tv Key Capitol Hill Hearings CSPAN October 15, 2015 10:00am-12:01pm EDT
a government leader and how to work together and how to solve problems. working with renée and also having worked for six years with joe lieberman, i was very grateful to an editorial that he wrote in the richmond times dispatch in virginia talking about the types of things that we were able to accomplish during my term in the senate. ..
to talk about two examples, case studies, if you would come of the approaches that we took when i was in the senate to actually get things done and move things forward. i've had fellow senators during my tenure who had come to the end of 5% years and say they weren't even able to get an amendment that they've introduced to a vote on the senate floor. i will take two cases here to show you the way that we were able to do this. the first is on the post 9/11 g.i. bill which i believe is the greatest educational program for our veterans in history.
i started speaking about the need for a new g.i. bill a real g.i. bill fo for the people who would serve since nine 9/11 well before he decided to run for the senate in 20 -- 2006. i come from a family that has a citizen soldier military tradition. my father served in world war ii. i grew up in a military. my son left college and enlisted in the marine corps during the iraq war and was in ramadi, iraq, and we kept hearing over and over again this is the next greatest generation. may fight having spent four years working on the veterans committee when i was just out of law school was that if you say this is the next greatest generation, why don't we give them the same educational opportunities, the same shot at the future as the greatest generation had? why do we give them an educational program that mirrors what the world war ii generation
had? they had their tuition paid for. they had their books bought, their fees were paid and they got a monthly stipend, and it would change the social fabric in terms of opportunity in this country. so after i was elected and before i was sworn into the senate, i sat down with legislative council, i had been a legislative council years before and we wrote a post 9/11 g.i. bill. i introduced it my first day in office, and then came the real challenge. some people who were saying, one day in the senate, why should we pass this comprehensive veterans educational program that hasn't even generated out of the veterans committee itself, just coming out of your office? then there were others, quite frankly the bush administration and some of my really good friends over the years like john mccain who were opposed to the ib. idea. they were saying if you give that generous of a program to our veterans, then they're going
to want to get out of the military. it's going to affect retention at a time when we are meeting people to stay in because of the commitments in iraq and afghanistan. i spent five years in the pentagon. i worked in manpower a lot. my view of this was the other way around the. if you can't incentivize people coming into the military knowing that at the end of it they were going to have this kind of an educational opportunity, you would actually expand the recruitment tools, it wouldn't affect the retention pools. so we had a 16 month period where, from our office, we worked with the veterans groups closely listening to them with a different portions in the legislation, taking their suggestions in order to improve it. and we also develop a leadership
model in terms of a prototype if you would in terms of how you get things done in the united states senate. i developed a for senator group that we used in terms of talking to republicans and democrats, senator john warner who was a former marine and had been secretary of the navy. i had served on the staff when i see 25 year-old marine in the pentagon. john porter, chuck hagel, a vietnam veteran, republican. frank lautenberg, new jersey of the democratic side, and by so. frank lautenberg was a world war ii veteran. so we approached our fellow senators asked to democrats, two republicans, two world war ii veterans, two vietnam veterans, saying this is what these people need and deserve and have earned in their service. this was not an easy lift. looking back on it, it seems
rather logical in terms of its success, and it has been phenomenal. we've had now i think more than a million post 9/11 veterans who have been able to use the program, but we pushed it forward as a bipartisan group of veterans, and working with our colleagues, making the point, holding press conferences, bringing in the groups who would be affected by it. and after 16 months we passed the most significant piece of veterans legislation since world war ii. at a time when the congress, the legislative branch, was pretty paralyzed, quite frankly. so very, very proud of that. i think that is a leadership prototype that works, even in a paralyzed governmental system. that's the issue is criminal justice reform, a completely different issue in terms of the philosophical challenges or the
political challenges given the true debate between left and right in the country about what to do with the different problems in our criminal justice system. i started speaking out on this when i was running for the senate. i had spent time as a journalist in japan looking at their criminal justice system. i have seen the fairness of the systems in the military when i was a marine. we started collecting data. i started saying to my camping in the senate, this needs to be fixed. i actually had democratic party, political consultants, telling me to stop it. they were saying you are running in virginia against an entrenched incumbent. you are committing political suicide. at my view was put the issue in front o of the people can get te data, do the research, make the
argument, takes the hits. that's what a leader is supposed to be. when i came to this end i was not on the judiciary committee but we started work on criminal justice reform from our office as soon as i arrived in the senate. we were able to get hearings on the joint economic committee which i was a member of, rather than the judiciary committee, and hearings we focus on is what's the impact of mass incarceration, economically on a society, and all that wasted impacts it. how do you analyze drugs in america from point of origin to point of views and after use, some of the consequences of hard-core drug use. we had great seminars. we had a session we did with george mason university bringing people from both sides of the issue together in a way that alan merton, the president of
george mason, came to the end of his to close down this conference would put together, and he took the podium and he said, i am amazed. i can't teach you people to stop talking to i have never seen anything like this, kelo from different sides communicating at talking together in a way that you've just done. we brought in a constituent groups, the same way we did with the g.i. bill program. we brought people in from across the philosophical spectrum, more than 100, directly into my personal senate office, not on a committee. and we listen to them and we got buy-in is finally all across the political spectrum. this country need a national commission, 18 months to get the best bunch of america together to come in and tell us how to fix this broken system that is putting so many people into prison at the same time we are
not solving some of these problems that are keeping our neighborhoods actually feeling less secure. we wrote this proposal for a national criminal justice commission. we got a buy-in finally all the way from the national sheriffs' association, the international associations of chiefs of police, all the way over to the american civil liberties union, the marijuana project actually came on. i think it's the only bill i've ever seen i got to the senate floor where we have a buy-in from across the entire spectrum. we got into the senate floor during the time when the republican party was filibustering everything. they said they're just going to shut the legislative system down. this was late 2011 after we've worked on this from '07, '08, '09, 10, 4.5 years. it was a $14 million simple
national commission which i still think we need. we got 57 votes. we needed 60. we have bipartisan support. orrin hatch with his border. lindsey graham was a supporter. we had four republican cosponsors of the legislation that we lost but there are two things that came out in fact that we lost. number one, we had succeeded in bringing this issue into the national debate, and a way that was not being discussed before. instead of people saying to me or other senators emitting suicide by talking about it, let's say we need to talk about it, including a lot of leading republicans. the other was i think the people who filibustered on this one were ashamed. they were ashamed by the own philosophical allies. the "national review online" editorialized in second was in sight of filibustered such a commonsense piece of legislation that is only going to cost for teen .5 million come one
helicopter. but those are the approaches that can be taken -- 14.5 million. issues that need to be resolved and the key and both of them i think if i were to make three or four points is get your facts straight, take a leadership role in terms of being willing to take the criticism and hit at the beginning, build alliances, listen across the board and get something sensible that people understand when you want to move toward a solution. [applause] >> this is not, okay, there we go. we are going to take a couple of questions from the audience. >> first off, i would like to
thank you for your service to this country in the armed forces, the marine corps, and afterwards. [applause] second of all, as a fiscally conservative democrat i've heard you describe that same way, how does a fiscally conservative democrat work on islands in the budget, specifically, if you get into office, how do you make a splash so the rest of the country can hear what you have to say? >> well, i have a long series of positions that i've taken and i stay with. i'm getting a big bounce back, and echoed by the way, from the audio in your room. again, thank you for your question. we have tomorrow night to hopefully be able to discuss a lot of these issues in a way that a pretty broad audience finally will be able to listen
to the views that i've taken, and my hope for restoring the kind of strong bipartisan solving of problems that this country, which is what we desperately need as a national political system. >> thank you for taking the questions come and i apologize for the feedback. before you came on air we had a very interesting forum on fixing politics. and we got quite a big applause for term limits. i think some of the things that bother the average voter here in new hampshire is that the congress has set themselves up as an elite class of american citizens. they get lifetime salary. they can participate in lifetime
health care. they do not have to pay social security, and yet they are making decisions for us that they themselves don't have to support. what would you do should you become president to limit the amount of time that congress has a to take away somebody's earned benefits? thank you. >> thank you for your question. i would say first of all, i have a similar concern to one that you mentioned, and that is, actually starts off with how money has affected our political process. and as a result it also affects motivations on both sides of the issue that you mentioned, people wanting to stay in and having to
