response. let's start with rogers. not the only woman but the highest ranking. she is from washington state. republicans are hoping she can really speak in a railway -- in a real way to the american people in response to bread and butter issues. >> you can watch the rest of this discussion online. taking you live to the floor of the house, working on three bills on the calendar. any votes will be held at 6:30. 2014. i hereby appoint the honorable steve womack to act as speaker pro tempore on this day. signed, john a. boehner, speaker of the house of representatives. the speaker pro tempore: pursuant to the order of the house of january 7, 2014, the chair will now recognize members from lists submitted by

the majority and minority leaders for morning hour ebate. the chair will alternate recognition between the parties with each party limited to one hour and each member other than the majority and minority leaders and the minority whip , but in o five minutes no event shall debate continue beyond 1:50 p.m. the chair recognizes the gentleman from pennsylvania, mr. thompson, for five minutes. thank you, mr. speaker. mr. speaker, today i rise to acknowledge the 100th anniversary of boy scott troop 31 which is located in state college, pennsylvania. center county proudly within the pennsylvania fifth congressional district. with troop 31 scheduled to celebrate this milestone on scout sunday this coming february 2, i want to offer my praise to the generations of

young men who have given their all through service to others. chartered by st. paul's united methodist church, troop 31 should take this time to look back on its many accomplishments. this unit has awarded 170 eagle scout recognitions. since it was founded. which is no surprise considering that in just the last five years, troop 31 has racked up over 40,000 community service hours giving back to the local community. as the former president of the boy scout council and longtime scoutmaster of a boy scout troop in the same county, it has been an honor for me to observe the success of state college troop 31. the adult leadership of troop 31, including scout masters, assistant scout masters, troop committee members, merit badge counselors and parents are to be congratulated for over 100 years of molding boys into men.

through the principles and values of scouting. the countless boys that have hiked the scouting trail as members of troop 31 have gone on to become productive members of their communities, leaders in business and outstanding citizens. this scouting unit has exemplified the vision of the scouting founder when he stated, it is the spirit within not the veneer without that makes a man. mr. speaker, boy scout troop 31 deserves their praise and thanks for their service and sacrifice. congratulations on this historic milestone. thank you, mr. speaker, and i yield back the balance of my time. the speaker pro tempore: the gentleman yields back his time. the chair recognizes the gentleman from virginia, mr. wolf, for five minutes. thank you, mr. speaker. last week the drudge report featured an article with the striking headline, quote, the world's most ancient christian communities are being destroyed

and no one cares. this sentiment was expressed in no uncertain terms yesterday in an event in my district at st. john's the beloved. people around the greater washington, d.c. area gathered to hear from five syrian christian leaders, part of the delegation from the war-ravaged country and the first of its kind that i know to visit the u.s. since the hostility began. they'll meet at the heritage foundation at 1:00 p.m. today. their story and that of its communities bears telling, not only to american policymakers but the church at large that it represents christiandom. they spoke of syrian christians with ancient roots predating the apostle paul. today, these communities face violence, kidnapping, sexual assault, displacement and more. according to the fund that's hosting this delegation, an estimated 600,000 christians in

syria have already fled to the country or have lost their lives. this ancient christian community finds itself targeted by islamist elements in the country, including a significant number of foreign jihadists who have flocked to the battlefield. several messages emerged at the talk yesterday, but one held particular relevance for the faith community in america. these syrian christian leaders made a plea from engagement from the church in the west. specifically, they sought for american churches to adopt specific syrian churches to commit to praying on their behalf and that of advocating for them when possible. the need is great, but so, too, is the opportunity. the plight of christians in syria, while horrific is in some respects a similar story. time and again syrian christians remarked that they fear the faith that -- in iraq that thousands are being

targeted by rival islamist groups. today's iraqi christian population has fallen from 1.4 million in 2003 to roughly 200,000 today. in fact, throughout the middle east, christian communities are increasingly under siege and imperiled. christianity risks being ripped from the very fabric of the middle east when for centuries -- for centuries it's been part of the rich tapestry of that region. will we permit it to happen on our watch? will we answer their pleas for help or will their cries fall on deaf ears? i pray, i pray it's not too ate. the speaker pro tempore: pursuant to clause 12-a of rule 1, the chair declares the house in recess until 2:00 p.m. today. >> morning our speech is finished, members will reconvene at 2:00 eastern time.

starting legislative work later this afternoon. you can watch live coverage at 2:00, here on c-span. some news from capitol hill, florida republican trey radel is resigning, he was arrested for cocaine possession. he released a statement that reads some of my struggles had serious consequences. it is my belief that professionally i cannot fully and effectively serve as the u.s. representative. this comes after a rehab start for the first-term congressman. we will take you live to the hear senators mccain and murphy as the center for strategic and international studies, live at 4:15 p.m. eastern time. bill and hillary began their teaching careers at the university of arkansas.

hillary came a year later, career began inside this building at the university of arkansas. she was a professor and taught classes such as criminal law and trial procedure. hillary was a wellesley educated, ivy league law school grad that have worked in d.c. as part of the nixon campaign. at the time, nixon had been impeached two weeks before she taught her first class. >> hillary clinton, tonight at 9:00 eastern, live on c-span and c-span3. also on c-span radio and c-span.org. >> the real moment it started was with two gentlemen, one was nok dorsey, the other was glass, they were two friends and work at a company called -- a podcast company in early 2005. it was in san francisco.

failing, noahs and jack had been out drinking one night. jack had this idea that you could build something that would allow you to say what you were doing at a moment in time, in a very pithy way. eating."nking," "i am his cofounder had the idea that you could be able to share with your friends and connect with your friends. he was going through a difficult thought this thing called twitter they created would make you feel less alone. that was the genesis of the idea. everyone had a different concept of what it was. nickew york times's" bilton,, tonight on the communicators on c-span2. >> a look at how the federal reserve might try to use a future financial crisis and how

the agency should deal with critics. this is part of a brookings institute discussion from earlier this month, the panel runs about one hour 10 minutes. for those kind words and for making this possible. i want to thank the panelists of here and those who will speak later. they put a lot of work into writing papers for this thing and then we tell them, ok, talk about it in 10 minutes. i want to make sure we do --

everyone is aware we have copies of these outside and on our website. we will try to do them justice in the short time that we have, we will not succeed. there is much more work to do. our first paper is about the in monetaryy period policy we have been through. it was inconceivable 10 years ago that anybody would have thought that the fed cut interest rates to zero in 2008, the discussion is will it be zero and tony 15 or 2016? i don't think there is anyone better suited to talk about these policies then john williams, president of the san francisco fed, who did some of the fundamental research that was relied on when we discovered we were going to be faced with a threat as bad as the great depression. >> thank you, great to be here, a wonderful event and i'm honored to be part of it.

i was given the task to talk about monetary policy at the federal reserve. specifically around the issue of the zero lower bound. lower bound is basically the constraint that you cannot lower nominal interest rates much below zero. it was an issue that economists and other central-bank economists had studied it -- had d extensively in the 1990's and before the crisis. one thing that spurred the research was the experience of the last decade in japan and the experience of the great epression in the u.s. economists thought hard and wasied how big of a threat the zero lower bound, what were the implementations -- what are the indications for monetary policy. interest rates were well above zero, people thought it was an academic concern.

