you might get thrown in jail for it. i don't have kids and i'm not married, but that would be my observation. terms ofeducation in high-tech workforce, it is definitely a challenge to find people. there is a shortage across the country in technology and engineering. day, it has made this kind of transient shift of employees back and forth. that is why you see lawsuits between facebook and google because they are stealing employees. the only place they can get employees is other companies. i think that sends back to the fact that -- stems back to the pushing peoplee to go to college, graduate school, in the name of equality, we are saying everyone needs to get the same degree and be the thing.rson, do the same

the problem with that is when job,graduate and find a there are only so many of that type of job. but frankly, there are more jobs these days that you can get without having a college degree. most of my employees with our half, had noaybe background and what we do prior to working for us. we train them. you looking for basic skills and then train them. paul: exactly, we are looking for hard-working ethic. and we have settled with saying we will teach them the rest. my cto has become the educator in chief, helping employees develop and grow skills. you can see that across all industries. i don't think there is a job shortage. i think there is a worker shortage. but i don't think there's a people shortage. bob: we could spend a lot of time.

heidi, if you could address this briefly and then audience questions. heidi: i think the key is education reform, and private public partnerships like ibm is doing. things like that where you got employers telling the education system what skills they need and offering apprenticeships and internships. i think switzerland or sweden, one of them has a graduation of 97.4%, because at the beginning of the sophomore year, they are started with a company so they graduate with wonderful skills and great jobs and they love what they do and they are passionate about it. bob: excellent point. we have a resurgence of technical education. teaching job ready skills with fast numbers of young people, after they get that degree in hand. really great example at a

jesuit school. theou get a chance, graduation rate is all believable. private funded. bob: and one day a week they are actually getting real work. heidi: they get to pick their passion. like heidi was saying, education really is the key in many ways. if you don't innovate, you get behind. education has become the same way. we are educating the future for the 1960's. we have to educate the future for the future. [applause] bob: we have a microphone over here. kevin has a question.

>> i want c-span to hear this. kidding. i have kind of a loaded question. i think education in america sucks. bracketed by the government to get people to go. they keep raising rates and put scholarship money, then it becomes a farce. here's my comment. i believe that a lot of the affirmative action and diversity programs that are regulated, forced on businesses, is what is ruining your businesses. you talked about bringing people black peoplestry, don't want to come to little bens and he forced -- forced. but if you hire too many white

folks, the government comes in and says where are the black people? so you are dammed if you do, dammed if you don't. [laughter] here is my question. retailers that has been forced to hire three-foot tall watermelon -- guatemalan women, and then bases like google and high-tech people, that say we will hire anybody, which is the american way. i don'ting the best, eight-foot orre purple or from somalia. if they can code, i want them. from an hr perspective, do you feel like i feel, that government social engineering of business is really what is the

downfall of business? when america says bring us your est and brightest, i don't put you on the spot if you don't want as on public tv. what a great question. i want to cheer you on. i have documents at each of my mills about this they can have to monitor every month. thank god the head of my construction division, his daughter married somebody from louisiana. you have to monitor what percentage in your area, and that one person got us up to speed to be in compliance otherwise i would have been fined. [laughter]

and he is about four and a half foot tall. peter: i agree with you. our k-12 education system is in trouble. it is shameful. it is really shameful. we are trying to deal with this in colorado and jefferson county. we have recall elections because they are doing things right and the teachers union does not like this. thehers union is all about union and not about the kids. i think there are places and reasons to have unions. our kids need to get educated and they need to get educated well. colorado succeeds as a great organization that is working on rating schools. have an executive assistant

goal daughter goes to his with a d rating. she found out it was a deep rating, she said why do you want your daughter to go to the school if she can go to a berated school next door? because we love the teacher. the parents have to get on top of this, a huge piece of the problem. those who have parents that care. -- minority hiring has been the cause of any significant issues. i think it has helped us. is -- we like diversity. the problem is getting young people who are willing to work, to start. as i give talks to employees, i say you have to start somewhere. everybody wants to be president. but you have to start. college kids, they have a fancy

education. anay, why don't you go be apprentice or drive a truck for a while and learned the business? pretty soon you will be a supervisor and then the manager at's how the system works. young people want instant gratification. they get on their iphones with facebook. it's like a candy store. and they don't understand. you have to start somewhere. that is the key. i don't care what your race, religion or anything else is. you have to get started. bob: one more question? a lot of taxes for the

public schools. that we pay money for a terrible purpose. number one, the teachers don't almost every lesson i ever had in public schools was a review lesson from kindergarten. -- thetwo, the kids teachers never really cared what anyone did. and we are paying money so that they can get paid for doing absolutely nothing helpful in the kids education. what can we do to fix that? how? [applause] >> what is your name? >> one of the things we will do to fix that is the next time we

put a panel like this together, you will be appear -- up here. [laughter] >> thank you for the question. how many people in here were prepared for the job force by the department of education? seeing there are none, we will move on. the department of education does not educate people. over the past 20 years, you have seen an increase in the amount of administrators in schools across all levels that has doubled the rate of teachers and researchers, which has increased at a higher rate than students. we are increasing the bureaucrats, which is raising costs. the quality of education is going down while the cost is going up. you are crippling young people with rising amounts of debt for less quality. ,n no other world without work

etc. education, because the government has so deeply rooted its hands into our education. that's one of the first things we have to do is get rid of the department of education. we could each take a department and get rid of it. to talk about the money side of education,artment of education america is not underfunded. $600 billion annually. somewhere around 600 billion a year is spent on education in america. that, we pay all these taxes, and why do we pay these, because the government is doing more than it was intended to do. the biggest thing is to shrink the size of government. i'm not advocating for the government to give us $600 billion to control education. but i think we would probably run it better.

i think it is all about shrinking the government. ands about reducing waste eurocrats and getting back to rewarding educators. the costyou increase of administrators and these people, you are having less money to pay actual people educating kids. if you have less money to pay people educating kids, the next generation is saying, i can get it job better doing something else or sit at home. they will not be educators. i say that because my mom was a teacher. she taught for many years. the education system we had prior to the department of education that was not long ago, than when thetter department came in and said you have it wrong. question, we have discussion and electing people that will reduce the size of government.

the marley increase government, the further the quality of education will go down. >> i want to answer jack on one thing. obviously you have an unbelievable set of parents to get you where you are at. but that is partly what is missing in america today. i have real issues with the education system. but we have lost the family values. so many kids are raised by a single parent. that person does not have the time or effort for that kid. the american household has to get back together and figure out , and raise the standards themselves, and go in and help pop the standards of the teachers backup like what used to have been was a kid. thank your parents and i want to give them a hand. [applause] bob: one more. time for one more question.