come sometimes compromise on their views in order to raise money, and also what happens when people leave the system. with respect to term limits of though, here's a question i would have for the american people. the voters have the ultimate power when it comes to term limits. my own situation is about i have been in and out of public service by choice for different times in my professional career. i feel the urge to serve. i feel the desire to serve my country, but at the same time i have never been in a position where i wanted to do this without being able to take a step back, live in the world that the political system creates, and do interesting things. by the way i would not trade the opportunities that i have had as a journalist and as a novelist with having just spent my entire life inside elected to public
office. i was able to be the first american journalist to cover the american prisoners in japanese prisons. i was a journalist in beirut when the marines were there in 1983. i was in afghanistan as i said in '04. i've been able to do some fascinating things with the other side of my life. and that after while i feel compelled to come back in and put my or in the water and try to keep our country great. so the voters have that power. we are looking at different candidates, the question obviously is how someone can be elected when the financial systems right now seem so rigged towards simply keeping incumbents, and by the way, the are a lot of fine and bond funds that the incumbents. but the issue raised is an important issue. if you can't find good people to run its very difficult to say,
okay, six years, eight years is just enough. i don't think we should do that as a matter of law. we should do it as a matter of citizenship. >> thank you. >> patrick sweeney, cleveland, ohio. senator, i'm one of those that was disappointed he didn't seek another term. i don't know why you didn't. during the debate everybody is talking about the debt and ending the debt, clarifying today. i want to know how the debt was incurred from 2000, we had a $3 trillion surplus projected to be $6 trillion in 2015. and then it just evaporated. nobody wants to talk about how it's evaporated. but now we are up to $19 trillion of debt. i just don't understand all of this happened and there's no discussion about it. i know that's not come i don't want to put the burden on to but it ought to be discussed the
you're a candidate for president and i think it would be very helpful. >> well, there is a lot of discussion about it. in fact, the senate, the congress really spent months during the 2011-2012 period of discussing this to a point where the economic system was in danger of being shut down by both on the national debt which really had, it reverberated through the international community, and the national debt has been an issue for a long time. we have an obligation to grow our economy. a lot of money that is overseas right now held by corporations that don't have the incentives to bring it back in and invest in our economy. in other ways to bring
discipline into the federal budget process, but from the reagan administration forward there have been, it has been necessary to increase the national debt in order to fund the operations that are currently employed in the government. it's deathly, it's not an issue the i or anybody else consider as a i'm going to resolve it, but i think the policies that i'm willing to put into place will work towards resolving it. with respect to what i did not run for reelection, i would go back to what i said in the previous question. and that is, i think it's healthy for people to do public service for a while and then step back and reflect and regain philosophical independence and live in the world that politics creates. so i did it from the time i was
a marine. i did it after being on a committee counsel in congress. i did after spending four years in the pentagon and the reagan administration, and i did it after a term in the senate. remember, a term and is in is six years. that's a term and a half of a president. we did great things but i felt like it was good to step back. >> senator, i just had to finish a few people who have come up to me. they want you to come to new hampshire. you've got to come back to i know you're supposed to come up and we have some problems with your flight getting in, but you have a lot of support here so people want to see. we have another question. >> thank you, senator webb. my name is oliver spencer and i'm from concord, new hampshire. i want to say you are very thankful you on tv but we would very much like you to come up here and show the entire state, the granite state, but an american -- what an amazing
american you are and that you buy for are the best candidate. i did 24 years in the marines that are retired about three years ago, and after retiring i decide to go back to school and use the 9/11 g.i. bill to get my mba at unaids. it was one of the best experiences i've ever had and i can tell you i did for tours in iraq. i came as close as some of my classmates at the physical as it was with my marines i did in iraq. that 9/11 bill is so amazing what you and send it making did come at in the a lot of fighting and compromising. i think that should be expanded to what i've heard from a lot of these college students who have this rocking college debt to really broaden that, to broaden that so that they can truly
utilize that educational benefit which is just so amazing for public service. because we all know not a buddhist have to be in the military, certainly not the marines, but there are a lot of folks who can serve in other capacities that would be fantastic, and they are serving in these capacities. so let's expand that and give them all the same benefits. maybe expand a little more than 46 years of service before they get to use of those, but again, my experience of the 9/11 g.i. bill was absolute amazing. i am not passing it on to my three kids. they've got to earn it themselves i want to thank you again for being here but we're ready for you in new hampshire. [applause] >> thank you very much. thank you for that. i am looking forward to getting back to new hampshire and making many more visits. we did have a situation, again, a little different. when we are running out on a
camping we don't have that kind of money that a lot of other campaigns do. we rely on people who can send us a little bit of money through the internet. so when you die the kind of money can you don't have your own executive jet, i look at in the at mr. trump at least in that area of his existence. so we did have a situation in august where flights get canceled. they were not delayed, canceled on a really, really good trip i was getting ready to make to new hampshire. but i will be back and looking forward to meeting with those of you who would like to come and talk to us and listen more, and with your questions specifically. first let me say this. you did for palms and iraq. you earn that g.i. bill and is one of the great things in my life when i see the people who stepped forward to serve our country at a time like this and made sacrifices that stay with
you to rest of your lives. life. i know that about military service. i know something about the battlefield where i thought as a marine in vietnam. i'm so proud of my son who left school to go serve as an infantry rifleman and was in ramadi during those bad times. that's a special program and it's a program that was designed to assist those who served in the transition back into sewing life and to show are grateful this as a country for what you have done. with respect to these other situations that you mentioned, we need to get our arms around why college costs so much right now. that's step number one. we can survey discuss the other issues that you raise and recommend. it again thanks so much for service and i look forward to seeing you in new hampshire. [applause] >> thank you. we have one more. spent how is it going, senator
webb? i surfrider manchester three blocks away at the elementary school. service is something i'm very passionate about. president and the path from both parties have fought and actually passed so many different things to expand national service. my question to you is, if you are elected we continue that legacy? >> i thank you for that question. and if we look at our country right now, i've been saying this over and over again for a number of years, we have the places in this country, people in this country who are forgotten, who simply don't fit into the normal matrix of the art economic decisions were made. one of the best things we can do, and whether it's an area like west baltimore that's been so ravaged, or the appalachian
mountains where my dad's family came out of, the our people back there who are hurting, they are hurting because of their nose jobs. they are hurting because the educational opportunity are not the same way. for someone them to have to leave the area that they love in order to have a chance at success. the question that you raised is one very good way that we can do something about those situations, and that is to get young people who are coming out of school, have been make a commitment for a period of time and assign some programs so we can get those who have been able to make it through the educational system back into these areas and help regenerate, regenerate, energize these communities. and if we can design that kind of a program, it is a great way to educational assistance and
loan forgiveness that would go a long with that sort of activity. >> i am being told to make this the last question, but this is a veteran of wants to ask a question and i can't say no. so please, very quickly. >> good afternoon, skipper. i, too, am a retired marine with a boucher's degree i got with my g.i. bill. and i reinforce what the lieutenant said about our young people today with these our rent is college debts. my topic for you to use for ammunition against the folks you're going to be debating with tomorrow night, they have completely devastated our veterans administration, and it's on their watch. and we need help in the veterans
administration, medical field, both physical and psychological help. thank you, sir. >> thank you. thank you for your service to our country. as a fellow marine. and with respect to the va, i would say that, i've been working on veterans issues for a very long time. i served as counsel on the house of veterans committee 1977-1981 after i left the marine corps and finished law school. i was very fortunate during that period to have been a mentor to by our world war ii veterans who had, you know, world war ii veterans were the first ones who may programs like g.i. bill and would become experts in title 38 oh grams, which are the veterans
programs. and i learned about the obligations in terms of veterans legislation and how the veterans administration should function. and it was a real struggle for me during my time in the senate. i was on the veterans committee, to see the numbers grow, and particularly when it came to backlog on claims and with access to quality care which, by the way, most of our va hospitals, once you get into the system, i believe deliver quality care. but these are leadership problems. there are leadership issues and leadership often depends on the priorities of the people at the top, and the goals that they will communicate to those who are going to be running programs like this. ..