research, which identified a number of issues, i highlighted three of them. thatirst one was the fact the zero lower bound is a real, practical concern. it is not just abstract, it is not japan being special or unique. it is an issue we should take very seriously. in the paper i did with dave from the board of governors, we said if you follow that taylor rule with a 2% inflation objective, you would hit the zero lower bound about five percent of the time. some estimates were higher and somewhat lower. this is a very real compact will real,n -- this is a very practical concern. most of the time, episodes of the zero lower bound were relatively mild, relatively short-lived, and the simulation we looked at -- you would get a zero lower bound for about one year.

the effects of the zero lower bound with typically beaten the -- would typically be mild. about once a century, you could have a much more severe recession where the zero lower bound would be a bigger issue. the first conclusion was yes, it is a real issue. most of the time, not a germanic, life-changing -- most of the time, not a dramatic, life-changing issue. the second inclusion from that -- the second conclusion from that period is that conventional monetary policy should be modified away from a taylor rule into something that took into account the lower zero bound. do notclusions, one was keep your powder dry. if you are in danger of a recession or deflation, cut interest rates quickly and aggressively, get as much monetary stimulus as fast as possible. lower for longer,

even after the economy starts to recover, instead of a race to raise interest rates, keep interest rates low. that commitment continues to add ofmulus and reduces the risk inflation, helping the economy grow faster because of the zero lower bound policy. were these two strong conclusions, one is act aggressively i'm going in and act slowly coming out. the very conclusion from the research was really around a truly unconventional monetary policy, quantitative easing. they still hold to the name large scale asset purchasing, or lsap. think of having a translator in your mind, when i say lsap, say

qe. andd we use asset purchases intervene in foreign exchange markets, we did a lot of research on that, very academic and analytical. how that might help lower interest rates and improve financial conditions when the short-term interest rate is at zero. there were papers on how that usefule done and a complement to conventional policies. for the last seven or eight years, we have gained enormous experience, both with these policies and with the lessons from that research. my paper says what did we learn relatively -- relative to 2006, what did we learn you go and what did we observe out there. the first part of the paper, is the zero lower bound a big problem? looking at the world where all the central banks have had

interest rates at zero for five years straight, it is clearly a much larger problem. why, what did we miss? we thought zero lower bound was going to be a modest constraint most of the time. in fact, it has shown to be globally a huge issue. one of the lessons i try to emphasize in the paper is that we were full by the postwar u.s. especially the great moderation, a relatively small sample of data, where we did not have large shocks, we had a financial system, due to the lasting perfect -- due to the lasting effects of the reforms from the 1930's, the system was pretty strong. was behaving extraordinarily well. when you analyze what are the tail risks in an economy where nothing bad happens, it is surprising that you come to a conclusion that nothing bad ever

can happen. can rogoff -- ken rogoff has written quite a lot about this, you need to study history. you cannot just think that what happened in the 1930's or what happened in other countries is irrelevant for the u.s. there is an issue of how do you weigh the evidence from 100 years ago and from other countries, that is hard. one of the things i show in the paper that was illuminating, if you look at the data from the probabilityod, the that real gdp per capita would fall as much as it did in 2000 it was basically, -- as it did it would happen every 400 years. it never fell more than 3% in the years before the recession. in 2008, it fell .7% -- it fell 3.7%.

looking at data, you come to a different conclusion, real gdp per capita fell more than 5% of the time, without once every 20 years you expect to see a major recession like 2008. at 25nnot be looking years of the great moderation and draw conclusions. that was one of the conclusions. a lot of our macro economic research and models we use really do not help us think about terrorists or things to what we have asked -- help us thingsbout tail risks or we have experience. the other parts, looking out for guidance and quantitative easing . , one ofpening remarks the lessons from the research was that if you cut aggressively and keep lower for longer, you

can offset the effects of the zero lower bounds. we did see central banks cut effectively, maybe 10 countries in 2008. aggressively much more challenging was doing the lower for longer. somehow convincing financial markets we are going to keep rates lower for longer. in the u.s., i talk about this in the paper, up until august 2011 fomc decision to put out the day to keep interest rates at zero till may 2013, until that day, market and were that the fed was ready and raring to go to raise interest rates within 3 quarters or four quarters. the forward guidance that was instituted at that point and has been expanded upon, fundamentally shifted expectations about monetary policy. newtown expectations about raising rates by at least a year. it has shifted how markets

perceive what the fed's function is. since 2011, interest rate expectation and behavior has been much more consistent with what our expectations are, you are not seeing the market expecting us to raise interest rates in the next year or so. you can see this in terms of how the markets respond to news, in terms of surveys and market prices. it took quite a while for the fed to go to expose it forward guidance -- to go to explicit forward guidance, it seemed to have a major improvement in helping the economy improve economic conditions. , that wasn qe interesting. we had very little knowledge of what the effect of qe would be on financial conditions of the economy. there were few papers going back to the 1960's.

this was flying blind, we had some analysis based on specific circumstances. since then, i list maybe two dozen papers that have been written based on what has happened in the u.s. and the u.k. we have learned an enormous amount about how asset purchases affect the economy. my point is we still don't understand a lot of it. clearly, the evidence is when the fed and central banks do asset purchase programs, it affects long-term yields, it lowers interest rates. $600 billion for the u.s., the balance sheet seems to lower long-term treasuries by 15 to 25 basis points, a lot for monetary policy. there is a lot of uncertainty about how it works. is it really signaling future policy action? is it really an imperfection to the financial market that allows the fed to buy assets and affect the price? we have a lot of uncertainty the effects.e of

again, accor economists have ignored this whole aspect -- again, macroeconomists have ignored the whole aspect of imperfect information. dels that we rely on to see the effects of policies and calibrations of policies have very little to tell us right now about quantitative easing. a number of economists, clearly if you are a phd student, this is a great topic. has been working on developing models that allow us to think and estimate its effects, thinking about policy with that. that is in its infancy, we are having to use the models we have . i want to emphasize come a it is clearly at work, it is a very blunt toward. -- blunt tool. we came into this crisis come

into the global financial crisis having studied these issues about what should monetary policy due at the zero lower bound. aboutrned a lot from that the unconventional tools we could try to use. we have learned about how effective they are. someve learned a lot about of the challenges with these things. forward guidance is great and textbooks, always telling us how we could do forward guidance like in books, we would be golden. explaining to the public and arykets what monet policy may or may not do is very complicated and often prone to misinterpretation. ofntitative easing has a lot concerns about unintended consequences, leaving us with some pretty big issues we need to think about for the next several years.