it is really a statement. as an entrepreneur, i feel all the pain you feel. i have the exact same experience. but there is hope. from central illinois, we started a little class, 40 business people went together to pay for it. that was eight years ago. we take high school seniors, and each child has to start a real business. and the things that come out of that class are amazing. an example would be, if i make any money i'm going to give it all away. because they think it is evil if you make a lot of money. but that class has grown. four stn for state. -- ates. we are now going to be in 45 communities. i'm hopeful after meeting yesterday, we will have one in

colorado. it is transformational what the kids are learning. they understand what it takes to start a business. a 17-year-old said to me, i don't have to pay taxes, i'm only 17. so they don't have a clue. but there is hope. i identify with everything you say. education is everything. thank you. [applause] bob: panelists, thank you very much, this is better than i expected. [applause] >> in this next part of the conference, an author and economist discusses the causes of the financial crisis and the

possibility of it happening again. from the steamboat institute freedom conference in colorado, this is 45 minutes. have peter wallison, about the 2008 financial crisis and how it could happen again. does anyone believe another crisis could happen again? in march, did a presentation at the pavilion .hat was very well received his credentials on financial matters are impeccable. financialhair and policy studies for the american end of -- american enterprise institute. prior to joining that he practiced financial lot in d.c..

he filled a number of government positions. during the reagan administration he had a role in deregulation in the financial services industry. he was white house counsel to president reagan later, and also served under governor nelson rockefeller. he is the author of a book about ronald reagan. he has written many books on financial risk. he frequently writes columns published in the wall street journal. as well as the op-ed pages of the new york times. warms give a well -- steamboat welcome to peter oson.c [applause]

cracks it is wonderful to be here. i must say, i have to give a lot of credit to jennifer. i have written a book and it is an important book. but let jennifer saw in this book when it first came out, in january of this year, she saw that there was a direct connection between what i was talking about, or would be talking about when i described , theook, and the desire organization here to protect capitalism. there is a tremendous relationship between what happened in the financial crisis and the issue of whether capitalism is going to survive effectively in the united states. let me get started on that little bit.

i think these are really important issues. although the book involves something most of you have experienced, you probably don't understand why you experience that. do we have the slides that are available for this presentation? that is the book. know that in the had a lotcrisis, we of very bad mortgages in the financial system. what we might not understand is why there were so many bad mortgages and how these bad mortgages actually created a financial crisis. can i change the slides by telling you or do you have a quicker -- will this do it? let's try. that works.

most of us don't understand. most people in the united states don't understand why we had the financial crisis, why these mortgages led to a crisis. read in the mostly newspapers, what we have been told that the government is that it was the fault of the private sector. there was a lot of risk-taking, a lot of read on wall street, and the private sector was insufficiently regulated. ok, it takes a little time. the fact tell us something completely different. about what caused the financial crisis. what you are looking at here are the entities in the united verys that were holding

low-quality mortgages. subprime and other low-quality mortgages in the united states. in 2008 before the financial crisis. on the left, the blue, and the red above it and green above that is the government. these are government agencies. on the right, that is the private sector. right away, you should understand, anyone should understand, that the government created the demand for these mortgages. because these mortgages were on the books of the government. the facts are these. in 2008, before the financial crisis, more than a majority of all mortgages in the united states were subprime or otherwise weak mortgages. i was 31 million subprime mortgages. 76%, where on the books

of the government agencies. the blue happens to be fannie mae and freddie mac. they were government-backed mortgage companies, they are still in existence. they are insolvent. the government is controlling them and supporting them. just above that, the red is the federal housing administration and above that, other agencies. the point is, it was the government that called for and caused these mortgages to be produced. i'm not trying to say the private sector had nothing to do with this. we can see about 25% of these bad mortgages were on the books of the private sector. the principally if you were looking for the cause of the financial crisis, you would have to say that the government was holding 76% of all of these mortgages would suggest

something about who is really responsible. why are we at this stage, six years after the financial crisis, why are we concerned about this issue? a chart see here is that shows the recovery of the u.s. economy since the financial crisis. and the recession that followed that. the black line in the shaded all of the average of the recovery since the middle 1960's. the red line is this recovery. it is much see that worse than any recovery we have had in the past. that is the fault of something you just heard a lot about. the dodd frank act. sitting there in the audience and listening to the ceo panel,

i was kind of amused because i have given this talk many times. many of the people in the audience actually are in the financial business and have said, how many people have encountered or know what i'm talking about? very few people understand. in the financial business, they know there is much more regulation. they know if they have to comply with daily. but they don't understand it is all the result of a new act, and that new act was adopted because diagnosis that the media, to a large extent and the government itself, has given to the causes of the crisis. we have been told it was a lack of regulation, of the private financial system that caused the crisis. i have shown you the data that

indicates actually it was the government. but most of the things in the newspapers suggest it was the private sector and it was insufficiently regulated. the dodd frank act was adopted in 2010. that is by far the most suppressive law and post the financial system since the new deal. i want to talk a little bit about the dodd frank act because there is a clear relationship and thee slow recovery slow development growth of our economy, even after he came out of the financial -- after the recession that followed the crisis. there is a direct relationship. that comes through the new regulations that were placed on the banking system.

the new regulations that were placed on the banking system in 2010 with the dodd frank act. are 23 country, there million community banks. that is a bank with about $10 billion in assets or less. about 99 .5% of all the banks in the united states. those banks supply small what has happened when all of these new regulations have been placed on the banks is that they have been required to withdraw substantially from providing new financing and credit to all small business. business, about

18,000 500 larger businesses. what is a small business? less than 500 employees. any business with more than 500 is considered a large business. what is the difference between small and large in terms of act?t of the dodd frank is simple. large businesses, those with more than 500 employees, are able to register securities with the sec, and are able to get financing from the capital markets. they can issue bonds, notes, commercial paper and other ways to finance businesses. small businesses, those below employees, do not find it the or sensible in terms of

cost to register with the sec, so they get their financing from these community banks. what happened with the dodd frank act? one of the things adopted was called the community -- consumer financial protection bureau. many of you may have heard of that. many of you have probably seen some of the rules. a couple of years ago, one of the rules from the community financial bureau was 1000 pages long. it applied to j.p. morgan chase, which is a $2 trillion bank in new york and it applied to a $50 million bank in a little town in colorado. same regulation. but -- it j.p. morgan chase in new york has hundreds of lawyers

that can read and interpret this for-- 1000 page regulation the bank. but the smaller bank has to hire a lawyer to read it, then has to hire a special person to do the underwriting that the rules now require. probably requires other experts to reconfigure entirely the way it relates to its customer base. all of those costs are internalized by the bank, the small community bank, and that means they have to hire employees that are no longer in the business of making loans or looking for new opportunities for the bank. in addition, there's a lot more regulation in which bank examiners come in and tell them

how they should be conducting their business because the bank examiners are now told by the -- by their directors in washington that things have to be much more businesslike then that they have been in the past. instead of making loans to someone it you have known for years in your community, someone who has never missed a payment, now you have to have audited financial statements from that borrower. wants to seeiner those into the extent they are not available, the bank is charged with inefficiency or lack of quality standards. so that, too, causes tremendous cost for each of these little banks, making it much more difficult for them to finance small businesses. , we shouldall true see a difference between the growth rate of the small banks