thank you again and we will see you when you come back to new hampshire. [applause]. >> thank you for hosting me today. ,. [applause]. >> every weekend of the c-span network feature programs on politics, nonfiction books and american history and saturday at 8:30 p.m. eastern on c-span, editorial cartoonist describe
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richard nixon and the shaw of iran and its effect on us foreign-policy. sunday evening at 6:40 p.m. george mason university history professor on the confederate flag edits history in relation to the latest. get our complete weekend a schedule at c-span.org. >> we are live this morning at the brookings-- brookings institute on the discussion with the federal reserve with phil dudley and economist john taylor it is just getting started. >> based on where an inflation is and how far the economy is from unemployment-- winona greenspan was chairman of the fed and he was either incapable or unwilling to describe his approach to the rest of the world and what made the rule so amazing was he seemed to capture the greenspan with an equation in ways that were more clear than greenspan was ever able to
claim to anyone else and if you read the transcripts-- transcripts, he talked the same way inside the fed as he did outside. the chairman's role has evolved and some use as a yardstick to see if interest rates are too high or too low and there is even legislation pending in the house that would require the feds to cling to congress want to deviate from the roll and if so, why. filled dudley takes a different approach and said policy rules are worth looking at, but are not a good substitute for in-depth analysis and judgment and he has called the taylor rule incomplete because it doesn't incorporate financial conditions. he said the fed influences the economy, not directly, but through financial conditions and way back when he was a comments at goldman sachs he talked about financial conditions index as a guide for monetary policy. i am not a phd economists, i'm a student of economics and most of the economics i know i learned as a reporter for the "wall street journal" from wise and
patient teachers like bill dudley and john taylor, so i look forward to detainees lesson and a phil will start and speak for about 12 minutes and then john taylor will respond and then they will join me on the stage for conversation and then we will turn to questions from those of you in the room or more people watching online you can send us questions in the it twitter, so please join me in welcoming our first presentation, phil dudley. [applause]. >> thank you, david. it's a pleasure to be here today to participate in this panel with the john taylor and i'll take today's topic, which is where to go next entry vest the issue on how monetary policy should be conducted in this is getting considerable attention in washington dc. to put it distantly, the question i went to tackle this
how is it better for policymakers to start with a formal rule or if a policymaker should have a flexible approach and consider the broader set of factors in setting monetary policy. is what i say reflects my own views and not necessarily those of the open market committee or the federal reserve system. getting right to the punch line, i favor a more flexible approach that incorporates a broader set of factors into the monetary policy decision-making process and the world is complex and ever-changing. there are factors that can affect economic output-- outlook and the mandated objectives and their pry the appropriate monetary policy. at the same time i do not favor total discretion in which monetary policy is determined in an ad hoc fashion. as david said, looking outside to see if we need an abella today. to be it most effective households and businesses need to build to anticipate how the federal reserve will evolve--
respond to evolving conditions. it depends on not only what policymakers decide to do today, but also on what the public anticipated affluence he is likely to do in the future as economic outlook changes and evolves. our experience in recent years under-- how important expectations are in influencing monetary policy to policy makers need to act in a systematic and consistent manner, so expectations are informed accurately and economic behavior can respond consistent with those expectations. in my view, this rules out a total discretionary monetary policy. before i could kick the use of prescriptive rules of monetary policy i would like to make it clear from the start of the taylor rule, which is a formulation based on 1993 and 1995 peppers has a-- papers has a reference for policymakers. first it has two parameters, long term inflation and
potential outlook that map directed to the federal reserve to a managed object of. is second, the rule has been a desirable feature that with economic shocks pushing the economy way the taylor rule prescribed policy response that can help push the economy back to where the central big schools are. , number of studies have shown the taylor rule a robust in the sense that they generally perform quite well across the a range of different assumptions of how the economy is structured and operates. despite these attractive features i don't believe any prescription-- prescriptive rule including the taylor rule can take the place of a monetary policy framework and incorporate the collective assessment of a large number of factors that in fact in the economic output. it could be detrimental to attainment of the federal reserve objective and the shortcomings are not just theoretical, they been relative
to monetary policy recent years to first, the taylor rule is not forward-looking. it's policy prescription is based on the current size of the output gap and the deviation of current inflation from the fed's objective not how these variables are likely to evolve in the future. in a rapidly changing environment that taylor rule and prescriptive rules will wind up being behind the curve at. in the fall of 2008, taylor rule prescriptions were well above the level of interest rates that were appropriate at the time given the sharp persistent deterioration and economic outlook and the sharp tightening and financial conditions that occurred during that time. of course, economists in time mechanize such prescriptions what event inappropriate and they suggested various ad hoc modifications to the prescriptions. john himself adjusted modification to his room where appropriate at that time. there was no consensus about what the right modification to the rules were at the time in part because the circumstances were so unprecedented and the
outlook was so a certain. if it had been required to justify to congress deviations from a reference rule at that time, i believe that would have slowed down how we responded to the crisis and would've resulted in a monetary policy that was not officially accommodative. the consequence would have been a lot of financial and a deeper recession. second, the taylor rule listed used with a 2% real short-term interest rate is consistent with a neutral monetary policy. larger literature concludes the equilibrium short-term interest rate is unlikely to be constant with its value affected by many factors including the pace of technological change, fiscal policy and the evolution of financial conditions. sometimes it can be higher than 2%, presumably this is the case during the late 1990s as rapid technological change lifted productivity growth and sometimes it can be well below 2%.
when credit-- credit availability dried-up during the financial crisis in late 2008, this drove the equilibrium art below 2%. were recently the slope of the economy and the low rate of inflation that we have seen our evidence that equilibrium rate today is well below the 2% rate assumed by the taylor rule. if 2% were consistent with a neutral monetary policy than the very low rates of recent years should have been extraordinarily accommodative. as a result, we should have seen much faster than the 2% growth rate we have actually had over the past few years and we should've seen inflation rate much higher than what we actually experience to. this conclusion is supported by a number of more formal models. for example, the williams model estimates the equilibrium rate is around 0%, not 2%. third, the taylor rule and more broadly any prescriptive rule for the quantitative adjustment of the policy rate to change is
intermediate variables such as inflation is incomplete because it doesn't fully account for the factors that are crucial to how it's monetary policy impulses are transmitted to the real economy. monetary policy affects economic activity through its affect on a financial conditions including the level of remark, bond yields, foreign-exchange value of the dollar and credit conditions. if the relationship between the federal funds rate and other indicators of financial conditions were stable, then witt and they just focus on the level of short-term rates, but because conditions vary considerably relative to short-term rates, as we saw in the financial crisis and its aftermath, one needs to consider developers and financial conditions more broadly in setting monetary policy. at times when short-term rates have been near the zero round federal reserve has taken financial to ease conditions without actually changing short-term interest rates. such actions have included for guidance that they have once he
was likely to keep short-term rates low for a long time and large-scale asset personages that resulted in lower bond term premiums. as i said at the start, because i don't want to favor a role mechanically doesn't mean i favor the polar opposite. that is a fully discretionary monetary policy in which market participants, households and businesses cannot anticipate how monetary policy is likely to evolve as economic and financial market conditions and economic outlook change. households and businesses do not have a good notion of how the federal reserve will respond to changing economic and financial market conditions, then this would loosen the linkage between short-term interest rates and financial conditions. this is also likely to lead to greater uncertainty about the outlook in a higher risk premium and i think would make it more difficult for policymakers to attain their objectives. instead, what i favor is a careful recitation of us factors that influence the economic outlook and how monetary policy is likely to respond to changes in outlook.