inflationy, then 2% buffer that every central ba decided on. to give you a little bit of cushion in a deep recession. is that really appropriate or properly calibrated given the lessons we have learned about the zero lower bound and the severity of the recent recession? we understand financial markets much better. we think seriously about how the financial market reforms will change things. finally, the most interesting whole-- was this inflation targeting regime we have all agreed on, which has a lot of positive benefits, really not as well suited for the zero lower bound condition as some alternatives? targeting.inal gdp i'm not taking a stand on those, changing the inflation target is the electric curtain rail of monetary economics. i am laying them out as issues

we should think about. we need a lot of research and a lot of work on these are the next few years. >> we will poll the audience. answers to these of those questions. [laughter] when we thought about who could paper, martyhis feldstein came to mind. one of the few economists who has walked between policy and academic circles and is respected in both. and has views on whether the fed did the right thing. take it away. >> thank you. paper thatery rich is worth careful reading, i am very impressed at how well he was able to summarize it in the 10 minutes that david gave him. i did not get 10 minutes to that tryingealize to do it in seven minutes, which

was david's assignment, i better write it down or i would go on much too long. let me read what i wrote after i read the very insightful paper, proper conducte of monetary policy under the adverse conditions we have experienced since 2006. although we might hope that such conditions will not happen again, john presents persuasive historic evidence that such declines in aggregate demand are likely to recur. it is important that we learn from recent experience and consider alternative policies. the 2000 seven downturn was not only deeper and longer than the usual recession, but also different in its origin and structure. it was not caused by temporarily high real interest rates, and therefore could not be reversed by the fed's usual rate reduction. even at a near zero federal fund

rate, the recession perceptive. -- the recession persisted. the downturn was caused by mispricing the risks of assets. individuals bought overpriced homes and banks gave high-value mortgages to individuals unable to repay them. house prices began to collapse in the summer of 2006, causing a massive fall in household wealth and in residential construction. boughtnd other investors ofrpriced sections securitized subprime mortgages that collapsed in value, signaling the overpricing of risky securities. in many cases banks and other financial institutions could not even determine the value of their portfolio assets because of the lack of willing buyers and sellers. could nottherefore

know the value of their own capital and could not judge the solvency of potential counterparties. the financial markets became dysfunctional and credit dried up. the federal reserve and the treasury together acted very boldly to revive the financial markets. with a combination of asset purchases and guarantees that went far beyond monetary policy. although these actions succeeded in reversing the financial collapse, they did not reverse the economic downturn. thefederal reserve also cut fed funds rate to near zero in late 2008. late to satisfy john's suggestion "to act aggressively and cutting rates when a sharp decline in output threatens." that would have implied cutting rates in 2006 when house prices began to collapse. the fed funds rate was still

nearly enroll five percent in the fall of 2007 -- was still of 2007. in the fall in analyzing challenges of 2007 and 2008, it is important to go beyond simulations. traditional macro econometric models cannot begin to capture 2007 becausein they lack well specified financial sectors, let alone the securitization of mortgages and the widespread presence of off-balance sheet special investment vehicles. financial crises may not share the same features. although this meeting is about monetary policy, i think it is wrong to ignore the role of fiscal policy at the zero lower bound. before 2007 wisdom

was that cyclical fluctuations should be managed by monetary policy alone. countercyclical fiscal policy is generally too slow to react within the typical recession downturn. but in 2007, several of us concluded that current conditions implied that a fiscal stimulus was needed. unfortunately, the bush tax cut was totally ineffective. a small, one-time rebate that households almost entirely safe. 2009bama stimulus plan of probably dampened the downturn, but was too small and not concentrated enough on increasing government spending. with an inadequate fiscal policy, the fed was the only hope for stimulating the economy. with the said fund's -- with the

zlb, they rate at the shifted to unconventional policy bondsgovernment and mortgage-backed securities. john provides a review of the evolution of the short rate guidance. he concludes "explicit forward guidance can effectively anchor interest rate expectations out 2 years." i ask why is a two-year anchoring economically significant? the usefulness of forward guidance would be persuasive if it reduced the longer-term rates that are relevant for mortgages and equity prices. john reminds us that the standard textbook theory implies 's cannot affect assets

prices and interest rates. we know that that is wrong. the fed's massive purchases of treasury bonds and mortgage backed securities drove the yield to treasuries to just 1.7% in may 2013. the announced plan to end the purchase program was enough to .rive them rate back to 3% john quotes research showing that $600 billion bond purchase lowered the unemployment rate by 1/4 of 1%. remarks, "an his great deal of uncertainty about the magnitude of these effects and their impact on the overall economy." missing in all of this analysis is a balancing of the potential output gains of lsap's against the risks generated by

sustaining abnormally low, long-term interest rates. potentials include price bubbles in equities, land, and other assets. portfolio risks as investors reach for yield was junk bonds, emerging market debt, i'm covered options, and the like. three, creditor risks as lenders make loans to less qualified borrowers, long-term mortgages at insufficient interest rates and so on. and four, long-term inflation risks as commercial banks acquire a large portfolio of low yielding assets at the federal reserve that could be converted to commercial loans. conclusion at in his remarks, john asks whether lsap 's should be a standard tool in short rates are at the zero lower bound?

best, too soonat to tell. we will know more when we see the outcomes of the risks that created.'s if the economy now expands at a healthy pace, which i think we have a good shot at, we will not know what the risk outcomes would have been in a weaker economy. what is clear is that a balanced fiscal policy should be part of the response with the economy is stuck with excess capacity at the zero lower bound. finally, john asks whether it would be better to target nominal gdp or the price level or an inflation rate higher than 2%. would be a of those mistake. although inflation is not a problem now, the time will come when the fed will want to limit or reverse inflationary pressures. and theory both teach

us that it is easier to do that if the public understands that the federal reserve is committed to a consistent policy of low inflation. flirting out with other, more can only weaken future public support when the fed needs it. >> thank you. john, let me ask you to respond to two of the interesting points made. when you describe the history of monetary policy in this crisis, you did not mention fiscal policy. was aw that fiscal policy big player, to quote ben bernanke, was "counterproductive." likewe get to an episode this, what is the right thing for the monetary policy to deal. -- to do. you compensate for lousy

policy and do more or do you say ook, we areies, l doing this, publicly indict them for not doing the right thing? >> i do not think fiscal policy sizabley, we had pretty fiscal stimulus. i agree that more would be better. >> i am thinking more recently. >> ok, but in the depths of the recession, 2008, 2010, there was extraordinary fiscal stimulus that was helpful. the fact that we turned the other way is more negative. the way i think about this is from the point of view of monetary policy, you have to realities as given and the political realities around us. we have to take it as a given that fiscal policy is doing what it is. we have to have monetary policy tobest calibrated and we can

achieve our goals. i agree that we should -- that the leadership can and should speak clearly and forcefully about the affect -- the beneficial effect of countercyclical fiscal policy, especially at the zero lower bound. i think that is a message that most economists would agree on. i think it is obviously logically -- it makes a lot of sense. there is the reality, washington does what it does. we have to try our best given what -- the hand we are dealt. that whatout the risk you are doing now is just sowing the seeds of the next bout of financial instability? >> in terms of greater risks. >> how much do you worry that what we are doing now, we are clearly missing the on inflation and unemployment target you have -- risks creating

financial instability that will give janet yellen headaches? learned thell lessons of the past decade or so. we follow very carefully what is happening in financial markets, both in the banking part of the financial system, but most this is a capital markets based economy. it is not just the banks, you have to think about the shadow banks. reallystudying this, we increased our monitoring and our analysis around this. my argument would be that the first line of defense regarding issues of financial risk is around micro and macro policies on the having and running them -- having an and him and him. the stress test, we -- having and implementing them. the stress test, we have made strides in terms of our