and the small businesses and the growth rate of the larger businesses. in fact, the data shows that. since the financial crisis, since the recession that occurred just after the financial crisis, large businesses those with more than 500 employees have been growing at a rate that is consistent with is that the black line. that is as they are growing and as they are recovered at the rate they always have in the past. small businesses, those with less than 500 employees are not growing at all. in fact, as they have declined. if you want to know why the u.s. economy is sputtering and and we areing forward, why not seeing growth, it is because small businesses which are

responsible for about 64% of all new hires in our economy are not being sufficiently financed so that they can get the inventory is grow and make loans that the banks can make loans that small businesses will be up to use to grow. so that is why it is extremely important to understand dodd frank, the fact it has on the banking system, and that in turn on the growth of the entire economy. that is one issue. we understand now is the reason we should be caused thebout what financial crisis is that we adopted a law that does make the financial -- that has made our financial system function much less effectively, much less slowly, and will continue to do that as long as it is in effect. i am part of a group in and some other

organizations like ours to repeal the dodd frank act over time. that is the only way -- [applause] peter: that is the only way we believe this economy will ever return again to the kinds of growth we had before. have thisd we problem? a -- a we end up with system and our mortgage financing business that caused this financial crisis? the collapse of all of those mortgages? what i am showing you hear is something called the affordable housing goals. these were doctored in 1992 -- adopted in 1992 by congress and imposed on fannie mae and freddie mac, i mentioned him

backed, the 2 government mortgage companies. they were required to getting an identity to to make loans to low homes borrowers for because fannie mae and freddie mac did not make their own loans but they would buy loans from originators like the banks. 30% ofre told in 1992, all of the loans that you buy each year have to be made to people at or below the median income. in the places where they live. if you look at the charts, you 1996, not started in in 1992 because by 1996, it had risen to 40% up at the top. but there were three kinds of categories. low and moderate income, below median income. the nets was underserved areas,

largely minority areas. as special affordable, people with incomes 80% or 60% of median income. and over the years as you can see, those requirements went up. the black lines are the requirements of fannie mae and freddie mac and red and green lines are fannie and freddie in meeting those goals each year. what happens when you are required to by more than 50% of all of your loans from people who are at or below the median income where they live or in some cases 80% or 60% of the median income where they live? fannie and freddie were famous in 1992 before this law went into effect for buying only prime mortgages. what was a prime mortgage? you have to have a good credit

score. you had to have a 10%-20% down payment. after the loan was closed, you have to have no more than 30 is percent of your income going for things like your mortgage or credit card -- 38% of your income or for things like your mortgage or credit card. no more was used for those contracted obligations. those are the three standards. were not particularly tough standards especially the ficairement for a 660 score. the average is about 17. those were the requirements before 1982. -- in the average is about 710. once you are told there is a government quota that says you have to buy mortgages that are made to people at or below the median income, at or below 80% you had toinorities,

combine all of those things together each year, what do you do? you start to reduce your underwriting standards. and that is what happened. fannie mae and freddie mac were the dominant players in the residential market -- mortgage market in the united states. as if they cause their own underwriting standards to decline, all underwriting standards declined in the united states. what happened after that? let's see if we can make this happen. there. what you see here is an enormous housing bubble. many of you probably experience during the period of 1997 to 2007, a tremendous increase in the value of your home. this was the result of reduced underwriting standards. how do we know that?

we know that because you can't think about it this way. has $10,000 to buy a the requirement, the underwriting requirements is you have to have 10% down payment, you can buy a $100,000 home. thehe government causes underwriting standards to change that you only need 5% for an underwriting standard for a down payment, you could buy a $200,000 home. and of course, that is what happened. it was much more money, much chasing housing prices starting in about 1997. that pushed up housing values. another thing happens. the personal was going to buy a $100,000 home with a 10% down

has now borrowed instead of $90,000 to buy the home has borrow $190,000. that's a much weaker borrower, a , many more much more and larger obligations then the personal who would've bought to $100,000 home. this build a tremendous bubble. a housing bubble. had gotten to a point where it was about all homes in the united states where this was effected and entirely throughout the country was all housing prices had doubled in the 10 years. much biggerit was a bubble than the previous ones we had had. there are always bubbles in any commodity. but they normally decline, they rise and decline like the oil

price we see every day. but it is bubble did not because the government kept forcing more and more money into the residential mortgage market in order to keep it bubbling. in the clintont administration. this all started in the clinton administration continued unfortunately into george w. bush's administration. saids memoirs, george bush "i was delighted by the fact so many new people were able to buy homes. what i did not understand was all of the risks that we were creating by imposing those rules." understood now has what mistakes were made but it is too late now to understand the errors. what all of us have to understand is that a decline in underwriting standards of the

kind of data had started in 1992 and its standing through 2007 is not good for our economy. government'ss the interest to reduce underwriting standards not just to make loans to low income people. that is a social policy, government could have other reasons for doing that. but in part, all governments like to do this because if you ,et the housing market to grow more people are buying homes, they are buying rugs and gardening services and all kinds of furniture and all kinds of things that make the economy grow. the government wants to reduce underwriting standards. and we, the people, have to understand the consequences of that for us. if you are someone who owns a home, you know probably if you try to sell the home that your home is connected with everyone

else's home in the neighborhood. if your neighbor defaults on his car loan, it has no effect on you. you may have to drive him to work but no other problem for you. if your neighbor the falls on his mortgage, that affects the value of your home. all americans have to understand this is yet another thing the government can do which can cause huge losses for all americans if we do now watch what they are doing. and we are doing it all again. one of the reasons and this comes to the point that jennifer was making, do you believe we have another financial crisis? yes, we could have another financial crisis. the financial crisis we had came from government policies and we do not understand what those policies were. that's was it this book is

about. it tells you why we had these policies and why we will likely do it again. only a few months ago, the president said he was going to the fha, federal housing administration insurance fee by about half a percentage point. what does that do? it makes it much more likely people making risky mortgages, bought by fha, people making risky mortgages will have more opportunities to do that. we will have more people taking big risks on their homes than we had before. in addition to regulator of fannie mae and freddie mac said also several months ago, you know, you have been buying mortgages now with about 5% down payment, that already is too low. but you're been buying mortgages with 5% and i want you to reduce

them to 3%. this is all part of the same process. that process is the government trying to boost the economy, trying to boost to the economy by making the housing market bubble in little bit more. it is dangerous for all of the rest of us. we all ought to be aware of it. how did all of this turn into a financial crisis? is a little here chart of the mortgage-backed securities market. banksortgages are held by and other financial institutions as whole mortgages. but the men of them are packaged together -- but many are package together into pools and securities are sold against the s and theom those pool interest people are paying on their mortgages. and as you can see, that was a aboutital market up until