this includes fiscal policy, productivity growth, the international outlook and financial conditions as well as how much inflation and unemployment deviate from the feds objectives. by conducting policy in a transparent way, and communicating what is important in determining the central bank's reaction function, i think policymakers can strike the best balance to monetary policy that fully incorporates the complexity of the world as it is while at the same time maintaining considerable clarity about it is likely to respond to changing circumstances. a formal policy rules such as the taylor rule mrs. is balanced by going too far in one direction. what is important for attending the feds mandated objective is not the monetary policy is described in terms of a formal prescriptive rule, but rather the f1 seat intentions and strategies are well understood by the public. this argues for clear communication through the f1 seat meeting statement and minute, statement concerning his
longer-term goals and monetary policy strategy, that share press conference in testimony before congress and speeches by the chair and other purchasing through its also important that the strategy be the right reaction function. this means a policy approach that responds appropriately two important factors beyond the two parameters of the taylor rule, output estimate and the rate of inflation. thank you for your kind attention. [applause]. >> thank you all for coming and thanks for inviting me to be here. last time i was speaking in this room-- not the last time, maybe the first time i should say, the first time in 1982, and i gave a paper about how something called the swedish investment fund was like a policy rule.
stan fisher who was a discussant and i looked up what he said for this because it's interesting given that stan is now in the fed, he said john reaches a surprising conclusion, somewhere , sometime a government policy worked in the way was intended. [laughter] >> maybe that same day or at another meeting the same year, paul volcker was here and we went over and had a few drinks and jim tobin came and i remember-- this is 1982, difficult time and i remember very well jim asking paul, why don't you lower interest rates, paul. paul said, i don't set interest rates, i set the money supply and the market reacts to the interest rates this would've ended the conversation right and which is a whole interesting issue, but this was also a cross roads period, if you will. a time where the fed was turning, i think, and it's
somewhat related to where we are now. i think what he was able to do with his colleagues is turn the fed from a very discretionary stop go, go stop policy, which was destructive with both inflation and unemployment rose in the economy didn't do well i basically change. it was tough. it was a crossroads during that tough time. i think this experience, plus all the research that people have done has led me to the conclusion that we really need to strive to some kind of a focused rules -based policy because actually that is what bolt did. he was very ad hoc in the 70s in the late 60s and 70s when i started and a change in the economy actually performed remarkably well and we call it the great moderation. urban king calls it nights with
noninflationary consistency. it was relayed and i don't think there is any question the two are related. unfortunately, it didn't say that way and as i interpret the history, the federal reserve began to get off of that rule like policy. i think it originally it showed up in 2003, 2004, 2005 for the crisis and that causation in the deviation along with other things a regulatory lapses. at least it made the great recession worse and led to a lot of the problems we have had in the last 10 years and i think the fed's actions during the panic-- i will come back to that as i discuss some of builds points where-- they were admirable under a last resort action in the pack-- panic of 2008. it seems to me they continue to get off track and unconventional policies in the way forward guidance was handled was quite discretionary and under will like and i think that is one of the problems i have seen, so one
way to think about the crossroads is where the road to should be, where you should be going and to me it's really to get back. i think it's important the way bills-- bill articulated this. it's really not an all or nothing thinking or he and it's a matter of direction. i think that is what we need to be focusing, so to me aside from the transition, aside from the crossroads, which is what we are focused on so much now, it's good to have a sense of where we are going and i think bill's remarks are constructive. so, to me we should be going in a sense back, but not because the world is different and you can see how emerging markets are so much integrated with the rest of the world, but go back to a situation where you can fairly well understand the reasons for the ups and downs in the federal reserves, federal funds rate is
the target. it's never going to be rocket science and it will never be perfect, but you can understand those-- in a sense that what was going on in this rule like period. referred to the taylor rule is one way to describe that. taylor rule is not originally a prescriptive device, it was a recommendation device and i was always very surprised about how it described much of the greenspan afterwards carried picket this is more general and its never meant to be mechanical. people quote my original papers saying it shouldn't be mechanical, but it is never meant to be mechanical. so, we are at this crossroads now, actually i stated this wonderful dupont plaza-- not depart plesac, the two-part circle hotel last night and i'm looking at another crossroads. this one has 10 routes to take. [laughter] >> massachusetts avenue, new hampshire avenue, connecticut avenue, 19th avenue ne go either way, both ways on both
streets, 10 options. the fed to get to decide which option. it seems to me driving around the circle. driving around that circle. [laughter] >> we want it to go somewhere. i think a rules -based erection and it's not going to be easy. it was never easy. we saw some-- learn to something from the transition off of q.v., former chairman ben bernanke he talked about in the way that wasn't clear, but then when it was clear it was quite smooth and strategic and i think it will work quite well, so clarifying where you are going and how you're getting there is important and i would say one thing that bill mentioned is that normalization is getting back to a rules -based policy also requires getting the balance sheet back to a normal level. is accommodated issue under a lot of the debates.
of course, when the fed does raise rates it will have to do it by paying interest on reserves and/or reverse repose. of delay, you can see the situation where the interest rate, federal fund rate is determined by the supply and demand for reserves and i think that is important since of rules indexing makes it more difficult to do qe and it seems-- i don't like qe, qe of infinity, especially, but it seems to me that's another part of getting back to a rules -based policy. which of those streets is it? maybe peace treat for prosperity which way on p? maybe west. i was like a western direction. [laughter] >> it's also, by i the way, a downhill. it's easier to drift in that direction. so, bill, as i said i appreciate the care with which he has addressed these issues and he also gave a very important
speech in 2012, two foreign relations, which talks about his view and how they relate to policy rules. in a sense, it seems to me that by listening to this and meeting these things, it's a way about commuting how if legislation was passed that maybe it might be used because it's really an attempt to describe how-- what the fed would be doing is different from a simple rule. a rule that useful to compare and so that kind of discussion might very well be how the fed would constructively respond to the requirement that it reported its strategy and i like how bill used the word strategy all the time. it's a strategy, not reporting mechanical rule and indeed it may have sometimes require some modifications. i think the example bill gave
2008, he mentioned i suggested modifying the rule. that is true. it's actually a period we had this enormous movement between the-- it seemed to be real credit issues in the market, so the simple idea was just adjusted by that spread. adjusted-- very disciplined and would've made a bit of a difference, but the modifications are still within the context of a very rule like discretionary thing. bill mentioned the taylor rule is not forward-looking. that's because its response to the current state of the economy , as best as we can measure it. it's always hard to measure where you are. by the way, we are getting better and our forecasting, so where we are now is a little easier, but i think that's, in a sense, not the way i think about
it because if you want to examine whether a policy rule works well, it's always going to be evaluated in the context of the model of the world or a view of the world, which is forward looking, so the fed or any other central bank reacted to today's inflation rate is implicitly describing how it's going to react to tomorrow's inflation rate tomorrow and any model or any view of the world, which involves expectations will take that into account, so even though you can't really see a forecast of inflation and the rule, you see actual inflation rates. it really is forward-looking. in fact, attempt to make-- say to replace the current inflation rate by a forecast of inflation thereby making it look explicitly forward looking, it work that well and kind of muck up the works. got to figure out how you can do a forecast of inflation and it's very hard. i think the question with equilibrium real interest rate
is important. originally, taylor rule had a 2% target of inflation rates and it also had 4% equilibrium of normal fund rate, so 2% real. the dots indicate the fed is slipped that down a little bit, i think from four to three and three quarters, three and half. the rehab is kind of median at this point. i don't think that's in any way inconsistent with-- with using a policy rule to read you want to be able to describe if that is the case. it can't be willy-nilly. i've always worried about, you change your strategy or rules too often it becomes discretion in rules clothing, so you have to be careful about that. finally, in the last minute, bill recommends have a careful list of things you respond to.
and how you respond. taylor rule is to simple. but, is that really so different? isn't that really what we are striving for? the reason why the taylor rule is simple is because we made it simple. we did calculations having the struggle then was to find a rule for the central banks to use when it inherently would be so complicated. could you somehow boil it down to some key things and it was amazing we could. but come i think the idea is you can boil it down to those couple of things, have trouble measuring them, but does it mean your strategy doesn't sometimes consider other factors as long as it can be described as a systematically unpredictably, it's possible. i think that is what we are striving to do. thank you. [applause].