implementation of the stress test and dodd-frank. we are balancing cost and benefits around our qe policy. i feel the macro benefits outweigh the issues row. risk aversion today in the specificyou can find examples of farmland prices are leveraged loan prices. broadly defined, our financial system is in a risk-averse mode and not a risk letting him know. the concerns that i are still -- a risk loving mode. the concerns are still not as prevalent as people think. >> i will offer paul tucker a chance to ask a question. >> a comment, i agree with up on do not give inflation targeting, that battle needs to be constantly

reaffirmed. i think central bankers elsewhere in the world are puzzled by the fed's slow approach to plaintiff easing. rather than deciding on a stock of money, base money. that you want to put out there and then review after a wild whether you have done enough. just as you would set an interest rate, leave it, and decide after a wild whether you have done enough. instead, you have a policy to trickle it out there on a flow basis. >> i have never heard $85 billion a month called a trickle. [laughter] we have obviously been trying different approaches on that. qe1, qe2, a $600 billion purchase over a specified period of time, it

provides a lot of certainty, markets like that. when you make the reaction, the market reaction occurs immediately. there is clarity around it. policy not how monetary should be conducted. monetary policy should be adjusting your instruments as the economic outlook evolves. one of the lessons we learned from the earlier episodes was, we were surprised that the economy did not do as well as we thought. we needed to introduce a new program, qe2, operation twist. endeding a more open policy, markets come to conclusions about how big the policy will be, by having it open ended, it automatically can be adjusted in size, composition, and duration as economic conditions change. that is what we laid out, a substantial improvement for the

labor market. the economy did not do as well as we thought. ira member the question when we started this program, would you do $600 billion? change in thef a outlook, we are doing far more than that. that is what we should be doing giving what -- given what is happening. as with paper, we are adjusting that. the natural thing is to adjust your policy instrument as economic outlook changes. i do recognize it creates quite a bit of uncertainty. when will the fed stock purchase, we had the taper tantrum last year. it is something we have learned. when you have a $600 billion policy, you don't have flexibility of adjustment as conditions change, that is a weakness. there is a lot of communication challenges. i think confusion when you have an open-ended and relatively

vague condition for bring you to -- condition for bringing it to an end. >> we have a couple questions, tell us who you are. a question ends with a question mark. greg, in the middle. stand up. greg, "the economist." the real output affect that you identified was based on models that link the decline of long-term interest rates to the output affect. as you have said, we have vastly misunderstood the linkage between the role of the financial system in terms of changing the interest rate and what does to the economy. do you make the case in the last five years that the friction to the financial market has blocked the transmission of monetary policy the way it normally does. doesn't that weakened the

intercollegiate you have drawn between allocated easing in the real economy -- doesn't that we aken the and." that weakenedn't the empirical effect you have drawn? >> yes, the cylinders are getting less clogged now, there is no question that lowering interest rate expectations for guidance and connotative easing -- through forward guidance and quantitative easing. it has lowered auto rates. we are seeing improvements and autos, durable goods. the monetary transmission mechanism has been partially clogged. at the same time, the very aggressive policies have gotten

traction and are really important parts of the economy. >> in the back. >> john, "the wall street journal." the fed employee lower for -- the fed employee a lower for longer approach after the tech bubble burst. later, we had a housing bubble. what is the risk that a lower for longer policy could contribute to bubbles? does it disturb you at all -- it does not seem that the woodford models, upon which lower for longer is based, take much account for the creation of bubbles. how should this factor in to the it employsing now as a lower for longer policy again? use do notls that we

take seriously the financial system, a complex financial system out there that has and andhave changes in leverage risk taking. i would add to that, our models tend to assume highly rational agents who have a full understanding of things. so bubbles never occur. thinking about these issues, we have to broaden our minds to n approach that allows for the fact that these things can happen. as markets get away from fundamentals for significant markets canancial get distracted. i do not think the low interest rates were an important contributor to the housing bubble. i think fundamentally flawed aspects of our regulatory environment were the key part of that. iiiell i dd-frank and

and other things are adjusting those in a very important way. have open we have to minds about understanding how low interest rates, for a long time, affect assets prices and risk-taking leverage. >> the woman in the middle. hi, abby cohen, trustee of the brookings institution. these to be here. marty feldstein made an all the fedcomment, needed to do was mention taper and financial markets adjusted. we saw that the biggest adjustment was not in the u.s. it was in emerging markets, especially emerging-market debt. that raises the question of what is it that we do not know about between our

financial markets and monetary policy and also markets around the world. what do we think now about the interplay of central-bank policy from different nations? and also, the regulatory differences, with regard to the supervision of financial institutions? >> uyes or no? [laughter] >> let marty. >> obviously, we sell hot money flows intoot money emerging markets, big swings in those flows when the discussion of tapering happen. the most important thing is that we are communicating effectively across the globe with our central bank colleagues. that communication includes understanding what our policies are and what our attentions are. countries seen, these

who have been affected, no question, effective and a major , have adaptedlows their approaches and policies to better insulate them from some of those effects. that said, at the end of the day, we live in a modern and global financial system. this is just part of the world that we live in in terms of monetary policy in the u.s. having effects outside the u.s. we need to study those and coordinate and communicate effectively with our colleagues around the world. >> marty? >> i think the fed does not take those effects on other countries into account. probably not. should, to the extent that there is a risk that it will flow back into the u.s. what you are describing is the it has been,

ignored in economics and and central banking for too long. it does not just flow one way, it can bounce back. the concerns in this capital, at the worst of the euro crisis, demonstrated the linkages of the world do not just run from here to there, they can flow back as well. the second part of our program, can we use financial regulation to prevent a repeat of this crisis. if so, how far along are we on that path? to talk about that, we have invited paul tucker, he was until recently the deputy governor of the bank of england. he came to boston and harvard because he said the weather was better. very much.u as john said, macroeconomic policy contributed to the conditions in which the crisis occurred. the ultimate cause of the depths

of the crisis was a deeply dilatory and supervisory regime. deeply flawed in design and deeply flawed and implementation . on both sides of the atlantic, it would be hard not to do better. the paper that brookings has published covers a load of technical things. i want to pick out one or two things that are in the realm of political economy. there is good news as well as some challenging news. -- iood news is something think ben bernanke has a great deal to be proud of, stress testing. could potentially revolutionize bank supervision over the coming quarter of a century. i think it will take a wild to play out and mature. i think it will be a while for its full effects to be seen. it is revolutionary in two or three respects.

first, it gets the macroeconomists within the federal reserve and other central banks to work together. this is a necessary condition for central banks to have the broad mandate, to which they are now returning. secondly, it makes regulators look at banks in a joined up way . if you like, this is part of a natural -- part of a macro label. most importantly, it can transform the accountability of the federal reserve and other banks around the world. monetary policy is something where over the past 10 or 20 years, it has become increasingly transparent. what the public gets is what it can see.