2007. in 2007, just as the bubble collapsed, so did the mortgage-backed securities market. that was important because most financial institutions held their mortgages through mortgage backed securities. the reason for that is a little technical and has to do with accounting and regulations and government regulation but to the government actually gave the bank and other financial institutions and advantage in and their capital requirements if they held mortgage backed securities instead of home mortgages. most of them went in and bought a lots of mortgage backed securities. what happened here in 2007 is the value of those securities declined to almost nothing. this is because as the bubble

began to dissolve, the bubble declined, and enormous number of new defaults became evident. the newspapers were beginning to report these defaults. and data about the housing industry was showing a huge number of defaults. inwhat happened is buyers the mortgage-backed security markets simply walked away. they fled the market and did i want to buy. and because they wouldn't buy, the prices fell to almost zero. under accounting rules, the institutions are required to carry their securities and market value. , thean see that they had mortgage backed securities had or 2008. value by 2007 and so that is why you were reading the newspapers that x-ba

nk and y-bank was in serious trouble. that is because they had to write down their assets and when you write down your assets, your capital declines and also in directses, you suffer losses under the accounting rules. that is why we had something that looks like this and there were many financial institutions all over this country that were in trouble. it is the relationship between that problem and did the government's decisions that cause the financial crisis is as we understand it. if we had left things along, -- alone, over time these values would have come back because what we had is plead double flinging the dust people fleeing the market until they understand more information about what was causing these losses.

the government did not leave it like that. there was a large investment bank on wall street named bear stearns, many of you have probably heard it. 2008 wasrns in march in trouble because it was one of the major investors in mortgage backed securities and it looks like it was failing. ,nd the government then decided hank paulson secretary of treasury, and ben bernanke come the chairman of the federal reserve, they decided to rescue bear stearns. i say this is one of the biggest -- major errors that it's ever been made. theof the poorers decision government has ever made that made a crisis to rescue an investment bank like bear stearns but they did it. i call it the original sin. when they did it, they sent a signal to all of the rest of the market that they are going to , alle all large banks

large financial institutions. they will not let them fail and that changes the way the managers of these institutions decided to operate. yourse normally when assets go down, your capital goes down on a you look weak or nearly insolvent, you go to the market and you sell more shares. because you want to tell your creditors that you have plenty of equity under the obligation that you owe to them. government is going to rescue everybody, what is the reaction of managers or creditors? creditors stop being worried about their decision because they figure if the company fails , they will be rescued in a way. and at the managers of the companies say why should i dilute my shareholders, the

stocks were way down, washing a reduce -- -- why should i dilute my shareholders by selling at this low price? in septembers that of 2008, fannie mae and freddie largehose 2 very government that institutions, became insolvent. and the government also rescued them. what was the significance of this to most people? the significance was everyone still thought that fannie mae and freddie mac were only buying prime mortgages. no one understood how many subprime and other low-quality mortgages were in the financial system. that chart i showed with the very beginning is entirely new. 2007, had that data in 2008. when the market, participant in

the market, realized fannie mae and freddie mac were insolvent primere only buying mortgages because fannie and freddie had never told anyone that as they had begun to buy these very low-quality subprime mortgages, people said things are much worse than i ever imagined they were. poolhen as they began to their money out of all other financial institutions including one very well known now named lehman brothers. now, if the government had rescued lehman brothers after thingsg bear stearns, would have gone according to what everyone expected. , if yournment did not remember, rescue lehman brothers. they allowed lehman brothers to go bankrupt. that frightened everyone in the market and created a panic. and we saw then something that no one had ever seen,

regulators, academics, business people, others, the biggest banks in the country would not lend to one another. even overnight. they were hoarding cash and they were doing that because the fear was that to the extent that anyone came to them and asked for cash, if they cannot deliver immediately, a rumor would spread on wall street they were in liquid and they would be ruined. and thisordered cash was we understand to be the financial crisis. problem. parts to this the government forces down underwriting standards so that it craves this gigantic bubble and a lot of very weak mortgages out in the financial system. a majority in fact, 31 million such mortgages. then at the government rescues

bear stearns, causing participants in the market to andeve that is their policy they will rescue everybody. and event the government reverses its policy and causes a panic that will understand is the financial crisis. the result of this was the dodd frank act. , which camewhy about because the government blamed the private sector for taking all of those risks with insufficient regulation. as a result of that, we have this very slow recovery that i showed you at the beginning. this is the story and this is why it is extremely important for all people in the united states to understand why we had a crisis. it is not because we do not have sufficient regulation of the private sector. it was because we do not understand what the government was doing when it was forcing

what was essentially a social residentiale financial system by requiring fannie mae and freddie mac to buy mortgages that were not of the prime mortgages that fannie and freddie had initially been famous for. so, that is what it is book is about. it is, i think, the only book of its kind that explains from the beginning to the end what happened in the financial crisis with an awful lot of data. i should mention i was a member of the financial crisis inquiry commission which was set up after the financial crisis by congress. let me see if i can get something up here. nope. set up by congress to tell the american people to tell congress to tell the president what

caused the financial crisis and was notfort, i think intended to inform people. it was intended to create a foundation for the dodd frank act. and so i dissented from the report of the financial crisis inquiry commission. i wrote a 100 page dissent. is an outgrowth of that. and i found in fact after it was all over and after the commission had departed, having the insufficient regulation for the financial crisis, after is a departed, i got an awful lot of information from the files never shown to me as a member. and most of that information is now in the book. so if you are really interested in why we got to the place where we are, this is the book you should be reading.

i think we might have a little time for questions. is is that true? >> if i can ask a one real quick. canada does not have this problem because they have consistently asked for higher down payments. do you think it is possible politically for us to go to that if we get a new president with so cajones and willing to take the heat? possible toit is have good policy. the important point because as i explained, the government has a real incentive to reduce underwriting standards. it really helps them a lot and make the economy grow. it is important to the american people to understand the problem. and that is whoever is elected president is going to be told, well, you know mr. president or madam president, if you really wanted economy to grow, all you

have to do is start reducing some of these underwriting standards are you and of course the economy will grow more. that would be a gigantic mistake. if the american people are fully informed about why we had the are much crisis, we more likely to have a good policy no matter who is elected president in 2016. >> i am. as to what you think of the incredible irony that no other than barney frank what it be the author of dodd frank when barney frank in identity to start on the committee that recommended a reduction in lending loans that was the genesis of subprime loans and you should regulate how it should be fixed. peter: [laughter] if you were barney frank, what would you want to do? you would want to blame the financial crisis on something else entirely. you would want to focus everyone's attention on the risk-taking among the private

sector rather than on the government's policies. you cannot blame him. it is true for avoiding the blame by offering a law that onuses everyone's attention the mistakes of the private sector rather than the policies that he endorsed and enforced. i was in the government at this time. i was at the treasury department 1980 -- the reagan administration of 1981 to 1987. i was also the one who communicated a lot with people in the bush administration in the 2000. thereey were aware that was something going on at fannie mae and freddie mac. they do not know exactly what it was because fannie and freddie were not disclosing they were taking credit risks.