>> thank you very much, both of you, for clear and distinct presentations. this is how i rate people who come to bookings. whether they stay within the time, context is secondary. and when to remind people if your watch online, you can put it on twitter #said in one of my colleagues will be your agent here. when to start with you. i think there is a woody allen movie and i can't remember which one it is where he goes on a first date and assess to the girl, can we just kiss at the beginning and get it over with, so before we get into the deeper issues, so tell us are you going to raise rates in december or not? [laughter] >> i wish i knew the answer to that.
we said it depends on the data and we log data between now and the end of the year and we will have to look forward to the data. it's crazy to presume what the data will be. >> if the economy performs as you forecast, then? >> i said if it performs in line with my forecast and i would favor raising, but it's a forecast, not a commitment and people who have been in the forecasting business node times the forecast i write sometimes they are wrong, so if they are relying on my forecast i would look up the data and evaluate how the economy actually unfolds >> thank you. so, you said it was important that the public will understand the intentions of strategy of the central bank. how well do you think the fed has been doing that lately? what grade would you give yourself? >> well, in terms of what we will do this year into the next couple meetings, i think that we probably haven't been doing that well because there are different
views on whether the economy will perform in a way consistent with lifting off later this year or not that is-- i think that disagreement about whether economy be strong enough is a realistic one given the economy is growing only slightly above trend, the unemployment rate is coming down very very slowly, the reason economics suggest the economy is slowing and we had these development in china, and the emerging market economies that could develop in a way that could come back to her eric economy and whole den us inflation, so it's reasonable people-- slight differences in the forecast will lead to people's abuse whether it's appropriate time. i think where we are clear as in terms of what's driving our decision. we have been very clear that what we want to see his further improvement in the labor market, so we can become reasonably confident that inflation will return it to percent. i think we have also had a
tremendous amount of information terms of how we think the economy will evolve and how we will react. compared to the 1970s and 80s, the federal reserve has much more information about what we are thinking, what are forecast is, how we think-- >> you get more information? >> absolutely. if you go back even 10 or 15 years ago we didn't provide an interest rate path and now you can ashley c the different suspense, what they think in terms of the time of lift off and at the last meeting you had 17 participants in the 13 of them expected lift off to take place sometime this year. >> john, how well do you think they are communicating their intentions and strategies now? >> i think it's a little confusing, unfortunately. right now, leading up to the last meeting there seem to be more difference of opinion and more confusion than i have seen before. then, i think half the people were surprised by the decision and half thought it was about
right and what they expected. >> the meeting got it right. >> it would be nice if there was a sense of 80% got it right. >> but, how'd-- >> but, it is difficult now and i think the reaction to that decision was to me instructive. i think one of the concerns, we don't know all the reasons you and your colleagues make the decisions, but one of the reasons to postpone was concerned about turbulence in the markets and the postponement itself seem to cause more turbulence, so that in itself i think was a learning experience. i don't know if bill would agree, but i think it's very important because it is hard to change after so many years of zero. it is inherently difficult to do it, so i could understand that. >> i think we were-- our decision was based on the fact that-- i think the issue was,
are we making sufficient progress towards our objective of full employment and stability and to the extent there was concern about the chinese growth outlook and uncertainty about how china was feeding to the commodity prices and putting pressure on the emerging markets and that created uncertainty about the impact on the united states, so part of that showed up in terms of financial market turbulence, but to me the issue wasn't the financial market turbulence it was a bout what was happening in china with the economy and the risk of that that could come back to the us and slow the us down to make it more difficult to achieve our objective. >> john, do you think the problem is that they are not following a clear rule or do you think that policy is too easy or both? >> i think they go together. if you look at a lot of rules, i mean, bill has given some counterexamples, but many rules in the funds rate should be above zero. it would still be lower than three and a half percent than normal, so it would be easy in
that sense. it would still be easy, but i think right now there is the sense out there that any increase is sort of-- it can be done as long as inflation is less than 2%, unless the economy is not roaring ahead, but i think experience shows a rule should have a higher rate at this point given the state of the economy and will still be easy. it will still be quite easy compared to normal. >> now, when we talk about using a rule in normal times when things are stable like they were in the 1990s and you think that one reason things were so good is because the fed was using a rule, but it's also true that we had a pretty unusual period in the last 10 years. what would the taylor rule have had the fed do and if the only
thing you can tell us is, well, let's deviate from it than have you really are, worcester aim of having a systematic rule to which people can put confidence in? >> first of all, the rate would not have been so low in 2003, 2004, 20005 and i've written about it many times. that was written down before the crisis. that is probably the biggest thing, but the cut in rates in way is almost exactly what the rule would say, so you basically have the ray coming out. i don't think it would have gotten as high if it had been raised earlier back then and 03, 04, 05 and you typically had inflation pickup and i don't it would've happened, so they cut the rates and there were no complaints about that. in 2009, there was an issue about the zero balance. i have always thought when you hit the zero balance it doesn't mean you did-- it means you look
at money growth and make sure that a study. so then, i think after-- as late as 2010 or 11, there could have been some movement in the fund rate, so to me as before the panic and after the panic that are big problems. >> explained to me what happened. once you hit zero the rule tells you the interest rates should be negative; reich? so, how do you-- >> you don't have a negative. i have never thought of having a negative rates make you say you want to increase the money, but how do you increase the money when you're at zero? it will just increase by itself. >> how do you add more reserves to the ranking system? you do a qe. >> q he was not motivated by money growth. there may have been sufficient not to do any qe. >> we were trying to make financial conditions more a common to have to stimulate and that feedback to money supply. >> i never heard any discussion
about what we need to do now that the rates are zero, just make sure money growth doesn't fall and that was the lesson from the great depression. >> how do you prevent money growth from falling? >> what did you do when you did qe? you bought bonds. >> you don't like the rationale for qe or you don't think they should have done qe and should've done something else? >> i think they should have made money-- sure money growth didn't fall. >> we would have been buying securities to put reserves in the banking system and that's exactly what we did. >> certainly wouldn't have purchased masses-- massive amounts of mortgage-backed securities. >> you are not explaining what causes the money supply growth. there has to be some instrument of policy. >> doesn't increase the monetary base. >> so, they would had had to buy some? >> i don't think necessarily by. money growth was doing okay and
would've been-- >> it was doing okay because we were providing stimulus to the economy and that's why was doing okay. >> it-- that was not the justification. the justification with the low mortgage rates, lower long-term bond rates and eventually it was to stimulate the stock market i never heard a description we have to get the two moving again >> i think the reason why we didn't focus on money supply growth was because we seen that linkage between money supply growth in gdp was broken down a recent years and it brings it back to-- paula systematic in his pursuit of his goals, but he was not a creature of habit in terms of what instruments he used to achieve those goals and he use money supply growth for a time and when it no longer turned out to be a good predictor he switched of active interest rates, so i think we completely agree we want to be systematic and the pursuit of monetary policy, but you also
want to be flexible so if you imply some rule and the rule is not working then you need to modify your rule and that's what really happened in 2008 and a 2009. we were at the zero lower-- low balance and yet the economy needs more stimulus because we are far away from our goal, so how do we provide more stimulus or you provide more stimulus by florence-- four and guidance. it was much superior and following a rule and say that we have to follow the rule because you-- we got much-- not great results, but better results. >> the first thing, if you want to say what a policy rule would have said you can go back to people before this time included myself, which was if we did stimulations of models and that rate hit zero than we usually cut it off at 50 basis points or 100 basis points and then the
idea is to go back to the friedman rule appeared it seems like the taylor rule came from the friedman rules and then you do that and that was basically the strategy and i don't think it would have been more than a year to do that. >> money supply growth grows a certain rate, so how do you-- >> exactly right. >> add reserves, which is what we did see mac i don't see the conflict. >> you added so much in ways that were not dedicated to increasing money growth. >> your two objections are one it wasn't described in terms of money growth and bill said-- and in the second question is that you think a rule in which she would've been comfortable what have implied less qe then they got? >> may have implied no qe. remains to be seen-- remember-- i actually did work on evaluating the qe and found it is not impact more securities.