have an interest in being opaque only when it goes wrong. when it goes wrong, suddenly it is an interest. i having an annual stress test -- by having an annual stress the results of the stress test with inamed institutions in the public domain, that gives members of congress on behalf of the public and ability to ask the federal reserve and others questions about supervision they have never been able to ask before. that is a massive step forward. it is very important for those of you that work on the hill, it is important that congress delivers in asking those stress test the each year. the other feature that is important goes to the business of central-bank lender of last resort policies and support

operations. that has been controversial, in this country especially. it has been controversial because people think that the federal reserve might have led to firms that were bust, and lent to non banks that were bust. whether or not that is true, transparent stress testing makes this much less of a have it in future.habit in the if a firm in receipt of lender resources, that will be revealed by the stress test. this is a very significant discipline device on the federal reserve, the bank of england, the ecb. one that i think has been underappreciated. three other points, quickly. the biggest issue on the banking bank --can the failed

kenny to be to feel -- the biggest issue on the banking failis can the too big to problem be solved. i believe it is on the brink of being solved. it would be good if there was an international treaty, but there will not be. for those people in this country who advocate -- when a vast institution as bust that it goes through the core, they are ignoring the reality that courts in different countries cannot doperate ex ante because you not even know which judge will be sitting in london or new york on the day it is brought to the court. this is inevitably, whether one likes it or not, it is inevitably a matter of interagency cooperation across the border. not gettion, i will

technical, is to push losses from sis. from-- to push losses subsidiaries up to holding companies. when the equity is exhausted, the bonds can be converted under administrative discretion into mquity, and the fir recapitalize. this can make this problem largely go away. there is more about that in the paper, i do not doubt rodgin will pick it up. let me come to things that concern me more. if too big to fail is the biggest problem confronting western society, a close second is regulatory arbitrage. reforms arenking reasonably well conceived. no one should kid themselves that tomorrow's problems are going to be located in banks. banks, they are

likely to have traveled elsewhere. finance, more than any other part of the modern economy, is a shape shifter. you think the problem is over there, it will instead be over here. this is a tremendous challenge in terms of flexibility. another one that john alluded can monetary policy stimulate risk-taking and bring about conditions of bubbles and bursts and collapses? yes. and that requires regulators to have a more dynamic approach to regulation of institution, raising capital requirements or liquidity requirements during the boom. again, that requires flexibility. here's the rub. like,ociety is typically role-based regulation so that unelected representatives -- not elected are presented as, unelected agencies do not have

untrammeled, discretionary power. that is a good principle. it is hard to reconcile this with effective regulation of the financial system, this is almost not debated at all in this country. such is the devotion to rules. in the united kingdom, it has been debated. the solution is a legislative ofcedure to enhance tools regulators when needed. you need that today, the rest of the world needs you to have that debate. the fourth issue is this. i think this is the biggest of all. the problems are never technical. the problems are about building effective institutions, agencies in the state sector. thatatory arbitrage means a lot of the problems that

threaten stability are as likely to come under the jurisdiction of securities regulators as they are under the jurisdiction of the bank regulators or the central bank. the securities regulators do a great job. they do not have financial security -- financial stability in their objectives. if you look at their congressional testimony they rarely asked any questions over the stability that could come from the parts of financial systems that they are responsible for keeping safe and sound. either their objectives need to be broadened, altered, which is a much more important issue and is a question that occasionally gets raised here. alternatively you must some other body, whether it be the federal reserve or some new begin in the to power of override so they can

ensure all parts of the financial system will sufficiently lead into the next. if that does not happen than the next crisis will be sooner than otherwise. thank you. have -- wend we thought it was good enough for them. we don't pay anywhere near your hourly rates. >> thank you, david. it truly is a labor of love. to even begin to scratch the surface of paul's thoughtful, comprehensive, and provocative it would take much more than my allotted seven minutes. i am just going to focus on two fundamental points. first, it is undeniable that the risk of failure of a major bank

must be sharply reduced from what it was in 2008 by reform of the regulatory system. and the systemic consequences that could result from such a failure must be dealt with by a credible and effective resolution regime. writes, the banking package of reforms is coherent and well received, seeking to addressthe seat -- to the deep-seated flaws in our regulatory system and too big to fail. dohough there is so much to we are generally on the right track. calls of more radical reform of not just the regulatory system but the basic structure of the banking system are both unnecessary and fraught with their own risk. inpaul later, narrow banker -- narrow banking cannot in itself make the world safe. suggest reducing bank to

your graphic divisive vacation. second and relatedly, paul makes the crucial point. solving too big to fail matters huge lift because improvements in bank regulation alone will not confine -- there are two aspects in placing too big to fail in its own area. first is moral hazard. the second is a resolution regime that can minimize the risk of syria's the stomach consequences. syria's hysteric

hissuences -- serious hi systemic consequences. it would become equity to provide push in the free capitalization. echo -- how much? i agree with paul's view the the general amount should be around 10% of risk weighted assets for more complex institutions, assuming an amount of equity. the long-term debt requirement should be calibrated to a .easonable worst-case i believe if there is to be

pre-positioning, the amount of internal debt required at the operating subsidiary level should be based on a lower percentage, perhaps five percent. that invent that an off operating subsidiary suffers losses greater than its equity, the holding company would have the reserve of capitalize a should assets to fill the hole after utilizing the preposition debt. worried that a higher requirement will encourage rain fencing, which is antithetical to the type of structure paul supports. issue relates to the conditions for pulling the debt into equity trigger. the regulators need discretion but it needs to be limited. textld demand a solvency

-- solvency test. if we have a specific capital, it should be at a level where private sector recapitalize nation is profitable. -- recapitalization is profitable. counter parties will flee and once one host country pulls the trigger it will be difficult for others to resist. major tank is prematurely placed in resolution proceedings, the world's financial systems will be plunged into uncertainty. this should be relayed by the substantial debt shield that paul proposed. there is a special issue relating to code -- to host country discretion. paul suggests the host country must have a hand on the trigger because otherwise host authorities will be worried that the home authority might not in

fact pull the trigger. i would suggest the adoption of obligations of action at the parents level, as opposed to placing too many hands on what is a truly nuclear trigger. last created by paul's proposal is how will the resolution regime -- and he mentioned this this morning -- is established and implemented on an international basis? the arrangements are the greater the certainty that the regime -- it couldemented be best effectuated by finding treaties. if that is not feasible, as paul suggests, there should be a document endorsed by the regulators and ideally by the g 20 heads or finance

ministers. one approach is a key understanding among the regulators. this is an inferior option as the market may assume it is not worth the paper it is not written on. let me close with paul's summation and endorse it. solving the problem is definitely within reach. it is now a matter of wealth. so vividlyrnanke demonstrated that where there is a will and courage and conviction that there is a way. thank you. ask you a broader question? the tone of paul's paper is that we are pretty much on the way of renovating bank regulation. we have a long way to go in regulating the non-bank financial system. thatu think this is a risk we are going too far in

constraining credit or making something so complicated that there is no chance it will ever work? >> i think the package of reforms is a relatively reasonable reform. me -- i wish o f r would study everything that is being done on a holistic basis before you can determine the critical question on whether there will be a constraint on credit. i do worry about the interaction of some of these, even though one proposal is doing so. >> i basically agree with that. something that may not have been stated very much is the report about the restructuring of the banks. what everyone thinks that conclusions on structure. the first two thirds is a pretty careful study of all the