people in the bush administration were aware and started to draft legislation that would impose much stricter regulation on fannie and freddie then existed before. and who opposed it? dodd and frank. now, they have the names on the law and they are heroes to the left. to the rest of us in this room and the rest of americans who see this, they should not be. kind of surprised you did not include discussion of the role of credit default in the recession. that athe amount of risk lot of the investment banks were taking on in the portfolios. i do: well, for one thing, not have time to talk about things like credit default swaps but they are covered in great detail in the book. in my view, credit default swaps have no role in the financial crisis. what a credit default swap does

is it takes -- i want to explore exactly how it does and doesn't so it gets a little technical. it shifts risk for one area to another. it does not increase risk that takes risk for one company that inholding that risk and effect a size it to another company. it is just like insurance. -- assigns it to another company. let's say you have -- of course you do have fire insurance on your house. down,f your house burns you are covered. on the other hand, if your fire insurance company fails and does away the issues presented sometimes on credit default swap , is a business that has written a credit default swap like an insurance company, is it fails -- if it fails, the thought is

everybody suffers loss. that is not true. fireu have not suffered a and your fire insurance company fails, you can go out and buy another fire insurance policy. is that is what most people did when they were worried about aig. they went and bought other credit default swaps to protect themselves in case aig failed. the credit default swap market functioned all through the financial crisis without any hal t. the credit default swap market function fully and continue to operate. it is now much more heavily regulated than it was before. but the regulations in my view are simply imposing many more costs and centralizing the risk outead of putting the risks

and diversifying the risks throughout the financial system where there is much more capital to take them. he is now centralizing the risk in various government-backed institutions called financial markets utilities. as a result of that, they are a likely cause in my view of another financial crisis in the future. the way we protect ourselves is by diversification, not by centralizing risk. jennifer: peter, thank you very much. we have to wrap up. thank you. announcer: tomorrow night, women and foreign policy with michele flournoy at a conference hosted by the bush school at texas a&m. here's a preview. flournoy: my first tour of the pentagon in the 1990's, i

decided, kind of a lonely thing being a woman later at that time. i said let's have a lunch for all of the women, senior women leaders of the pentagon. we sit at one table. eight or 10. and weeks afterwards, there was appears the theory -- and there was a conspiracy theory data women got together and have lunch, what were they plotting? was in thest when i pentagon in 2012, i would say if you invited all of the women leaders from the pentagon, you would've does you would overflow the executive dining room. that is good. at the highest level, it is still, i was still often the only woman in the room for many, many meetings. think it is improving in our agency but still women are definitely the minority. since in thess

1990's, definitely better. above more progress to be made. announcer: more with michele flournoy tomorrow here on c-span. or watch anytime online at www.c-span.org. announcer:'s signature feature of the tv is all day coverage of book festivals with top-notch fiction authors. here's our schedule beginning this weekend. live from austin for the texas book festival and the following weekend the nation's heartland for the wisconsin festival in madison. at the end of the month in nashville for the southern festival of books. at the star of november that on the east coast for the boston book festival. in the middle of the book, louisiana book festival. at the end of november, the 18th year from florida for the

miami book fair international. as national book awards from new york city. just some of the affairs of festivals this fall on c-span2's book tv. announcer: at the brookings institution, a panel of economists discuss monetary policy and the decision-making process. it was moderated by david wessel of the brookings institution. this is one hour and a half. david: good morning. director ofessel, hutchins center at brookings. i welcome all of you. the purpose of the hutchins help improve the quality of fiscal monetary policy and public understanding of it and we come together at an interesting moment for the federal reserve. interest rates have been as zero

and now about to rise or maybe not. they need something better of looking outside and deciding if today is a should bring an umbrella or not. we thought it would be a good time to talk about where the fed finds itself and what framework is should use as it enters the definition ofany an extraordinary period and monetary policy. bill dudley who joins us today came to the new york fed from goldman sachs in 2007, interesting timing, to run the market desk and became president intoe new york fed thousand nine. he served as vice chair of the open market committee. john taylor is the married

robert professor of economic at stanford and many other things at stanford. he was a member of the council economic advisers in the first bush administration and under treasury of secretary -- undersecretary of treasury. he is known as being the creator of the taylor rule three he deny ashley put the name on it, somebody else did. a simple rule of fun. -- he did not put at the name on it, somebody else did. how far the economy is for full employment. john undeveloped the taylor rule in 1993 when alan greenspan was chairman of the fed. alan greenspan was either incapable or unwilling to prescribe his approach to the rest of the world. amazing was heso decided capture the greenspan fed with an equation and ways much more clearer than greenspan was able to explain. if you read the transcript, greenspan talk the same way outside of the fed as inside.

the taylor rule have evolved in the use of the yardstick to decide if interest rates are too high or too low. there's legislation pending that to tell when fed they deviate from the taylor rule. bill dudley takes a different approach. he said is not a good substitute for in-depth analysis and judgment and is called the taylor rule incomplete because it does not incorporate financial conditions. he said the fed influences the economy and way back when he was economist he talked a lot about a financial condition index as a guide. now, i am not a pgd economist, i'm a student of economics and most i know i learned as reporter for "the wall street journal" for wise and patient teachers. today'sorward to the

lesson. bill will start in speak for about 12 minutes and john taylor will respond and as will join me for conversation and we will turn to question from those of you in the room or people watching all, you can send us questions by twitter. please join me in welcoming our first presentation, bill dudley. [applause] bill: thank you, david. a great pleasure to be here to participate with the john taylor. today's topic which is where to go next, torturous the issue of how should monetary policy be conducted. an issue getting considerable attention in washington, d.c. to put is that since, the question i want to tackle is it better for policy macros to start that policymakers to have a more flex -- policymakers

devil more flexible approach? as always, what doctors say reflection -- what i have to say reflects my own views. write to the punch line, i favor a more flexible approach that incorporates a broader set of factors into the monetary policy decision-making process. the world is complex and ever-changing and many factors that can impact the outlook and the attainment of the objectives and the appropriate monetary policy. after the same time, i do not favor total discretion in which policy is in an ad hoc fashion as we go along as david said looking outside and deciding we be seen on umbrella today. for to be most effective, participants and businesses need to anticipate how the federal reserve it slightly to respond to evolving conditions. the transmission a policy to the real economy not on a what policymakers decide to do today

but what the public anticipates the fmo see will do as of the outlook changes and evolves. our experience in recent years underscore time porting expectations are in influence the effectiveness of monetary policy. policy makers need to act in a systematic and consistent manner so they are formed accurately and behavior can respond consistent with those expectations bring in my view, it was a total discretionary policy. prescriptive rules, i like to make it clear i stormed the taylor role come the formulation based on john's papers have another a positive attributes for useful reference. first, it has 2 parameters. of a mende.ectly second the role has a desirable feature that when economic