if you do a careful study of what else was going on to affect risks, it did not have an impact itself on reducing rates in the mortgage market, so-- in that sense it did not work, so in that sense-- >> i think we made it worse. >> you now have a policy which you can't describe systematically and you don't know how you will unravel it and i don't think that is constructed 30 i think a sense-- >> once we got to the zero lower balance we had never been there before and we are at an unprecedented financial crisis and at that moment it make sense to figure out what you can do to innovate to provide more monetary policies to the economy and that's what we did and i thickets preferable to saying we are just stuck here and we have this old federal rule that we have to follow. i think we did much better by pursuing the course of action that we did and that's just my view a. >> and you disagree on the advocacy of qe p read you don't think it works and you think it was helpful. >> yes. >> 22 that one thing because you
both mentioned it, but i'm not sure everyone understands. the taylor rule has an equilibrium real interest rate in it and that is an interest rates that we think is the inflation-adjusted rate when that economy is in full employment. >> neutral monetary that just keep shooter. >> and when you did the taylor rule there seemed to be a lot of consensus that we kind of knew what that was, but now there is a lot of disagreement about what it is and there is a substantial argument that has come down, so if you are the fed and you pointed out that it's hard-- it's always hard for the fed no matter what you are doing, exactly what the inflation rate will be, how big the shortfall from full employment is and doesn't get another order of magnitude more competently we can't assure you know know what equilibrium rate is? >> first of all, i don't think it's correct that everyone agreed about what the neutral
rate was of the 80s or 90s. that was basically an approximation that seemed sensible at this time and it worked. there wasn't like there was-- didn't think of it in those terms much. the very focus on what equilibrium real federal funds rate should be and the sense came out of the policy rules. it was assumed-- that rule had a lot of twos and it and you seem to remember the number two. 2% inflation target, which the fed eventually adopted, 2% equilibrium fund rate, one over two for the coefficients, so it was based on lots of studies, but in a way it was simple. >> i don't think it has changed that much about the uncertainty. what i think has happened is we are in a world which is craving, maybe it will reverse, but for a while has looked for more discretion and a so that is the
best way to put indiscretion into a policy rule. you just change the level and you can do whatever you want if you just change that rates. >> you don't think there is more uncertainty today about the equilibrium rate than there was 10 years ago? >> i think what has happened because of the unusual monetary policy and holding things that zero and how that will unwind, i think it has caused more uncertainty of way inflation rates will go. in a way, the inflation is more stability-- i mean, what would you assume about the inflation rate in the 80s? so, think there is much more certainty about that. >> john, you talk about the rules and the rules came first and in the policy in the 80s and 90s followed it, but is it more accurate to say there was this monetary policy in the 80s and 90s and it turned out the taylor rule was a good description of the monetary policy? i mean, isn't that the causality >> it's been described as the
fed deserves an assist. [laughter] >> the taylor rule, if you like and i think that's correct. what to put it this way, what was going on with voelker was an attempt to focus policy on a smaller number of things, maybe inflation, so he that inflation was the best thing to get down in order to help him with the rate and to be clear about that strategy, he didn't even have to go and talk about it very much. i remember the jackson hall meeting then he basically didn't say anything and everyone knew what the policy was and they didn't have to talk about it. it was very clear. but, if you just did a regression at that point you would have the 70s in there and you get much different estimates, so someone at least if what you are saying would have to choose a particular time and use that to dry the coefficient, so i think it's really based-- at least i can
speak for myself and it was not based on a regression. it was not based on looking what the fed-- it was based on what our research told us would be good to do. >> no one wants to go back to the monetary policy of the 70s , so we certainly agree on that. >> when you tell the story about what is happening, i had this caricature in mind that the only thing that matters in the economy is monetary policy. get stability in the 80s, bad-- bedtimes in the early '80s, bad monetary policy, poker brings a miracle and there it is good for a while in the fed deviates from your relativity falls apart. aren't there are whole lot of other things going on at the same time? >> absolutely. monetary policy cannot do everything. the fed says that my group that completely, but it can cause instability. it can cost stability and i think if you look at the timings of those movements and look at different period of history,
look at different countries monetary policy is very powerful for good and for bad. >> your view is the if the fed had been tighter in the 2003, 2005 period we would've had no crisis, no housing bubble or a smaller one or what? >> yeah, it's not a little bit. in comparison, in 2003, the fund rate was 1% and inflation rate was about to. in 1997, the inflation rate was too enough fund rate was five and half percent, so 2% inflation, two different period and roughly same study of the economy and 1.59% and the .1%. it's a big difference. i think that was part of the search for yield, part of the excesses and iowa state wasn't the only thing. i think there was some regulatory oversight missing, but those together and we never know for sure, but it's just the kind of thing that people were talking about in the kind of thing that happened.
>> do you agree? >> i think monetary policy is very second, order and i would point to the mortgage underwriting standards or lack of standards. i would point to the leverage that existed in the financial sector. i would point to this securitization of early complex mortgage-- mortgage that people that were safe and it turned out to be toxic. i think we would've had a housing boom even if that fed had followed a slightly different monetary policy. i would have a different critique than john which is even though the federal reserve raised short-term interest rates , financial conditions never really tightened. stock market went up and mortgage credit availability until we got deeper into the financial market became more and more available, psychic was the fact that monetary policy wasn't sufficiently tied to generate a tighter set of financial conditions, not because the fed
was deviating from the taylor rule, but i think the biggest failure is on the regulatory side. >> chairman rené keith wrote about this in his blog-- >> and in his new book. >> exactly. >> john, when you look at what the fed has done over the last several years as bill pointed out they had these quarterly forecast where they think the rates will be in the next couple of years, what they think they will be in the long run and they had this .-dot plaque although there are no names on it. that this press conference and written a mission statement. they have moved to a 2% inflation target. overall, do you think this a move in the right direction or a move with too much information and not enough-- >> i think you can have too much information as to make you may not have too much information. >> you can have too much
information and talking all the time and thinking you are being transparent, but you're confusing things. in a way, i agree there are many different examples of how to communicate and sometimes you don't have to communicate if people know what you're doing and i think that is kind of the ideal. i do think that the examples you are giving are missing an important thing, what strategy. there is a very important statement of goals and strategies that you guys worked out. it's all goals and no strategy. if you read it, it's a couple pages and there's no strategy. it doesn't say what you will do to the instruments. it doesn't say how you will react if your goal is off track and to me it's misnamed to read it's just a goals and you need another thing on strategy. >> i think we do have a pretty clearly defined a strategy. we are going to follow a monetary policy designed to push
the inflation rate up in the on implement rate down. we are going to lift off and we anticipate we will lift off after we have made further progress and become reasonably confident inflation has returned to 2%. that seems to be pretty clear to people. i mean, what's not clear is about how the economy will actually perform. so, i think the issue is not how the fed will react to the incoming information, it's about how the economy will actually perform. is that the economy going to be strong enough to generate further improvement in the labor market to make us reasonably confident that inflation will return to 2%? we want it to be clear. we can do with the former, but we can do the latter so there will always be residual uncertainty. >> i don't think there is anything in the reaction. when your remarks mentioned that there will be a list of key factors in some sense of how you react to those. i don't see that in the strategy statement, bill. i heard used say that here and i applaud that, but i don't see anything there. >> i think it is there in the
statement, the press conference, the summary of economic protection and we basically said what is important to us. pressure on labor market, pushing the unemployment rate down and a sense that this will be sustained, for not just about what's happening today, but how it affects the economic outlook and if those things happen then we will begin to be able to raise into normal interest rates. i don't really understand what's unclear right now. with unclear right now is that economy. >> are you kidding? no one knows what you are doing. [laughter] >> on sorry, this is a public event. >> don't hold back, john. >> by the way i want to say i have great respect for your position and respect for what you are doing, but one of the great things about our country is that we have a civil society that can criticize. >> debate is good and i completely agree with that. >> the question you think the
fed has not answered are what? what other questions, what information do you want that you don't have? >> how much will it react with the interest rate when certain events happened? >> you mean like and if sense, if inflation gets 1.9%? >> yes. >> and you think that is a wise thing to do given all of the other-- >> for example, you asked me, david, what should interest rate be now if it were normal and i said if it were back to normal it would be maybe one and a hal percent. i don't hear anything like that coming out of the fed. there are dots, but what is the .-dot 2017 by mr. x, referred to. epic if you connected those dots to those people's forecasts or outlook, then you would begin to talk about a strategy. >> you have a median forecast for gp, and median estimate of