different regulatory measures in a joined up way. i think the problem with the lack of the conceptual framework. the banking policies are clearly informed by a sense that the leverage,f excess excess capacity, excess connectedness and too big to fail. isind each of those things the body of analysis and economic research. there is never england framework on thinking about markets policy. the most important point is they badly need a framework for a markets policy. i think it has something to do

we are trying to identify which markets are systemically relevant. the financial system depends so heavily on them. and then whether the liquidity of those markets -- is it surreal? everyone behaved as though these asset backed securities were information sensitive, completely safe. they flipped to be highly information sensitive, very quickly almost assume something went wrong. foreseen ifave been policymakers and analysts and economists have had a framework of on thinking about the as well asof markets thinking about the resilience of firms. others have been talking but

precisely those things. about thetruck discussion of convertible debt. paul's paper talked a lot about that. the concern i always have is with these trigger points. once people start worrying the trigger may occur, the markets don't wait around to find out. whenever i think about a discussion on convertible debt -- >> this is a very federal reserve point of view. [laughter] problems arethe liquidity problems and that liquidity problems are curable if you can solve out the solvency of the institution. was -- y question what is wrong with just having just hold more

equity, don't make it complicated, don't make it too sophisticated, just more equity. >> that is a good point but it hasn't happened. you can take what i am describing as second best if you like. then? it ise done not quite convertible. this isn'tatching, convertible equity in the sense of a convertible bond. bondis a regular senior debt, which could be flipped into being equity out of the discretion of the authorities. i think that raises an important point.

monday essentially be the authorities do not have the unless the this institution otherwise fulfills the criteria for getting into resolution or bankruptcy. that is pretty converged between this. that there is a big difference between equity and potentially convertible debt in terms of the cost of the funds to the bank and ultimately to its customers. toave always been attracted the idea of having this extra security, which is debt that can be converted to equity when there is a critical moment where more equity is needed, rather than having straight out higher equity ratios. cheaper to do the bonds, which

have a certain probability of turning into equity but are not full-scale equity. >> a question here? why don't you stand up? the clearing house? we didn't get to that part. [laughter] >> i would like to follow-up on paul's comments regarding stress theing and ask both on macro economics and regulatory is there anks -- integrity associated with stress testing and some concern that stress testing, at least as it is currently envisioned, is a little opaque? the model is opaque and not transparent and the assumptions are somewhat subjective. how do you reconcile that with the effects of stress testing? , i agree with everything paul

said. i think stress testing is the most important, transformative change in our supervisory approach. is it opaque? i think we tried the heart make it more transparent. yes, they are subjective. you are going to come up with based on some are analysis of things. thes hard to say this is appropriate way to do that. one of the more important istural changes we have seen economist and regulators and supervisors actually talk to each other. using our economists to do risk modeling and analysis. the economists have learned the importance of the supervisory approach.

about theare issues subjective -- there are a lot of things going on with the fed, which is kind of intriguing. one of which is how to properly frame the question of stress testing. -- it is an area of fundamental research. it has been a positive change. >> stress testing is a very good thing. you thinker hand when about how complex large financial institutions are and you think what would happen in the case of an economic weakness or a replay of the events of 2007, very very hard to have any confidence in the outcome of those stress tests. it is important, it has to get better over time, but it is frightening in terms of depending on it.

there are lots and lots of doubts in the eurozone about whether that is being done in a fair and open way. >> i thought the issue was the banks will tell us what we need to do and we will to those things. is the stress test being done well? they are definitely being done well in the united states. if you can just imagine how much time directors alone are spending on revealing those stress test, yes i think they are being done well. it is very difficult for us to sit here and criticize the european stress test as to week, not sufficiently rigorous, and they are to opaque. a willingness to

reveal the models before hand and worry about gaming, there is a value encode spaces. in code spaces. >> over here? >> i am doug from brookings. hall, i thought you had a lot of excellence remarks. thank you for those. one comment i do have is you expressed a preference for an accelerated legislative response rather than it being so rules and that is much harder to do when you're not in a parliamentary system. weresaid either that's change the statutory objectives of the securities regulators.

>> i was harkening back to earlier remarks he made on rules-based versus discretion. one of the biggest concerns about this single point of entry is the cross-border aspects and some jurisdictions are not designed with those holding companies at the top. >> great question. by an accident of history, nearly all ubiquitous banking group's have holding companies. out of that has come a good structure in terms of resolution. that is not the case elsewhere. big banks in europe and asia do not have holding companies. i believe they will need to

restructure. i think those structural reforms have at least one order of mine today of significance, each of which can be sub played. local subplots. what roger and i are describing can sidestep a lot of the difficulty. frankfurt gets into some difficulty. the subsidiary does not need to go into resolution in frankfurt. instead the debt can be triggered so the subsidiary gets recapitalize. there is no default, there is no event of default. instead all the losses are pushed to the top of the group and the group can be dealt with by one authority.

one of the things i like about that is for the first time in living memory, this will make coastal authorities have a concrete discussion about corporation. they will be able to find out whether they are prepared to enter into an agreement that allows the structure to work. this will play out over the next year or two. the debate will come to an end. the panel andhank i am sorry we don't have time for more questions. this is the kind of conversation we want to continue. >> we will return to the brookings institution in just a

moment. first a look at capitol hill. a house and send it back in after a weeks break. the house in at 2:00 eastern time 40 minutes from now. they will be considering federal funding for abortion. hill,ther news on capitol radela congressman itrey is resigning after pleading forty and being arrested cocaine possession. he said -- the congressman time in a rehabilitation program. this is his first term. yale -- hee in after graduated from yellen 1973. hillary clinton's career happened right inside this building.

she was a professor and taught classes on trial procedure. hillary was well educated. was -- at this time nixon had been in peach two weeks first -- lary had her >> live on c-span and c-span three. also on c-span radio and c-span.org. motive -- the real moment started with two gentlemen. they were two very close friends and they worked at a company that was a podcasting company in early 2005. the podcasting company was failing and they had been -- no and jack were out thinking one night. jack had this idea that you could build something that would

allow you to say what you were doing in a moment in time in a pithy kind of way. nola cop -- noah, his cofounder, he had this idea that you should be able to share with your friends and be a will to connect with your friends. he found this thing called twitter -- he thought this thing called twitter that they created would make you feel less alone. that was the genesis of the at it that everyone had a different concept of what was once it started to grow. >> nick bilton looks at the origins of twitter tonight on "the communicators." >> back now to the brookings for more on the federal reserve and avoiding a future financial crisis. >> one of the consequences of the financial crisis has been an

enormous increase in the prominence of the federal reserve. and with that an enormous increase in the criticism of it. and the political backlash to our perception that the sickly the fed bailed out wall street and main street got screwed. ben bernanke said on 60 minutes that he did not set out to save wall street, he set out to save main street. in order to save main street he had to save wall street, which is logically to -- logically true and twice as long as the average attention span of an american. think about where the fed independence stands and the , we asked asks colleague of mine from the .rookings institution we are going to discuss that christina romer.