shocks push away from the central bank, the teller will prescribes the policy and can push the economy from coming back. a number studies have shown the taylor rule in the sense it's performs quite well across the range of different assumptions of how the economy is structured and operates. despite these attractive features, i do not believe any prescriptive rule including the taylor rule can take the place of a monetary policy framework that has the collective assessment of a larger number of factors that impact the economic outlook. as i say, the taylor rule has significant shortcomings that could be detrimental to attainment of the mandated objectives. not just theoretical but very relevant to monetary policy in recent years. first, the taylor rule is not forward-looking. it's policy prescriptions based on the current size of the output gap in the deviation from

the fed's objective, not how these examples are likely to evolve in the future. in a rapidly changing environment, the taylor rule and other similar will be behind the curve. rulee fall of 2008, taylor were above the level of rates at the time. and a sharp, tightening financial conditions that occurred during that period. many economists recognize such prescriptions would've been inappropriate and suggested various ad hoc modifications. said modifications were appropriate. there was no consensus about what of right modification were at the time and because in part the circumstances were so unprecedented and the outlook was so uncertain. had -- i believe

that would've slowed down how we would responded to the crisis that would resulted in a policy that was not sufficiently accommodative. the consequence would been a longer financial crisis and a deeper recession. second, the taylor rule for ally used as 2% neutral monetary policy. large which are says the [indiscernible] the value affected by many oftors including the pace technological change, fiscal policy, and the evolution of conditions. sometimes much higher than 2% and this was the case during the late 1990's as rapid tapping -- rapid technological change is sometimes well below 2%. when credit availability dried up during the financial crisis in late 2008, it was far below 2%. recently the economy and the

lower rate is evidence that equilibrium today is well below the 2% rate assumed by the taylor rule. with aere consistent neutral monetary policy, the very low rates of recent years buttressed by our asset purchases should of been extraordinary accommodative. as a result, we should saying much higher than 2% growth rate than we have seen and should have seen inflation rate much higher than what we actually experienced. this conclusion supported by a number of more formal models. the williams model estimates the equilibrium short-term rate is around 0%, not 2%. and more broadly in a prescriptive rule for the systematic quantitative adjustment for the policy rate to change intermediate variables such as rigidity is incomplete because it does not count for the factors crucial to how monetary policy are transmitted

to the real economy. monetary policy affects economic activities through financial conditions included the level of the equity market, bond yields, for exchange of a dollar, and credit conditions. if the relation between the federal funds rate in other indicators of conditions were stable, one could folks on the level of short-term rates. the financial conditions vary considerably as we saw the financial crisis and its aftermath. one needs to consider development of conditions more broadly. short-termtimes when rates were at a the federal reserve took actions that eased conditions without changing short-term interest rates. such actions have included for regardless that the fmoc was likely to keep rates low for aligning time an asset purchases that resulted in lower bond term premiums.

because iat the star do not want to favor a role mechanically does not mean i favor the polar opposite, the discretionary monetary policy in which market participants, households, and businesses conducted his may how monetary policy is likely to evolve as economic conditions and the economic outlook change. house closing businesses it did not have a good notion of how the federal reserve -- this will loosen the linkage between short-term and financial conditions. uncertainty and make it more difficult for policymakers to attain their objectives. of those factors that influence the economic outlook and how monetary policy is likely to respond to changes in the outlook. this includes fiscal policy, productivity growth, the international outlook, and financial conditions as well was

how much inflation and unemployment deviate from the fed's objectives. by conducting in a transparent way and communicating what is important in determining the central bank's reaction function, i think policymakers construct the best balance between a monetary policy that incorporates the complexity of the world as it is while retaining considerable clarity about how the fmoc is like to respond to changing circumstances. a formal policy role such as the tailorable misses this balance by going too far in one direction. what is important for tanning mandated is not just a formal prescriptive rule but rather the fmoc's intentional strategies are well understood by the public. this argues for clerk medication for the fmoc's meeting stamens and meetings and longer-term goals and monetary policy and the press conferences in

testimony before congress and speeches by the chair and other fmoc participants. it is also important that the strategy be the right reaction of function area the policy toroach appropriately factors beyond the two parameters of the taylor rule -- output gap estimate and rate of inflation. thank you for your time and attention. [applause] john: thank you for coming and thank you for inviting me to be here. last time i was speaking in this room, not of the last time, maybe the first time, first time in 1982. i gave a paper about something called the switch investment fund was like a policy rule. stan fisher and i looked up what he said because stan is not at the fed.

he said john reaches a surprising conclusion somewhere, sometime, a government policy worked in a way it was intended. [laughter] john: maybe that same day or another meeting that same year, paul volker was here and we went over had a few drinks and jim tobin came and i remember-- it was 1982, a difficult period and i remember very well jim asking paul, why don't you over -- lower interest rates? do not setr said i interest rates, i said the money supply and that was the end of the conversation. period, also crossroads a period where the said was -- fed was turning. somewhat related to where we are down. do withwhat was able to

his colleagues was turned the fed from a very discretionary stop, go, stop policy which was distracted in the economy did not do well -- and disruptive and and i do well and it was tall. crossroads are always tough. and i think plus all of the research that people have done have led me to the conclusion that we really need to strive rules-based policy because that is what paul volcker did. he was very ad hoc in the 70's -- 1970's when i started the subject and a change in the economy actually performed remarkably well, the great moderation. i was like the word along b -- long boom.

unfortunately, it did not stay that way. , theinterpret the history federal reserve began to get off of that rule like policy and 2003,ally showed up in 2004, 2005 before the crisis. that deviation along with other things and regulatory lapses police mesa great recession worse and -- made the recession worse and lead to a lot of problems. the fed's reaction, to discuss some of bill's points, were admirable. it seems to me it continue to get off track and a coverage of the policies, quantitative easing, the way forward guidance e-likendled was un-rul that one of the problems i've seen. one of the west the thing about the crossroads is where the

roads should be and where you should go. it is veryget back, important the way bill has articulated, it is not all or nothing but a matter of direction, more rule like a more predictable. and i think that's where we need to be focusing. transitione from the , aside from the pros rose is what we're focused on so much and now, good to have a sense of where we are. bill's remarks were very constructive. to me, we should be going in a sense back but not completely because the world is different. you can see how it emerged in markets are integrated with the rest of the world. go back to situation where you could fairly well understand the reasons for the ups and downs in the federal reserve's target. never going to be rocket science, never going to be perfect, but you can understand those pre-in a sense, that is what was going on and that rule like period.

caleb was one way to describe that. it was not originally a descriptive device. -- the taylor rule is one way to describe that. it's a described much of the greenspan's fed. i think of it as more general and not as mechanical. people always quote my original papers and is never meant to be mechanical. as it is crossroads now and actually stated this wonderful dupont plaza, dupont -- circle hotel and looking at another crossroads. it has 10 routes to take. massachusetts avenue, new hampshire avenue, connecticut avenue, peachtree and can go is her way or both ways. 10 options. and the fed has decide which option.