how that will translate in terms of the unemployment rate and inflation and then you have the dots that show how people think interest rates real evolve, so i could give a complete description. >> what would be helpful in this relates to this legislation, if that legislation passed and you had to report some kind of strategy, you guys, the whole system would have to get together to think about it and articulate and it would be hard. it's like when money growth was put in a federal reserve back in 1977. originally the fed reacted in a way which they didn't want-- so, what the fed did was everyone got together and they thought what is the best way for us to report money growth this year in the following year and it was-- there were a difference of opinions. so, they had come together and i think that is what would happen in this case. >> you mentioned legislation to read one of the facts of life is that almost all of the people who like that legislation and criticize the feds are
republicans and the democrats have been very defensive of the fed. i'm curious whether-- why you think that is and does it it make it a bit uncomfortable to think it has become so partisan? >> i think it is a problem. i have thought about it for a long time. by the way, when i testified it is just so stark and it's an arcane subject. somehow, i don't think it just reflects the polarization people refer to all the time. it could be-- there are lots of possibilities and some people say the parties have somewhat different philosophies about government and interventions in power, so one party is sort of generally less interventionist. i'm not saying everyone is and the other is a little more interventionist, i think the fed is quite interventionist recently. there could be-- i'm sure there
is more political reasons. if i were a political scientist i could figure that out. i don't think it's good, quite frankly. people mean well. they are trying to be constructive, but for some reason it has gotten very partisan. >> why do you think it's bad? what is your concern? >> the issues don't really, to me, follow along party lines that much. we all went to have a strong economy and a stable economy and keep inflation low and all of those things, so there is nothing that needs to be parson about it. it could also be, it could go way back to the william jennings bryan type of partisanship. i don't think it's that cement the fact that it is polarized politically understates why it is a bad idea. in part because it would essentially politicize the monetary policy process and i think you want to have independence of monetary policy in terms of, insulated from the
political process. it doesn't mean the fed can do whatever it wants, congress sets the goals of monetary policy in the fed has to carry that out, but you don't want the feds to be second guessed over every little monetary policy decision because that would politicize the process, reduce the credibility of monetary policy and make it harder for the fed to achieve its goal. there has been a lot of research that the outcomes are if monetary policy-- i think this legislation would reduce that independence and that would risk having a less effective monetary policy process in the united states, in my opinion. >> and disagree with that. i think in some sense if you look at where independence has come and gone, abs and flows, think of the accord on and off and the period of the 70s and it's clearly administration, so in a sense this legislation leaves it up to the fed to determine what a strategy to be,
when you change it, what the report said and i think-- it's my experience in government, which is not a central bank, but in the administrations is that i think it would improve independence because this is our strategy and we reported it, so get off our back. >> wait a minute. i agree with you that the original concern about independence and the central was the ministration, but since i say the bill clinton and beyond in the administration both parties have been consistent and if there is a threat to fed independence it seems to come from congress. i'm not sure you could get a vote in the majority of congress who think independent central bank is a good idea. you could get the vote of the majority of the congress to pick the day of the week. [laughter] >> we are actually talking about particular legislation and there are pieces of legislation which go in the direction you are talking about, but this legislation i don't see it that way. i think it's constructed in a
way to get more independence and warrants to let-- insulation heard there is always resistance by the fed with congress. congress has a responsibly of oversight. this legislation enables the congress to have oversight in a way that things like the fed don't and it basically, when joke is if there was a fed and the j0-- [inaudible] >> if you report your strategy as you see fit, i think along the lines that there was described at the podium and there is a way to have accountability. >> if you had said the fed looks at taylor rule or taylor rules and if members of congress, it always amuses me the members of congress even those in favor of john's bill never asked janet
yellen, so slightly wet the taylor rule will cut you down how you are deviating from it or it is not clear to me what their motivation is, but you have a semi annual report to congress and there is lots of tables and charts, why not just put a chart in with the taylor rule until congress we did it and let's talk about something else? >> you could do that. i think the problem is when you start to focus on any particular rule though is that you are creating questions when you deviate from that rule and then that they in turn limit your ability to pursue a different approach in a systematic way. ..
my evidence looks at historical periods where the economy is performing well and unemployment is low. and you don't have to look at the united states alone. you can look at other countries. it's counter to what you said and i think if i understand you have a different view but we would be better off now even in this situation already one and a half% to be less concerned about the downturn.
what are you going to do in the downturn? >> people that have a sense of the economy is operating well and we've gone away from that very unusual policy. at the economy is in much better shape. it's not the only issue. >> let's compare where the u.s. is today compared to europe or japan. the big difference between the countries we've been as aggressive and we were more aggressive than the recount and as a consequence even though we haven't performed well it's been better than the other economies. they were slower out of the block with similar types of policies. check japan followed you.
you did all of this and they say it's too high they are going to appoint a governor that is going to do what the fed did and they drove to 120 just what they wanted but where is the economy? people have written a lot about the exchanges and in 2014 they drive down. we have a big problem internationally. how about you in taxing than? >> there's more about the monetary policy i think it's a lot to do with the economic growth and about now the change in prices the commodity price to the budget and i would argue that the monetary policy in is
very on important in terms of what's going on. >> did you think that for the period since the crisis has hoped the fed achieved or something they have to fight against? >> the stimulus package i don't think worked out too well in 2008 with the bush administration. in the past there's this temporary stimulus things that don't do much of that so that's what i think about the policy. i do think the unraveling of those has required some contraction so i don't think that's sort of inevitability in the short-term boosts his. i do think that it's a long-term problem. it is unstable now and it's
going to continue to explode. the fed is continuing that as a problem but it seems to me that the fed actions sometimes the idea is out there we are the only game in town. fiscal policy isn't working so we've got to do it. the bankers are out there and their advertisement as we can do it and everybody wants you to do so you end up doing too much. i think central banks, the bank in 2009 the governor said mr. taylor my government is telling us to do the same thing as the fed is doing. can you give some ammunition so we don't have to do that? this pressure came all over the place to do something and i don't think that it was -- sometimes you say no, that's not our job. we are not able to purpose institution. >> slid his contract should very
and they should also do that or just say you voted for these clowns. >> they should look at the overall economy. including fiscal policy. >> congress gave us a clear mandate and that's what we need to pursue. it doesn't say anything about we have to take the world as it is and of course we need to put all the tools we have available. obviously i would have liked a fiscal policy differently than john likes the long-term outlook and maybe a little bit less than it was in 2013 and 2014 but we have to take the world as it is and the best we can to achieve the objective. >> so a lot of this speaks of the state and local level in the
economy itself and basically state and local spending has proceeded very fast so that's part of the overall economy. i wish we had one of these rooms where there were clickers. we are going to take questions now and there's a lot of people here so i'm going to ask you to identify yourself and keep your questions short and. we will see. >> question for bill. formerly of the new york fed emphasized financial conditions and the framework thinking about how policy affects. the biggest change has been good on and it's probably because you have a lot more then one would
normally anticipated based on the plans and the differentials so when you look forward what do you think about the dollar in the context of your forecast and policy strategy? is it reasonable to assume you would get more from the dollar than you would normally get if you followed the path that is more like the path that is currently priced into the market? >> we consider the dollar in terms of how it is going to affect the prices and performance and it's about 15% on the basis of so of course that is dampening the inflation so we take that into consideration that we don't have an object of further dollar to think and worry about.
it's an environmental factor like a lot of other environmental factors and all those things together are what one would describe as financial market conditions. you are going to incorporate that into the monetary policy thinking. adversely the conditions are tighter than you would expect to grow more slowly. >> if the monetary policy and financial commissions are tighter because they anticipate -- >> if it is consistent with market expectations in other countries follow you wouldn't expect it to move. if we tighter and more rapidly than xbox and other countries were to follow the easier policies than the dollar would probably appreciate. but today the dollar's current
valuation is incorporating and expectations about the monetary policy and other countries. >> i am a micro- micro economist so what me just say as i hear this it's like is like the regulatory agencies abide away in the 70s and 80s we had regulatory agencies that employ the prices that were regulated and people then took your perspective and said this is rigid to start giving flexibility and you said they can make decisions on their own so we can do it for you and say
i it's desirable so let's go one step further and started deregulating all these industries and that is what i'm thinking about your perspective if people are so good at guiding with the fed ought to be doing what don't we go that one step further and completely isolate the fed from any kind of political influence is and let them make policies are. if you find that off-the-wall than i would say fine but that find this and bring you back to the rule say if they really are good we ought to let them go but given that we can't look at these situations could be a complete disaster maybe it isn't so bad, what do you think?