rogoff has done a lot of things and has written about what has happened to economy in the wake of financial crisis. it turns out to be an interesting and relevant question. >> inc. you, david. if -- thank you, david. the attitudes toward central-bank independence and the role of the fed and democratic society, a have been raised by extraordinary actions of the fed. and also by the new regulatory sunspots abilities -- regulatory responsibilities. issue i tried to think about are what are the risks that congress will try to make changes in the nature of the arm's-length relationship with the fed to short-term political preference. this is a really important

question. logic and history strongly suggests that a less independent central bank is less likely to reach its price stability objective. i suspect a high degree of independence will be necessary for the federal reserve or any central bank to achieve its financial stability object's. -- objectives. i would like to begin with two useful distinctions about independence. one is the distinction between goals and instruments. this is partly due to stand fisher. -- to stan fisher. the general paradigm is in a democracy goals should be set by the elected representatives of the people. but the instruments should be set by the central bank with considerable independence in a

very substantial arm's-length relationship or arm's-length .istance to achieve these goals the settings of those instruments and short term political pressure of those instruments. of banks need to be held accountable for outcomes rather than the inputs, how they are achieving them. includebility does not the need to explain as clearly as possible how the instrument -- it isrelate to the only central goals that the banks should be held accountable for. a second distinction to make between thinking about independence and the dependence of central banks. in the case of monetary policy there is a clear rationale for considerable instrument independence. independence lags in the policy effects, the tendency for

economic cycles to be longer than political cycles in the united states. they have met that one is trendsetting to these short-term political pressures there is too much emphasis on short-term output games -- output games. i think the regulatory accountability nexus is much .ore complex of financial stability --not so regionally measured so easily measured for accountability purposes. it is hard, the measures they are going through.

regulation supervision clearly affected the distribution of profits and credit, not just the overall levels of output and credit. there is a potential for fiscal tosequences the financials -- financial regulations have done right. these are more political positions then monetary policy. in the u.s. we had a bifurcated system. independence and the regulatory side because of the need to cooperate. i think a high degree of independence will be required.

we saw in the lead up to last crisis that there was considerable resistance, even to the small steps regular were taking to try to make the system safer in the early 2000's. do think the threats to monetary policy interdependence normal now.han there are a number of reasons for this. around the crisis eroded the public support for the federal reserve. in my paper there are some charts on the confidence of the federal reserve and unfortunately a lot of confidence has been declining. there is procession -- perception the fed. try hard enough. -- the fed did not try hard enough. there was little recognition in that classic function of the

central-bank to provide a liquidity in a crisis. there was confusion among representatives between spending and lending. they character -- they characterized it as spending. the actions of the federal reserve and the crisis a necessaryustified and keeping with classic central banking. recovery, some actions have been perceived as distorting asset prices and save hearing -- asset prices. favoring the rich. there has been a hit to the

reputation to the fed. unfortunate but true. issue is the whole discussion of the federal reserve and federal reserve policy has been caught up in this very polarized political have beenthat we experiencing in these countries these days. in the papers there is a chart of democrats and republicans and their support for the fed. that polarization shifting and switching and getting worse over time. a very disturbing example in my mind, this was in the republican --maries, who will fire bank fire been burning cane fast as. when thesturbing to me republican congressional leadership wrote a letter to the federal reserve trying to dictate portfolio choices.

this is a direct interference or and attempt to interfere. then there are the votes against ben bernanke when he was reappointed and janet yellen more recently, the number of votes in the party, i think you can see the polarization affecting the fed. the third issue that i think is worries some is that many of onse objections centered inflation and an overly accommodated fed. painting is always unpopular central --oliticians many politicians. a long time of unemployment. i think the tightening issues will be questioned even more. will be hard to explain but

there will be plenty of opportunities for guests and test for second-guessing. consequences, raising the cost for borrowing for the fiscal authorities and reducing, perhaps eliminating payments from the fed to the treasury at the same time. i will also increase the focus in the congress on this. a fourth policy is mainly the responsibility of the fed and to encrypt -- to a considerable extent i think this is a terrific addition to the rulebook here. a could also meet political resistance. it gives the fed more exploder -- more exposure to predators. the threats to the potential and threats to independence are substantial here.

i do think worries about these threats should not to turn the federal reserve from doing what it sees to be the right thing. i think the best defense of instrument independence is success at meeting your objectives. exiting too soon because you are wereed about what people saying and thereby sending the economy down into a recession or orventing it from recovering waiting too long because you're worried about the political of your exit will undermine your independence over time because you won't be meeting your object is. the best defense is doing well coupled with continued effort to explain what the fed is doing and why it is doing its. i have a very nice will talk about the origins of transparency to defending independence. fedmain immediate threat to

independence for the degree of fed independence seems to be backing for the government accountability office. ,his would not be a good idea in my view. this is an audit about the accuracy of the financial statements. this is about studying the efficacy of policy. gao audits everything about the fed in this regard. was established in the late 70's. congress who are opposed to fed actions would use the audit to argue a minimum of delaying, perhaps exit, from conventional monetary policies. the fed does not have to wait for the gao study. it does not have to appear for gao recommendations. this will be an additional pressure point that moves the needle in a wrong we -- in a wrong way.

it would be a bad signal to the financial markets and it would undermine a very useful distinction between independence for monetary policy and independence for regulatory policy. tohink it is important debate this in a democracy. i certainly hope there is no action that would significantly undermine or reduce the independence of the federal reserve from where it is right now. should mention that these academic issues, these are historical issues you have studied for some time. >> i think the first thing to say, don is always so wise and balanced. it is a delight to read anything anything heo read

writes. i agree completely with what he said about fundamental importance of central-bank independence and the threats of the fed. i think that's somewhat different perspective on why maybe gives matters you a sense of where the threats are coming from. a classic case for central-bank independence, which is politicians have a short-term outlook. let them control monetary policy they are going to pump up the economy before an election and that can cause inflation. in contrast, if you delegate monetary policies, they can take a longer run view and then you get less of these problems.

i am skeptical of that story for a couple of reasons. the number of people that have tried to look for evidence that politicians to pump up the economy before elections by and large cannot find them. this is with the not at also comprising exception of richard .ixon -- the not so surprising exception of richard nixon. finally, probably my most compelling reason for not believing that story about politicians and independent central bankers at different

time frames really does come from history. if you look over many countries, when have we made it to stakes? when has inflation gotten too high? by and large it has not been particularly correlated with central-bank independence. it has been correlated with ideas. when we have screwed ideas about how the economy operates. what this leads to is the sense that the main reason or rationale for central-bank independence is expertise. want to delegate our monetary policy to an independent central bank because they -- because we think they will do better because monetary policy is really hard. a very nice paper from this morning gave us a sense. you wouldn't want to delegate --

you wouldn't want congress telling us how to build a nuclear arsenal. you don't want congress telling you that monetary policy makers -- telling monetary policymakers how they see price stability and maximum employment. want monetary policy because we expect the outcome to be better. if i am right that the main reason for central banking independence is expertise, because we want a monetary policy made by experts, i didn't suggests -- this is coming back because this is sort of where don ended up. the biggest threat to independence is to add monetary policy decisions. then loses bank their main argument for independence. they are better at it than other people. japan, i foundo it a little hard. i cannot tell if he was

lamenting that the democratically elected government had replaced the governor of the bank of japan and strong-armed more expansionary monetary policy. in my view 15 years of deflation the caused -- has caused bank of japan to lose its right to claim superior expertise. another example comes from the 1930's. i think the federal reserve thought it was taking actions that was consistent with the federal reserve act and yet their policies were failing miserably. i think in that situation it is only natural that central-bank independence comes to threat. accountability has to involve more than central banks providing information about what they are doing. point elected officials should take appropriate actions to fix the situation.