it now seems to me it is driving around the circle. driving around that circle. and we want to go somewhere. i do not know -- on a rules-based direction and not going to be easy and never was. and we learned something from the transition off of qe, former chairman bernanke talked about in a way that was not clear. and then when things got clear, it was white smoke does quite smooth and worked quite -- quite smooth and worked quite well. , would say one of the things normalization, dating back to rules-based policy requires getting the balance sheet back to normal level. a complicated issue under a lot of debate. raise rates, it what to do it by paying interest on reserves or reverse repose.

ultimately, like to see the situation where the interest rate, is determined by the supply and demand for reserves. that puts an important sense of and makes ite fed more difficult to do qe. i do not like qe, qe infinity especially. it seems another part of getting back to a rules-based policy. it?h of those stories is prosperity.ree for maybe wes. i was like the western direction. place you canill go, maybe a little easier, easier trip in that direction. bill, i appreciate the care in which he has addressed these issues. he also gave an important speech in 2012 to the council of foreign relations which talks about his views and a how they relate to policy rules.

in a sense, it seems to me that by listening to this and listening and reading these things, it is a way of how is -- past,re was plast it might be used. an attempt to describe what the fed would be doing is different from a simple rule and nobody was to follow a simple, mechanical rule is useful to compare. that's kind of discussion might very well be how the fed would constructively respond to the requirement that it had reported strategy. how it uses the word strategy. it is not reported mechanical rule. indeed, it may at sometimes require some modifications. the example bill gates of -- bill gave up 2008 was i suggest modifying the rule and that is true. the period where we had this

enormous movement between the libor spread. it seemed to be real credit issues in the market. by,mple idea and adjusted libor is not the best thing to use anymore. very disciplined. it would have made a little bit of a difference. in other words, the modifications were within the context within a rule like, nondiscretionary thing. bill mentioned the taylor rule is not forward-looking. that is because it responsive to the current state of the economy. the best we can measure it. it is hard to measure where you are. i think we are getting better in forecasting. so where we are now is a little easier but i think that, in a sense, is not the way i think about it. if you want to examine whether a policy rule works well, it will

always be evaluated in the context of a model of the world or a view of the world which is forward-looking. fed or any of the central banks reacting to today's inflation rate is implicitly describing how it will react to tomorrow's inflation rate tomorrow. any model or any view of the world which involves expectations will take that into account so even though you cannot really see a forecast for inflation, you see actual inflation rate, it really is forward-looking. attempts to replace the current inflation rate by a forecast of the inflation rate, looking -- making it look forward-looking, they don't work so well. they muck up the works. question of what the equilibrium real interest rate is is very important. originally, the taylor rule had 2% inflation rate, it also had

eight 4% equilibrium nominal funds rate. 2% real. a 4% equilibrium nominal funds rate. thisis the median at point. i do not think that is in any way inconsistent with using a policy rule. that thato describe is the case. it cannot be willy-nilly. youways worried about change your strategy or your ale too often and it becomes discretion in rules clothing. you have to be careful with that. in the last minute, bill recommends a careful list of things you respond to. and how you respond. the taylor rule is too simple.

but, is that really so different. isn't that what we are striving for? the reason the taylor rule is simple is because we made it simple. if we did calculations, the struggle then was to find a rule andthe central banks to use it would inherently be so complicated. everything would matter. could you somehow boil it down to key things? and we could. the idea is that you can boil it down to those couple of things, but it does not mean that your strategy does not sometimes consider other factors. as long as it could be described systematically and predictably as possible. that is what we are striving to do. thank you. [applause]

david: thank you very mitch -- very much for your clear and sustained presentations. this is how i rate people that come to brookings. if they finish on time. the content is secondary. if you're watching online, you and oneit on twitter, of my colleagues will be your agent. you john.start with i think there is a woody allen movie but i cannot remember which when it is where he goes on a first date and he says to the girl -- can we just kiss now and get it over with? before we get into the deeper issues, tell us, are you going to raise rates in september or not? [laughter] mr. hughes: i wish i could --

john: i wish i could answer that. david: if the economy performs as you forecast -- n: it is a forecast, and not a commitment. people who have been in the orecasting i would look at the data and evaluate how the economy actually unfolds. david: you have said that it was important that the public well understand the attentions -- intentions and strategies of the central bank. how well do you think the fed has been doing it lately? john: in terms of what we are going to do at the next couple of meetings, we have not been doing that well. there are different views on whether the economy has been performing well this year or not. that disagreement about will the

giveny be strong enough that the economy is only performing slightly above trend. the recent economic news's a just the economy is slowing and we have had these developments in china and the emerging market economies that could come back and hurt our economy and hold down inflation. i think where we are very clear in terms of what is driving our decision we having clear in that we want to see further improvements in the labor market so that we can become confident that inflation can return to 2% at the median term. andared to the 1970's

1980's, the federal reserve has much more information now about what we are thinking, what the forecast is, -- years go back even 10 ago, it did not provide an interest rate cap that now you can actually see all of the different fmo see participants, what they think in terms of the liftoff. if you look at the last meeting, you had 70% -- 17 participants. think how well do you they are communicating their intentions? i think it is a little confusing. john: i think half of the people were surprised by the decision and half thought it was about right. wase would be nice if there a sense of -- 80% got it right.

it is difficult now and i think the reaction to that decision was instructive. one of the concerns, we do not know all of the reasons. reasons -- was concern about turbulence in the market. and the postponement itself seemed to cause more turbulence. it was a learning experience. important because it is hard to change after so many years at zero. it is inherently difficult to do that. i don't think our decision was based on the turbulence in the financial markets. are we makingthat sufficient progress towards our objectives in terms of employment. the uncertainty about the

outlook.rowth emerging market economies. that created concern about the impact that could potentially happen to the united states. me, the issue was not the financial market turbulence but what was happening in the chinese economy and the risk that it could come back to the united states and drag the united states down and make it more difficult for us to achieve our objectives. david: you think the problem is is that policy is too easy or that it is not following your rule? at a lot of look the rules, bill has tried to get some counterexamples but many rules say the fund rate should already be above zero. it would still be lower above -- would still be lower than 3.5%. it would be easy in that sense. , the sense outow

cannothat any increase be done as long as inflation is iss than 2% and the economy not roaring ahead. i think experience shows a rule should have a higher rate at this point given the state of the economy. it will still be quite easy compared to normal. using when we talk about a rule in normal times, when things are stable like they were in the 1990's, and you think that one reason things were so good was because the fed was using the rule. that we had an unusual period in the last 10 years. what with the taylor rule have had the fed do and if the only think you can tell us is -- let us deviate from it, then have you really accomplished your aim of having a systematic rule that people can take comfort in?