>> they have to have legitimacy and they get the fact that the chair of the fed are appointed by the president and confirmed by the senate and the fact that the federal reserve is chosen by the board of directors and board of governors has two key approach and that is where this comes from and is also legitimate to the congress into the world where we are doing it and i think that legitimacy is very important and the problem in having this approach and people would have a legitimate question are these guys and where did they get the ability to do this in a democratic regime so i think the font we have right now works quite well. the sense of legitimacy of people doing the monetary policymaking because of the way that it works in terms of who
gets the position that reports to congress and the public about what we are doing so we can be a value can be a value weighted on the success and failure in the conflict of monetary policy so i think it is a good balance. people leave the decision-making about how to do it to us that the goals are set by congress and i think that is a good bill. >> i'm going to try to ask two questions. when you wrote the rule, the fed didn't have an inflation objective one of the benefits of the rule is that it had but 2% inflation and this has now explicitly as the 2% inflation goal. by analogy when i call my plumber and ask them to fix a week i don't ask them to tell me before you've looked at it how
he's going to fix it i just wanted to know he's want him to know he's going to fix it so they both expressed skepticism with an expectation in the foundations view right now and they also expressed a desire to see evidence of the what do you think of that argument and do you have doubts about the expectations i and if you want to see evidence before you start moving. >> the idea isn't just the inflation target. it's basically it leaves open completely how you get it.
everything goes. intervention in this market and that market doesn't describe the policy at all and also the plumber -- what if there was only one plumber in town? that you have a choice to go to what end he wouldn't you want some evaluation of the techniques? i think there's a little bit more of the analogy to think about. >> somebody would do something to make sure [inaudible] [laughter] a lot of us heard about how the inflation process works when you drive it down to the so-called full employment rate so there is a question about how much is inflation influenced by expectations versus how much i
pressure on resources and we can't know precisely what the shape of the trade-off is in terms of the type that's in which we get as a consequence and we don't know as we drive the employment rate down further. my personal view is a belief if you push it out far enough it will get steeper because why is the federal reserve letting inflation get that low and there is a lot of uncertainty about the linkage between the labor resources and how that feeds through. they have been angered over the years and that seems to be the more powerful term. i need to be confident so we turned to present objective.
for some people they might decide they need to see the place to be confident that i don't feel but i don't feel it is a necessary condition of inflation getting back. if i see more pressure on resources and have a believe the economy can continue to grow so the unemployment rate will continue to climb i would suspect i would become more confident about the medium term so i see the linkage between the pressure on the labor markets resources and my confidence about inflation. i'm not willing to throw that relationship out of the window even though there is uncertainty about how the linkage works precisely. >> question for both of you, can you comment on the usefulness in the united states of targeting the negative interest rate as the alternative to being experimented in europe?
>> it's worthwhile thinking about this a little bit going in a direction it opens so many cans of worms if you like. there's a great thing to do research on but i could imagine these new securities to get developed so the sites right now the interest rate doesn't have to be negative in the u.s. so i would stay away from it. we had this period in 2009 we could even think about it in sense and since then it hasn't been an issue in 2003 or 2005 because there is no co bound question because they were way below what would be reasonable. >> don't think it is a question on the table right now because they are growing above trend and it's a question of when will they raise the long term
interest rate and not the word to zero. the one thing we have seen over the last year or so if other countries have moved into its probably probably less than people had feared that they are doing it in a totally different institutional set so it's not obvious just because it's working relatively okay there that he would necessarily want it here. we have a different system in terms of how the markets work and you have to ask yourself the question is the benefit of going to the interest rate and it's too outweighed the potential cost and the unintended consequences. we decided not to pursue that option because the benefits that are not sufficient and the potential cost.
>> the gentle man in the back spinet aren't the interest rates already extremely high? you can see that in the world markets they are 3% the same as spain versus germany and half of 1% and so the rates are very high and we are seeing the effects of trade and also in terms of the monetary policy we are experiencing the limitation of what can be done from buying paper for the money ends up at the bank that doesn't leave in terms of creating money working with fiscal policy that negative so isn't there a limitation to say the mortgages or bonds versus actually buying stuff like water and port authority
bonds and highway bonds etc.? >> weekend by very short-term obligation funds and localities and it's very important which -- it's and likely. so what we bought was defined by the set of things that was within the domain to buy. the long-term rates are quite a bit higher than germany and japan they are about 2% and that is a very good thing because it shows people actually think that long-term interest rates in the long-term are going to rise in the coming years and that is a sign that we are making progress in terms of the objectives. the fact that interest rates are so low in japan and reflects a greater concern about the
prospects of success and greater concern about how quickly the short-term interest rates will be in the countries i am very happy that we have higher long-term yields and -- we are making progress to reach the objective. >> i ask you to flush out your comment in the beginning of the question in the slowdown in the economy could to give us a little bit more of what indicates what you're looking at it's going more sharply and i wondered if you could give your view on that. >> there's some news to suggest it is.
the last retail sales but we got earlier this week i don't want to make too much out of that. there's a lot of information between now and the end of the year and the economy has a lot of ability in the normal course that he is data is often not measured very well very precisely so i wouldn't want to make much out of it as what i see is that is performing pretty well in a decent clip the housing sector is recovering and the business investment is rising. what's holding the economy bracket things right now. inventory and the contribution the first half of the year we're probably going to give some of that back in the second half of the year almost certainly so the third quarter will probably be the second aspect is the dollar
is appreciated so much and growth in the rest of the world is the deterioration of. when i put it together i see an economy that is growing a bit about the trend and if that is the case we should see greater pressure over time and resources and if that is the case we should be able to begin to normalize monetary policy and beginning in the forecast. is it a worse outcome than you had hoped for or is it worse if you moved too soon and you take the economy at the wrong moment. raising interest rates would be good for the economy and keeping them low is bad.
>> moving them in the direction of where they should be there's a constant confusion about the rate is low why couldn't you have zero rates of his below to maybe that is a part of the question. you have to have one somewhat higher. i think zero causes its own problems. it's better to have more like the current needs in the sense in which it can go faster and slower but we are not in that situation now
>> to go back down to the bound reach questions if you wait too long you might have to take the monetary policy aggressively so you are balancing the two risks in the time the economy is going a little above the trend. people can reach different views not which is prominent figures risks on both sides. >> one comment if there's any troubles and techniques as possible. >> i thought we agreed to do away with that metaphor. >> in the thought experiment you've assumed we measure measure productivity incorrectly incorrectly ended higher today than we think it is which is the number of people who.
two questions. one is doesn't that mean that inflation is lower and growth is higher and labor markets are probably weaker than the date on measuring. if you're in a situation they are behaving very differently than it had in the past and the development of the rules and if your data is wrong wrong what would be the implication of applying the rule to be more flexible. >> the questions are related it's hard to estimate of the productivity. it means you are not sure where the gap is like to the potential but you need to do that and have a sense of this discretionary policy and where the economy is.
i think what we've learned and it's a good question but what we've learned is we could have lots of different views in the world and if your policy is robust it's one reason not to have a complicated thing and things were talking about a few minutes ago. it works a lot different in the models and it doesn't require an expectation on the medical on the growth productivity and that's what i think we found about a lot of the strategy rules so that's why they are attractive.
the university of frankfurt has a database of 50 different models. 50 different models that a lot of them are central banks. try it out on the 50 models. >> in the productivity of the potential growth higher in the output bigger than we think that would be different for the rule. >> it's always a problem to know the potential. it's harder in the developing countries where it's more volatile but it's not worth a problem if you are using it for discretion if you think that we
are understating? >> there's a lot of debate about it but they are understanding the productivity more now than we were a few years ago. the question that i would have is our way making bigger areas now that would imply inflation i don't know how we can answer this question because if we knew how to measure the productivity better we would be doing it. some are much more optimc