if the biggest threat to fed independence is more policy, i end up exactly where donis, which is the biggest counter to that red is good policy. as don points out, if the fed or some other central bank does not take actions that it knows to be correct or thinks is correct, because it is afraid of how congress will react, that will be a disaster. i had exactly the same analogy that don has. the best defense against threats to independence is an offense in the form of good policy. finally let me end up and agree with the last point that don made, which is his concern about political partisanship. i take it and a little bit of a different direction. the thing that worries me most about rising partisanship is the

is aide of that, which decreasing support or belief in the value of expert opinion. we see that not just with monetary policy but fiscal policy. i think we are seeing this across the board. so i think some of the decline and support for experts on monetary policy can be countered by a federal reserve doing an even better job of explaining why they are doing compelling testimony, all of those things. here is where chairman bernanke has made great strides. i think the greater transparency of the fed under his watch will be one of the lasting contributions. i think the battle needs to be fought much more broadly, by the press, by academics, by ordinary voters. i think it is that we have the hutchins center.

that will be in other voice fighting for the importance of expert opinion. i think only if we reestablish the value of expertise and evidence-based policymaking can we squelch what ics the indamental challenge -- what see as the fundamental challenge. where everything has to be boiled down to 140 independenceets -- only for intelligence. let me pick up where christy left off by saying that where christina left off by saying this world is becoming extremely partisan. off by sayingake where christina left off by saying this world is becoming extremely partisan. center's aspiration

is to have a more broad analysis. i accept the points you made. it is a very understated paper. he expresses some horrific concerns about what can happen. >> with your help we can get that journal looked at. blended in with the williams paper that we had earlier, it started very candidly. economists no less than they thought they did in understanding business, especially today. would go to -- absolutely we need to look at history. it is not that they don't have financial markets. it's that they are perfect financial markets that nothing can go wrong.

that is the core of the problem that is going to take a long time to fix. the interplay involves nonlinearity. y won't have to answer in the next five to 10 years. we exist in a world of tremendous uncertainty where we do not know if monetary policy has it right. ben bernanke wrote his 1983 paper about the great depression. it was 50 years later where there was a rethink of what we should have done. i come down on the side of having central-bank independence. expertise is very important. it is an environment where it is very difficult to preserve. let me finish on a couple of points, understanding the chairman is about to walk-in. certainly i do think institutions forecasting needs -- asrecalibrated to that

john pointed out in his paper, we live in a world where we have cycles more like we had before world war ii. we certainly emphasize this point also. that may mirror back to inflation targeting regimes, how you want to design its solutions -- design institutions in a benign environment we had before the crisis. let me lastly say there was a discussion about monetary policies, fiscal policies where it could have been an act quit -- been inadequate. some of that was based on the forecast not being correct. biggest disappointment in the policy response has not been in either of those. it has been in structural reforms. where are the reforms that are going to generate long-term states?n the united

simpson bowles had good ideas about tax reform. it did not happen. pages whenhas 30,000 you do all the legislation. but i think it is missing a higher equity ratio. of course, having more infrastructure investments, something all economists seem to agree on all along but do not happen nearly to the extent that we have. certainly these are problems that need to be studied and present challenges. the fed gets blamed for everything. that is that really true. and it is good because of the fed does not get blamed than the press gets blamed. we need independence because otherwise we get a lot of independence -- a lot of inflation because the polymath -- the policymakers are short side the. you have a side in this? -- are shortsighted. in this?ve a side

them as -- >> they had almost no expertise. if you ask any central banker and there are 199 pressures for lower interest rates compared to if youinterest rates, think that there were complaints about the policy now, wait until you see when the fed has to tighten. witham going to disagree that. listen to some of the pressure coming out of congress today. i am sure there will be pressure on that direction when the fed tries to raise rates. but there are a lot of people in congress that are chomping at the bit for the fed to tighten -- certainly to dial back on extraordinary measures. i think the pressures are more balanced. sittingmy experience,

behind a chairman for 30 years, was that many more congressmen were arguing for lower rates or not raising rates than there were for raising them. >> maybe the world has changed. we need to be careful not to be fighting the last war. >> maybe this time it's different? [laughter] demo maybe it is different. >> we have time for a couple of questions. it is different. >> we have time for a couple of questions. of blackrock.r a question for all of you. is the gao report really the right place to draw the line? can any of the four people up there .2 and irresponsible gao report that incited congress to go off in an irrational direction? point to and

irresponsible gao report that incited congress to go off and then an irrational direction? gao reportt think a would be a disaster for central-bank independence. i think it does move the needle a little bit. it would be used by congress as a tool against the federal reserve and mostly my concern -- i agree with what christie says about expertise. moreoncerns will be intense when they start raising rates. it is not a big deal and the fed can just ignore the gao and the call for the reports. i see it moving in the wrong direction, even if it is not a big deal. might be other things that might be proposed that i would .ee moving this seems like the wrong direction at the wrong time.

>> i am and 11 from imf -- i am andy levin from imf. contingencyto be planning and strategy. one way to think about this -- with this consistent different -- in normal times you may have a dr. you see occasionally. if you think he is doing a good job you keep going to the same doctor. if not you switch. the goal is to be healthy. under real-world circumstances, like your child is sick and needs to have surgery, you want to consult much more closely and talkphysician through strategy, what type of strategy, what sorts of

treatments will be appropriate? the more involved with that decision. when it comes to surgery in the operating room, of course the doctors and assistance have to be able to use the scalpels and that sort of thing. there is a level of instrument independence. but i think these to stations are what we are seeing today in the political world. in that sense, maybe this is a direction that don can expand and comp location with that can expand upon -- can expand upon. it is more like a sick child where the parents are very very concerned and where there are tough incisions, what are the risks and so forth. are theecisions, what risks and so forth. >> i agree. congress is given very vague goals. maximum employment, stable prices. ae federal reserve has done

good job, particularly in the past few years, in finding those goals better. done more about defining the strategy. i completely agree that consulting part of the that part ofy for the accountability is consulting on the strategy, explaining how the strategy is supposed to achieve the objectives, what the risks are on either side. i think chairman bernanke and the fed made huge strides in that direction. will there be challenges for chairman yellen? you bet. communication and consultation is definitely part of preserving independence. >> time for one more. and the way back there. >> i am from the imf. in related to whether central banking independence is valuable in an environment of political

-- we can cite a number of examples and the emerging markets, what could happen in the future. is central banking independence viable in this kind of environment? if the government is desperate enough for money they will make the central bank to what it wants. the of course the answer is no. of us is a matter of degree. this is a matter of degree. they can go through a long menu of options. yes, if it is bad enough that happens, i don't think we are talking about that in the united states nearly enough. -- >> thank you you. thank me in joining our panelists.

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