the rate would not have been so low in 2003, 2004, and 2005. it was written down book -- before the crisis. that is the biggest thing. in rate is what the rule would say. i don't think it would have gotten as high if it had been raised earlier. you had inflation pickup so the fed raised the rate -- i don't think that would've happened. in 2009, the real issue about the zero balance, i had always thought that if that happened you did not do massive qe you look at money growth. then, after 2012, as late as

2010 or 2011, there could have been movement in the funds rate. for the panic and after the panic is when the problems -- before the panic and after the panic is where the problems were. about -- do you go how do you increase the money flow when you are at zero? it will not increase by it self. you have to have more reserves in the banking system. to do that, you do q e. john: it may have been sufficient to not do any qe. credit demand moved back -- john: i've never heard any discussion about what we do that rates are at zero. how do you prevent money

growth from falling? john: would you do with qe but by don -- bonds. youd: you don't like qe or think they should have done something else? think they should of -- that is what we did. john: we should have purchased massive amounts of mortgage-backed securities. bill: you are not explaining what caused the money supply growth. john: you increase the monetary base by an amount that will increase the money growth. think -- the money growth was doing ok. it was doing ok because we

were providing a lot of stimulus to the economy. john: that was not the justification. the justification was to lower long-term bond rates and that was eventually to stimulate the stock market. i never heard a description -- bill: the reason we did not isus on money supply the -- because we have seen that connection broken down in recent years. systematic ins his pursuit of his goal but he was not a creature of habit in terms of what instruments he used. he used money supply growth for eight period of time. a kerry owed of time. a period of time. using a rule and it is not working, and you have to modify the rule. it happened in 2008 and 2009.

-- the economys needs more stimulus because we are far away from our goals. had we provide more stimulus? we kept interest rates low. scale provided large asset growth. we got much better results. better results than if we had stuck to the rule. if you want to look at a policy rule. we did simulations of models. offhe rate was zero, we cut 50 basis points or 100 basis [lost audio]en the

we are in a world which is is looking for more discretion and that is the best way to put discretion into a

policy rule. you can do whatever you one if you change it that rate. you don't think there is more uncertainty today about the equilibrium rate than there was 10 years ago? >> how that is going to unwind. it has caused more uncertainty the way inflation rates are going to go. in a way, the inflation -- there is more stability about where -- what were you going to assume about the inflation rate in the 1980's? i think there is more certainty about that. about the role as if the rule came first. -- itit more accurate turned out that the taylor rule was a good description of that monetary policy? isn't that the causality? >> i think greenspan describes it as the fed needs and assist.

assist. what was going on with paul volker was an attempt to focus policy on a smaller number of things, maybe inflation. he thought inflation was the best thing to get down. and to be clear about that strategy, he did not have to go it and talk about it very much. i remember the jackson hole meetings. he did not say much. everyone knew about the policy. rules-based.s very if you just did a regression at that point, you would have the 1970's in their and you get much different estimates. , someoneou are saying would have to choose a particular period and use that to drive the coefficient. i can speak for myself, it was not based on a regression.

it was not based on looking at what the fed did but what our research told us. >> no one wants to go back to the monetary policy of the 1970's. we can agree on that. >> when you tell the story about what is happening, i have this character in my mind that the only thing that mattered was stability. early bad times in the 1980's because we had lousy monetary policy. paul volcker brings a miracle. the fed deviates and everything falls apart. aren't there a lot of other things going on at the same time? monetary policy cannot do everything and the fed says that and i agree. but it can cause instability. it can cause stability. if you look at the timings of those movements. if you look at different period's of history, and you look at different countries,

monetary policy is very powerful for good and for that. andd: tighter in the 2003 2005. period. john: by way of comparison, into who thousand three, the file 2%. was in 1997, the inflation rate was inflation, 1.5%, the other .1%. it was a big difference. that was a search for yield. part of the excesses. i always say it was not the only thing. there was some regulatory oversight missing. put those together, and we never know for sure, but it is just the kind of thing that people were talking about. >> do you agree? i think monetary policy is

second or third quarter. order.hird i would point to the -- they turned out to be toxic. i think we would have had a -- if i were to , i would have003 a different critique which is even though the federal reserve rate systematically meeting after meeting, financial conditions never really titans. bond yields came down in the , it cameket went up more and more available. i think it was that monetary policy was not sufficiently tight. failure is biggest more on the regulatory side. has writtenbernanke

about this. john: in his new book. david: when you look at what the fed has done over the last they had these quarterly forecast, they say where they think the rates are going to be in the next couple of years. plot.ave this. they have a press conference. they have written a statement. they have moved to a 2% inflation target. overall, do you think this is all moving in the right direction? have i think you cannot too much information. mucheftly can have too information. you can be confusing things.

i agree there are different examples of how to communicate. sometimes, you do not have to communicate when people know what you're doing and that is the ideal. i do think though that the examples that you are giving are missing an important thing which is what is the strategy? statementn important on goals and strategy that you guys worked out. it is all goal and does reggie. read it. it is a couple of strategies. does not say what you're going to do to the instruments. it does not say how you are going to react if your goal is off track. to me, it is misnamed. it is goals and you need another thing on strategies. bill: i think we have a clearly defined strategy. look at the fmoc statement. it is designed to push the inflation rate up and the unemployment rate down. we havelift off after

made further progress in the labor market. that seems to be pretty clear to people. what is not clear is how the economy is going to perform. and i think the issue is not how the fed is going to react to the of incoming -- incoming information. confident.reasonably to be want us to be able clear about our reaction function and how the economy is going to evolve. thean do the former but not latter. there will always be some residual uncertainty. -- a list oftioned factors and some sense of how you're going to react to them. i heard you say it here. i don't see anything like it in the statement. in the think it is there

statement, the press conference, the summary of economic predictions. we have said what is important to us. pressure on the labor market. push unemployment down. in the sense that this will be sustained. not just about what is happening today but how it affects the economic outlook. if those things happen, we can raise interest rates. i do not understand what is not clear right now. john: no one knows what you're doing. [laughter] say -- i have great respect for people in your position and i respect what you're doing but one of the great things about our country is institutions like brookings. bill: debate is good. david: the question you think the fed has not answered is -- what?

what information do you want that you do not have? how will things react? bill: i do think that is a wise thing to do given -- john: you asked me david, what should the interest rate be now? if you were back to normal, maybe wednesday 5%. i don't hear anything like that -- ike.5 >> you have the dots that show

-- you have a pretty complete description. thiswould be helpful is administrations legislation. youhe if it -- if it passed guys, the whole system would have to get together and think about it and articulated. it is like when money growth was put into the act in 1977. the fed christ everybody got together and thought, what is the best way for us to report growth? and it was -- there were different opinions. a lot of people had heard them before. i think they had to come together and that is what would happen. kweisi mentioned the legislation. one fact of life is that almost all the people who liked that legislation and criticize this sear