this is what corporate earnings have done this is the historical average. the idea that we have really exhaust the possibilities of simple,